A solid rally in all energy products followed the Wednesday stats, which were slightly more bullish than expected. The market also is digesting the likelihood of OPEC taking more aggressive action in the near future. We know that we have cracked some higher cost producers threshold levels, which indicates some supply tightening in addition to OPEC. That said, some fresh data is pointing to lower demand which has led the market over the last few weeks. Volatility in crude oil has come in sharply with this rally, providing an opportunity to buy puts for those who remain bearish near-term. The Dec American $60 Put was offered $2.10/bbl, providing reasonable insurance for the next month. The costless crude collar was offered with the $60 put financed by the $76 call.
Consumers have been aggressively looking to hedge consumption for 2009 and also 2010. The call spread strategy remains attractive as volatility has yet to subside. The Fed rate cut was expected and the US equity markets appeared equally uncertain on the close.
New York, 5pm EST
Wednesday, October 29, 2008
Tuesday, October 28, 2008
Crude Rally Presents Producer Hedge Opportunities
Energy markets began yesterday by following equities higher but the rally proved to be short-lived as demand fears outweighed positive investor sentiment. The pessimistic near-term outlook of 6-12 months for crude demand reflects widespread fears of a worldwide economic recession, further compressing already weak demand. Yesterday's move higher resulted in implied volatility staying at already inflated levels.
December WTI crude managed to push back above $65 in early Asian trading, presenting many bargain opportunities for downside hedgers. Using Average Price Options, the December 2008 $40/60 put spread is currently trading around $3.75. That's $3,750 of total premium at risk to short crude oil from $65. Any move lower in the next few days would produce quick profits for this protection strategy, while holding it until expiration at the end of December could see a maximum profit of $16,250 with only $3,750 at risk. The strategy can be combined with the sale of the December $78 call to make the entire structure Zero Cost.
Singapore, 08:30
December WTI crude managed to push back above $65 in early Asian trading, presenting many bargain opportunities for downside hedgers. Using Average Price Options, the December 2008 $40/60 put spread is currently trading around $3.75. That's $3,750 of total premium at risk to short crude oil from $65. Any move lower in the next few days would produce quick profits for this protection strategy, while holding it until expiration at the end of December could see a maximum profit of $16,250 with only $3,750 at risk. The strategy can be combined with the sale of the December $78 call to make the entire structure Zero Cost.
Singapore, 08:30
Monday, October 27, 2008
Traders Focus on Lack of Demand
WTI December crude pushed closer to $60 yesterday as traders choose to ignore Opec's production cuts and focus instead on the continuing drop-off in demand. As winter quickly approaches, many refineries continue to scale-back production. The drop in crude prices as well as the sharp and sustained increase in implied volatility is mirrored closely by global equity markets, particularly the S&P500 which has shown a high correlation as of late with the price of crude oil. In the U.S., the ViX (volatility index) has seen a similar sharp and sustained increase in volatility.
Despite the seemingly bottomless pit energy markets appear to have fallen into, consumer hedgers have been entering the market lately to lock in lows not seen in almost a full year. In the Singapore Fuel Oil 180CST market, December 2008 is currently trading around $310. This represents lows not seen since early 2007. However, with the continued volatilty the market has witnessed, just buying swaps means taking on an enormous amount of downside risk on a daily basis. Combining the FO swaps buy with the purchase of the WTI Average Price November $55 puts for only about $1.50 would put a floor in the hedgers losses while still allowing for unlimited profits on the upside.
FYI: Last week's recommendation to buy the November $65 puts as downside protection against any Fuel Oil swaps purchase would have saved the hedger more than $125,000 on a 1:1 basis.
Singapore, 08:30
Despite the seemingly bottomless pit energy markets appear to have fallen into, consumer hedgers have been entering the market lately to lock in lows not seen in almost a full year. In the Singapore Fuel Oil 180CST market, December 2008 is currently trading around $310. This represents lows not seen since early 2007. However, with the continued volatilty the market has witnessed, just buying swaps means taking on an enormous amount of downside risk on a daily basis. Combining the FO swaps buy with the purchase of the WTI Average Price November $55 puts for only about $1.50 would put a floor in the hedgers losses while still allowing for unlimited profits on the upside.
