Market Volatility Continues to Surge

Volatility increased across all markets yesterday as the US House of Representatives rejected the proposed $700 billion bail-out package. Gold traded well over the $900 mark as traders sought a safe haven from the increasingly negative outlook from all other major markets. The CFTC released data showing the number of net longs in November WTI crude increased throughout September as the market rallied back towards the $110 level. With yesterday's selloff, expect the pressure to increase on these longs to all head for the door at the same time, possibly forcing the market down further.

Cheap option strategies are the most sensible choice for this turbulent market. Hedgers looking to protect against further downside moves in the next 6 months can find inexpensive protection in the Q408 - Q109 $90/80 put spread for only about $3.20. With the market gyrating more than $5 per day in either direction, a hedge with max exposure of only $3,200 per month begins to look very shrewd.

Singapore Fuel Oil hedgers looking to protect their downside can combine the above strategy with the sale of 180 Fuel Oil Swaps in the WTI/Fuel Oil crack, currently trading around $12.00.

Singapore, 09:18

Producer Hedges for a Volatile Market

Crude oil consolidated above $105 in late-day trading Friday as commodity markets remain buoyed by fear of a failure to pass the US Treasury's bail-out plan. As several weeks of extremely volatile trading looks set to continue, option premiums remain at increased levels. Recently, both consumer and producer hedgers have looked to the option markets as a way of protecting their fuel inventories or future purchases as the swaps markets have become too dangerous to navigate. Spreads can be purchased on the cheap to provide both upside and downside protection with very little or no premium at risk.

An example of such a producer hedge strategy can be found using Asian options in WTI crude oil. The Q4 $100/85 put spread strip can be owned for only about $3.10. That represents $3,100 of total premium at risk per month with $11,900 per month of downside protection. Again, if the market reverses and moves higher, the max loss on the hedge is only $3,100 per month. The protection can be made costless by selling the Q4 $118 call. This zero premium strategy provides about $12 of room on the upside before the short call becomes active.

Singapore, 23:17

Late rally but more questions than answers

Washington Mutual being the latest financial to call it quits, we now move into the weekend with more questions than answers. While there has not been much of a range today, volatility remains firm. Asian markets will have a jump on markets on Sunday evening and will be able to trade on data coming out over the weekend.

The downside risk here is that crude sells of with financial markets. The outcome of Morgan Stanley still remains to be seen. Credit default swaps were trading higher as of Friday evening for MS debt.

Hedgers protecting inventory may want to consider the WTI 90-105 put spread here for $3.90 per bbl. If the market drives back down to $90, this trade will prove to be very beneficial. Please contact HCEnergy Asia for up to date strategies Monday AM Asia time. Likely there will be some short term strategies that will pay off quickly. HCEnergy will provide liquidity to customers as of 0900am Singapore time.

NYC, 16h00 Fri.

Hedgers Turn to Spreads as Volatility Increases

Crude oil prices fell yesterday as traders digested solid confirmation of the widespread damage inflicted by the recent Gulf of Mexico Hurricanes. The data points to short-term losses in refinery output and production, while market players have taken a larger look at demand destruction on a consumer level. Of particular interest was the refinery utilization number, dropping to 66.7% which is below the 69.8% level hit in the aftermath of Hurricanes Katrina and Rita. As a result, US gasoline stocks suffered predictable losses, falling 5.9m barrels to their lowest level in more than 18 years. At the same time, US retail gasoline demand, as reported by Mastercard Advsors, fell by more than 5% in the week ending September 1st.

Market volatility continues to raise caution for hedgers and traders. Moves of between $5-$10 can occur in any given trading session, thus entering the market with swaps and futures can be extremely dangerous. While option premiums have become increasingly inflated in the recent volatility, call and put spreads remain an inexpensive strategy to cover risk. Using Asian options, the WTI Q4 $95/80 producer put spread strip provides $15 of downside protection and is currently trading around $2.40. For $2,400 of total risk per month, the hedger gains $37,800 of Q4 protection.

Singapore, 09:00

Pullback Provides Consumer Hedgers with Reprieve

Energy markets pulled back yesterday following an almost uninterrupted run from $90 back up to $110. While trading based on fundamentals instead of panic has yet to return to any market, crude oil traders appear to be digesting the latest supply issues, such as Mend's "war on oil" in Nigeria, Saudi Arabia's actual trimming of production and a return to importer status for China, that is after a brief stint of exporting oil products following the Olympics. The full extend of damage done to Gulf of Mexico's production facilities has yet to be quantified, however it looks to be several months before the region will return to pre-hurricane levels.

The recent pullback provides consumer hedgers with a reprieve for locking in protection against higher prices for the remainder of 2008. Using Asian options, the WTI Q4 $115/130 call spread can be owned for an average price of only $2.30 per month. That's only $2,300 of total exposure per month with a maxium payout of $38,100. The call spread can be owned for Zero Cost by selling the $92 put in the same tenor. This would make the max payout on the call spread strip $45,000.

Singapore Fuel Oil hedgers looking to protect their upside can combine the above strategy with the purchase of 180 Fuel Oil Swaps in the WTI/Fuel Oil crack, currently trading around $18.00.

Singapore, 10:00

Market Volatility Continues Unabated

Expiring front-month October WTI crude oil traded more than $25 higher yesterday as shorts were forced to square-up positions on the last trading day of the month. A weakening dollar exacerbated the shift into commodities as investors begin to question whether the government's $700B bailout will continue to see delays resulting from partisan red tape. Even if the rescue plan is implemented quickly, the Federal Reserve will be forced to handle long-term inflation risks directly resulting from the bailout.

Non-Opec producer Mexico continues to disappoint, reporting reduced oil exports for August. Meanwhile, defacto Opec leader Saudi Arabia has in fact begun to cut back on production. This at the same time China reports an 11.5% increase in oil imports over August of last year. The supply-side problems have clearly not gone away and it looks like world-wide energy demand persists throughout the financial crisis.

Singapore, 08:00

Supply-Side Issues Push Market Higher

Crude oil prices pushed back above the $100 level yesterday amid mounting supply-side disruptions. Mend, the Nigerian militant group, has been launching fresh attacks almost daily on the country's production facilities. Currently, losses are estimated to be approaching 1m barrels per day as about 300,000 b/d were taken offline just this week. In the Gulf of Mexico, fallout from Hurricanes Gustav and Ike has yet to be quantified, however gasoline stocks now sit at 40 year lows. A full damage assessment of post-hurricane production capacity will take weeks, thus fostering further volatility in the crack markets, specifically gasoline and crude oil.

There still remains time for consumers to lock in crude prices at six-month lows. Using Asian options, the WTI Q4 $105/120 call spread strip can be owned for an average price of only about $3.70 per month. That's $3,700 of total risk per month with a maximum payout of $33,900 should oil prices rally back above $120. The trade can be made costless by selling the $95.50 put in the same tenor. In this case, the hedge would have a maximum payout of $45,000.

Singapore 15:30