Optimism Continues/ WTI Hedging & Trading

Front-month crude continued the push on Friday for new 2009 highs on the back of unemployment data out of the US that was less-bad than expected. The optimistic trend for both commodities and equities that began more than a month ago gathered new legs last week as results from the bank stress-tests proved also to be less dreadful than anticipated. Financial flows into ETF’s and also from hedge funds continue to be the main catalyst in this rally. Watch for profit taking as WTI and Brent edge closer to $60 as this price belies the short-term supply glut, demand weakness and producer spare capacity. Also, expect less aggressive moves for storing physical product, as the strong rally has significantly narrowed the contango futures curve.

Opec cuts, being largely from Saudi Arabia, the UAE and Kuwait, have been in the medium to heavy sour grades. This is where price stabilization and the current move higher first began. However, it has clearly been financial flows which have pushed near-term crude prices (even those of the light, sweet variety) to new highs for the year.

Implied volatility has softened daily for the past two weeks as crude inched higher. While At-The-Money options and upside calls have become relatively cheaper (in implied vol terms), the put skew has recently been gaining attention. Many traders long from the mid-$40’s have taken advantage of the unabated push higher to purchase downside protection in the form of puts. Buying puts remains a safer strategy than simply selling swaps, even with the elevated put skew. The WTI July $40/50 put spread is currently trading around only $0.80/bbl and the July $45/55 put spread can be owned for zero cost by selling the $65 call.

Singapore, 09:00

Resistance Becomes Support/Singapore Jetkero Hedging

Energy markets continue to push higher as front-month June WTI convincingly broke through $56 yesterday. The July contract which is also heavily traded remains $1.20 over June and thus only about $2.50 from the $60 level (thus representing only about a 1.5 daily standard deviation move). A smaller than expected EIA inventory report proved the final spark as equity markets continue to rally and the US dollar persists in weakening.

Refined products also took part in yesterday’s rally with distillate crack spreads softening somewhat. Gasoline prices have shown strength recently as demand for the product has shown signs of life. Consumers appear to have been taking advantage of lower prices at the pump to do more driving. Questions remain as to what extend the H1N1 flu strain will damage the already staggering airline and travel industry.

Singapore Jetkero prices have steadily regained ground in the past week on the back of strong rallies in crude markets. The June contract has broken through resistance around $63 and looks to turn the ceiling at $65 into a new support level. One bright spot in the rally is that option premiums continue to soften, allowing consumer hedgers the opportunity to lock-in current prices before panic sets in due to further price rises. The 2H09 Sing Jetkero $75 price ceiling can be owned for only $2,000/1000 barrels when the $50/60 put spread is sold in the same tenor. Selling the put spread essentially cuts the call price in half and allows for a limited and known possible loss on the downside.

Singapore 09:00

Topping the Range/Singapore Fuel Oil 180cst Hedging

Energy markets continued their push higher yesterday on the back of optimistic stimulus news from China as well as that country’s outperforming industrial construction data. Despite the need for several major Western banks (Citi, Wells & BofA) to immediately raise more capital, it is optimism that we have “hit bottom” and the resulting financial flows into the commodity sector that continue to buoy the market.

However, look for profit taking on the recent run-up as June WTI is now trading around resistance at $54.50 as well as the top of the long-term $44-55 range. Singapore Fuel Oil 180cst looks to be trading at a similar resistance level ($320) after experiencing the same late April pullback and subsequent rally as that of WTI. Tuesday and Wednesday should make for interesting trading as US inventory numbers are released and we move closer to the next Opec meeting where production quotas are expected to remain unchanged.

Implied volatility levels softened further as crude prices pushed to the top of the recent range. Expect Singapore Fuel Oil option premiums to be relatively cheaper in Asian trading Tuesday morning. Fuel Oil hedgers worried about further price rises (but cognizant of the market trading on recent highs) can look to buy upside protection in the form of the June Sing FO 180 $325 Call. A portion of the cost of this price ceiling can be negated by selling the June $280/300 put spread. Thus, the maximum downside exposure on this hedge is limited to $20 plus the required premium outlay for the call.

Singapore, 08:00

Short-Term & Long-Term Outlooks/WTI Hedging & Trading

Financial markets continue to play a large role in crude oil’s recent consolidation phase. The current out-performance of several Western equity indexes, such as the S&P 500, have indicated optimism that the worst of the recent economic decline is behind us. Several fresh economic surveys have shown surprising results to the upside, with the Institute for Supply Management’s factory index revealing U.S. manufacturing is shrinking at a much slower pace than expected. It is now possible to read in the data strong indications of a soon-to-be-expected improvement in oil demand. Further out along the futures curve, relatively tighter supply/demand fundamentals as well as expected inflationary pressures leading to a weaker U.S. Dollar have put a firm cushion under both crude and product markets.

