Bullish gasoline stats/weather push market higher

A surprise gasoline draw helped push the market higher today, yet product cracks were not overly bullish. Crude was up as high as $117.46 by midday and those who took advantage of low cost options strategies and short covers rejoiced. There is some model information pointing to weather risk coming out in the next week or two, which contributed to the NG rally that subsided late in the day (NG up only 15 cents). This weather may also affect crude supply, so be advised.

Call strategies still remain our recommendation for hedgers that remain low on inventory. The September American/Euro style crude options will expire next Wednesday, so look to the September Asian or October American/Euro for near term hedges. Volatility is still firm.

Longer term, the Q4 120-140 Asian WTI call spread is offered at $4.00. This still looks like a good buying opportunity.

NY: CT (3PM EST)

A Fresh Look for Consumer Hedges

A second day of consolidation around the $115 level served to decrease implied volatility in the energy markets yesterday. Competing forces continue to pull the market in two directions: crude and product inventories throughout the developed world remain dangerously low and a recent IEA report cited inventories in the second quarter of 2008 grew at their slowest rate in more than a quarter century. The report also found that while demand appears to be easing heading into 2009, there will be a "renewed tightening thereafter". The U.S. Gulf hurricane season remains on many trader's radar, as a newly formed tropical storm has yet to determine its path through the oil-rich locale.

Long-term upside hedges are consequently getting renewed attention as of late. The 1st Half of 2009 $125/140 call spread strip in WTI has been trading around $3.50. For total risk of only $3,500 per month, this trade enables the consumer hedger to enjoy $15 of protection from January through June of 2009 should the market rally back towards $140.
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Decreased Volatility results in Cheaper Consumer Hedging Strategies

Crude oil prices consolidated around the $115 level yesterday despite escalating fighting between Russia and Georgia amidst the oil-rich Caspian region. Possibly below the radar now are increased tensions between Iran and the West over the Middle-Eastern county's nuclear program. Hedge fund short crude positions appear to be both driving the market lower and preventing any sort of rebound. However, with a drop of more than 20% in one month's time, hedger's have been focusing on locking in the current price, whether it be a South American producer buying downside protection or an Asian airline recognizing the need to protect against a possible move higher in the second half of the year.

Option premiums are becoming cheaper as the market adjusts to the $110-120 price range. The October $125 calls are now trading around $3.30, providing unlimited upside protection for the next month if prices rebound. A maximum investment of only $3,300 protects against the many risks we see prevalent in the market today: political, military, weather, and supply and demand.

Commodity sell-off bifurcates

We have witnessed a broad commodity sell-off over the last month, which has potentially hit a crossroad. US dollar strength has put pressure on gold and petroleum, and metals demand in is clearly weak in general due to industrial production. However, we see petroleum with substantial upside risk. News regarding the former Soviet states self-organizing to rally behind Georgia is one piece of bullish news that helped bring the market back to $115 from a low of $112.72 today. To protect upside risk, consider the September WTI Asian 120-130 call spread for $2.50 / bbl - a $10 wide payment with good leverage. To achieve a lower cost, the 130-140 call spread costs $1.25/bbl. In the event of a market surprise on the supply side, this would provide excellent protection. Also to note: back month crude volatility has been steeply discounted. Consumer hedgers looking for longer term protection have an improved cost profile.

Traders Speculate if Price Drop is Overdone

Energy markets plummeted and the U.S. Dollar rallied in trading on Friday as hedge funds continue to exit short dollar/long crude positions. With tensions between Iran and the West worsening, an actual war going on between Russia and Georgia, militant strikes in Nigeria increasing again, and a U.S. Gulf hurricane season that can still bare its teeth, the drop in prices is starting to look overdone. Just as with the move on the upside to $147, this downward push appears to have exceeded its mark and a correction may be upcoming.

Hedgers looking to lock in prices at the lowest levels we've seen in months have been pricing the October through January $120 price cap against the $113 price floor. This trade enables the owner to have oil prices capped at $120 for the remainder of the 2008 calendar year while putting a price floor in at $113. The trade requires Zero Premium, and as such there is no option decay associated with the hedge.

Pipeline Attack Reveals Upside Price Dangers

Energy prices experienced a day of respite after Kurdish militants damaged a key crude pipeline in eastern Turkey. While the pipeline is substantial and can handle up to 1m barrels a day, the incident serves to highlight upside issues in the supply/demand spectrum that may be overlooked at the moment. World inventory levels remain at discouragingly low levels and Opec spare capacity, as well as that of non-Opec producers, continues to decrease. Until these issues are resolved, the threat of oil prices returning to levels above $130 will remain with us on a day-to-day basis.

With this in mind, hedgers may want to lock in at least 50% of their 2009 fuel needs using inexpensive option strategies. $20 of upside protection is available for Zero Premium by purchasing the $130 / 150 call spread strip for every month in calendar year 2009. The price of owning the call spreads is offset by selling every $88.50 put in 2009.

Take advantage of easing volatility

New York, 5pm Thursday Aug 7, 2008

The market tested lows below $118 today but rejected a breakdown, ending up over $120. Technical analysis pointed to reversals in most products and volatility was being reduced by traders. We expect to see stronger RB cracks in the coming days while heat cracks have likely seen the majority of their sell off. However, we are not taking any positive bias yet with the heat crack.

This market favors buying options coming into the weekend. Fridays often provide buying opportunities as traders reduce positions fearing the cost of decay. Those looking to take a long position should look at the well offered September American $130 call offered 60 cents/bbl. This only has 1 week to expiry but provides insurance against an Olympics "event". Furthermore, we are in hurricane season now and the next two weeks may provide some interesting data. For those hedging hurricane risk, buy RB calls. A September $3.20/gal RB call is offered at $0.065/gal, providing good insurance in the event of refinery issues.

The Olympics provide an odd sense of peace in the world for the moment. Bush will be in attendance with some 70 other heads of state in Beijing.