FYI: Last week's recommendation to buy the November $65 puts as downside protection against any Fuel Oil swaps purchase would have saved the hedger more than $125,000 on a 1:1 basis.
Singapore, 08:30
Thursday, October 23, 2008
All Eyes on Opec
Oil markets traded within a relatively tight band yesterday as all eyes are on Opec's emergency meeting today. Traders and analysts are almost unanimously predicting the cartel will announce a further production cut; most estimate between 1-1.5m barrels per day while many expect the cut to be closer to the 2m barrel level. Opec has a second meeting planned for December where further cuts can be made, once the market has had time to absorb any cuts announced today. Regardless of the announcement, volatility will certainly continue in the near-term, thus option protection strategies are the most sensible.
Traders and hedgers have been entering the market within the past week to buy downside protection in the form of cheap puts. While the value of these options has increased substantially, cheap protection strategies still abound. The November through December $65/50 put spread strip is currently trading around $3.00 using Average Price Options. That's $3,000 of maximum loss potential for $12,000 of protection per month below $65. This strategy helps the hedger avoid paying a large premium for downside protection while still locking in protection to the $50 level.
Singapore, 08:15
Traders and hedgers have been entering the market within the past week to buy downside protection in the form of cheap puts. While the value of these options has increased substantially, cheap protection strategies still abound. The November through December $65/50 put spread strip is currently trading around $3.00 using Average Price Options. That's $3,000 of maximum loss potential for $12,000 of protection per month below $65. This strategy helps the hedger avoid paying a large premium for downside protection while still locking in protection to the $50 level.
Singapore, 08:15
Wednesday, October 22, 2008
Augmenting Fuel Oil Swaps with Highly Liquid WTI Options
Energy and equity markets dropped sharply yesterday as traders' focus remains on current and looming recessions in the western world. The crude oil market appears to have little faith in Opec's ability to put a floor in prices, as December WTI dropped below $70 to trade in the $66 range. Expectations for production cuts from Opec range from a minimum of 1m barrels to as high as 2.5m barrels, possibly spaced out over a period of 3-4 months.
A Fuel Oil hedger buying 5 lots of the 180 Swap around $370 early yesterday would have booked losses of approximately $185,000 according to settlement. Our recommendation was to augment the hedge by purchasing the November WTI $65 puts for $2.00. These puts are currently trading around $3.50, resulting in a gain of about $50,000 if the hedge was entered into on a 1:1 ratio. Thus, instead of exiting the market today with losses of $185,000, the prudent hedger would have saved himself $50,000.
Singapore, 09:45
A Fuel Oil hedger buying 5 lots of the 180 Swap around $370 early yesterday would have booked losses of approximately $185,000 according to settlement. Our recommendation was to augment the hedge by purchasing the November WTI $65 puts for $2.00. These puts are currently trading around $3.50, resulting in a gain of about $50,000 if the hedge was entered into on a 1:1 ratio. Thus, instead of exiting the market today with losses of $185,000, the prudent hedger would have saved himself $50,000.
Singapore, 09:45
Tuesday, October 21, 2008
Volatility Returns over Opec Questions
Volatility in oil markets returned yesterday after a short hiatus as crude prices drifted higher in early Asian trading, only to retreat sharply during NY hours. Traders had been banking on $70 (WTI) providing short-term support and as a result implied volatility began to retreat. However, doubts over Opec's ability to coordinate and follow through on what will surely be an announcement of cuts later this week, has caused traders to sell the market off and test the $70 level yet again. Opec's recently announced production cuts have yet to be greatly felt by the physical market and many analysts are concerned over the cartel's lackluster record in following through on its often bold announcements. Non-Opec producers Norway and Russia have declined to consider production cuts.