Of course, stubbornly high inventory levels should continue to act as an overwhelming weight balancing out any medium- to long-term bullish pressure. Despite Friday’s sharp rally, expect front-month WTI to pare back gains and drop once again towards $50 as the June contract failed to move convincingly above resistance at $53. Expect similar bearish price action in Asian markets as many traders return from the recent holiday weekend.

Long traders and producer hedgers looking to take advantage of the recent rise in crude prices can buy the Asian (APO) June WTI $55 put for around $4.00. This short strategy provides maximum downside profit potential with only $4 of potential losses to the upside. Similarly, the $60 call can be sold to finance half the purchase price of the $55 put (this strategy is also somewhat riskier while providing more immediate downside exposure).

Singapore, 09:00

Decoupling of Equities & Commodities/Sing FO Hedging

Expect further downward pressure across the energy complex as today’s EIA report should further highlight historically elevated inventories against enduring demand weakness. Equity sentiment continues to soften due to further capital raising issues at Citi, not to mention the hit investor confidence is taking from the yet-to-be-contained swine flu. Whether the tie that has bound crude markets to equities continues to deteriorate or not, the supply & demand fundamentals of the oil and products market have become too apparent to be ignored. Thus, expect light-sweet crude to push lower to the $45 mark while Singapore Fuel Oil 180cst should also test recent lows. Both markets have failed recently to push convincingly above resistance levels ($52 for WTI and $300 for Sing FO) and the Fuel Oil market in particular looks to be sitting right on key (and weak) support levels.

Physical traders long Singapore Fuel Oil and looking to protect against a short-term downward move should look to own a price floor (put) in June09 Sing FO 180 at the $270 level for $19,000/1000MT. This put floor can be made cheaper by instead buying the June09 $230/270 put spread for only $14,000/1000MT. Lastly, the June09 $270 price floor can be owned for zero cost (with unlimited downside protection) by accepting a price ceiling (short call) at the $295 level.

Singapore, 09:00

Swine Flu Worries/ Sing Jetkero Hedging

Worries over the new swine flu dominated talk on trading floors yesterday as commodity markets followed equities lower. Risk aversion and pessimism stepped back into the spotlight forcing the selloff, although the energy complex did recover markedly in late NY trading.

Opec and non-Opec exports remain flat with westbound tanker movements regularly showcasing dramatic declines. From the product standpoint, most cracks experienced little movement as newfound pessimism drove markets lower in tandem. Plenty of focus was on the airline stocks and jet fuel demand yesterday as the spread of the swine flu threatens to do further damage to an already impecunious industry. Finished products such as jetkero, gasoline and other distillates may be facing fresh downturns in demand now that a global pandemic may be added to the list of the global economy’s problems.

Implied vols experienced a slight bump yesterday due to the severity of the price drop and unexpectedness of the cause. As the consolidation in crude markets becomes more apparent, expect volatility to decrease and option premiums to do likewise. The Singapore Jetkero Second Half of 2009 $75 call can be owned for only about $2,500 per 1000bbls/month when the $125 call is sold at a ratio of 2000bbls/month. Similarly, the Sing Jetkero 2H09 $75 call can be purchased for Zero Cost by accepting a price floor (short put) at the $55 level.

Singapore, 09:00

Mixed Pressures/WTI Hedging

After a slow week, traders returned to energy markets on Friday, pushing many benchmarks back near the previous week’s highs. Nymex WTI rallied almost $2 to settle back above $50. Not surprisingly however, implied volatility continues to decrease across the product sector with more range bound trading expected for the foreseeable future. A softer U.S. dollar and decreased volatility in the financial markets along with what appears to be a delicate stabilization of the global economy have improved investor risk tolerance and put a temporary bottom under the price of commodities. On the flipside, the previously mentioned bloated global inventory situation alongside the IMF’s recent slash in its worldwide economic growth forecasts will continue to place supremely bearish pressure on the oil and products sectors. Furthermore, Opec Secretary General Abdalla El-Badri recently stated that he doesn’t expect any announcement of further production cuts at the group’s next meeting in May.

Consumer hedgers looking to take advantage of the significant drop in implied volatility as of late should look to own a WTI Second Half of 2009 price ceiling (call) at $65 for an average price of only about $4,000 per 1000 barrels/month. Much safer than simply buying swaps, this hedge offers max losses limited to only $4/barrel per month without the prospect of margin calls. However, the price ceiling can be owned for zero cost by accepting a price floor (short put) at $50. With the 2H09 underlying swap trading above $56.50, this collar strategy allows for an average of more than $6.50 of breathing room on the downside with unlimited protection above the $65 level.

Singapore, 09:00