Hedgers can certainly expect the resurgent market volatility to affect their long-term outlook. Consumers looking to lock in prices at relative bargain levels need to be aware of downside risks should the physical market continue to push lower. Buying Singapore 180cst Fuel Oil Swaps around the $370 level should be paired with the purchase of highly liquid WTI puts. Using Average Price Options, the November 2008 $65 puts can be owned for only about $2.00 per contract. That's $2,000 of maximum exposure per 1000 bbls. If the Fuel Oil swap trends lower in the short-term, the consumer hedger can sell out the losing position which may be to a large extent compensated for by the profits on the long WTI puts. Hudson Capital Energy makes markets and acts as counterparty for both the Fuel Oil Swap and WTI puts without charging any fees. This is an optimal strategy to consider in these extremely volatile markets.
Singapore, 09:45
Hedgers can certainly expect the resurgent market volatility to affect their long-term outlook. Consumers looking to lock in prices at relative bargain levels need to be aware of downside risks should the physical market continue to push lower. Buying Singapore 180cst Fuel Oil Swaps around the $370 level should be paired with the purchase of highly liquid WTI puts. Using Average Price Options, the November 2008 $65 puts can be owned for only about $2.00 per contract. That's $2,000 of maximum exposure per 1000 bbls. If the Fuel Oil swap trends lower in the short-term, the consumer hedger can sell out the losing position which may be to a large extent compensated for by the profits on the long WTI puts. Hudson Capital Energy makes markets and acts as counterparty for both the Fuel Oil Swap and WTI puts without charging any fees. This is an optimal strategy to consider in these extremely volatile markets.
Singapore, 09:45
Sunday, October 19, 2008
Basis Risk Strategies for Volatile & Illiquid Markets
Energy and metal prices failed to rebound in Friday trading as the current market volatility shows no signs of abating. Equities also failed to recover lost ground with the Dow sinking back below the 9000 level. Traders are watching Opec nervously as the oil group has called an emergency meeting for November ahead of its regularly scheduled December gathering. Late last week the cartel moved up the hastily assembled meeting to next Friday. As recently as early October with WTI crude oil trading closer to $90, some of the more hawkish members of the group issued statements claiming the world was oversupplied by between 0.4 - 0.5m barrels per day. As the market momentatily broke below $70, those extra barrels of supply were revised upwards by the group to 1m.
As traders view an Opec production cut as a fairly solid bet, it is pertinent for consumer hedgers to enter the market to take advantage of the more than 50% drop in many energy markets since only mid-July. Singapore bunker traders can protect against an Opec-inspired jump in prices while also limiting downside exposure by purchasing the Singapore 180CST Fuel Oil Swap in December at about $360. In order to avoid unlimited downside losses, the prudent hedger would purchase WTI puts (WTI options are the most liquid energy options in the commodity trading world, and help avoid the twin traps of counterparty credit risk and limited counterparties that Fuel Oil options currently entertain. These twin risks result in large bid/offer spreads making it extremely difficult to profitably exit bilateral Fuel Oil option deals). Using Average Price Options, the WTI December $65 puts are currently trading around $3.75 per contract. That's maximum risk of only $3,750 per 1000bbls of crude oil which provides unlimited downside protection should both Fuel Oil and Crude Oil continue lower. The above combination strategy represents unlimited upside protection gained from Fuel Oil swaps, with cheap unlimited downside protection from Crude Oil puts.
Singapore, 18:30
As traders view an Opec production cut as a fairly solid bet, it is pertinent for consumer hedgers to enter the market to take advantage of the more than 50% drop in many energy markets since only mid-July. Singapore bunker traders can protect against an Opec-inspired jump in prices while also limiting downside exposure by purchasing the Singapore 180CST Fuel Oil Swap in December at about $360. In order to avoid unlimited downside losses, the prudent hedger would purchase WTI puts (WTI options are the most liquid energy options in the commodity trading world, and help avoid the twin traps of counterparty credit risk and limited counterparties that Fuel Oil options currently entertain. These twin risks result in large bid/offer spreads making it extremely difficult to profitably exit bilateral Fuel Oil option deals). Using Average Price Options, the WTI December $65 puts are currently trading around $3.75 per contract. That's maximum risk of only $3,750 per 1000bbls of crude oil which provides unlimited downside protection should both Fuel Oil and Crude Oil continue lower. The above combination strategy represents unlimited upside protection gained from Fuel Oil swaps, with cheap unlimited downside protection from Crude Oil puts.
Singapore, 18:30
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