Crude Pushes Lower

WTI crude oil fell below $47 in volatile trading yesterday, marking a drop of more than $100 in less than five months. Short-term producer hedgers have benefited from cheap put purchases over this period, as rising inventories and refining capacity combine with relentless consumer demand declines and a global deleveraging of risk. Despite the steep drop of recent months, many traders see no reason for a near-term reversal of the trend.

Many hedgers have been taking advantage of short-term downside bargains combined with a longer-term bullish perspective. Using WTI Asian options, the Q109 $30 put strip can be owned for only about $1,000 of total risk per month per 1000 barrels. This position can be combined with the purchase of the 2H09 $90 call strip for about $1,500 of total risk per month per 1000 barrels. This "calendar strangle strip" position effectively captures downside risk in the near-term while providing potential upside consumer protection for the remainder of 2009.

Singapore, 09:00

WTI Below $50 as a Result of Opec's Failure to Cut

Front-month WTI crude pushed below $50 yesterday, giving back much of the gains from late last week. The drop in prices was seen by many as a reaction to Opec's lack of further production cuts at the sideline meeting in Cairo over the weekend. Approximately $5 of premium had been built-in to the market as a precaution by traders against a surprise cut by the cartel; it was this premium that began bleeding out during Asian trading and accelerated as the western markets opened.

Implied volatility increased yesterday as uncertainty returned to the market. Traders are now focused on how low crude can push in the next three to six months. Strong buying has been seen in both the $30 and $40 put range through the first half of 2009. Using Asian-style options, the WTI 1H09 $30 put strip is currently offered at a very cheap $0.70. That's $700 of total premium at risk per month- crude need not trade below $30 for these options to return protection/profits- any sharp drop towards the $40 level in the next few months should result in an increase in value for these puts.

Singapore, 08:00

Saudi Arabia Targets $75

Oil markets remained pensive on Friday ahead of Opec's sideline meeting in Cairo. As expected, the cartel did not announce further production cuts, however the markets may be stirred during Asian trading Monday morning as a result of Saudi Arabia's price targeting. In a rare step outside of typical form, Saudi Oil Minister Ali al-Naimi targetted $75 as a fair and reasonable price level. In late-day trading in NY, bargain hunters bid up the June 2009 $75 calls.

Similar consumer strategies have been targeted in WTI for mid to late 2009 when global crude demand may begin to return. Using Asian options, the July through December 2009 (2H09) $80/100 call spread strip is offered at about $2.70 ($2,700 of total premium at risk per month with a maximum payout of $17,300 per month). The call spread strip can be purchased for Zero Cost by selling the $48 put in the same tenor. With the 2H09 swap strip trading above $64.00, downside risk on this Zero-Cost 3-Way does not begin for more than $16.00.

Singapore, 16:00

Bounce off $50 Highlights Consumer Protection Strategies

Added stimulus to the ailing Chinese economy provided the backdrop for a rise in commodity prices as crude oil once again bounced off the $50 level. Current demand destruction was highlighted by the US stock data showing large inventory increases for both crude oil and unleaded gasoline. These numbers emphasize the plight of Opec; the cartel has struggled to cut production at a rate which would reduce stocks in competition with plummeting demand. The group continues to tread one step behind the market, although recent gains in equities combined with the crude market falling almost $100 in 4 months appear to have placed a temporary floor under the oil price.

Yesterday's rally from $50 resulted in lower implied volatility and therefore cheaper option premiums. Consumer hedges have come into the spotlight again with traders looking at the WTI Asian-style Q109 $65/75 call spread strip, currently trading around $1.90 ($1,900 of total risk against $8,100 of profit potential per month). For the same risk exposure but with a larger band of upside protection, traders have also been quoting the WTI Asian-style Q109 $70/90 call spread strip, currently trading around $1.90 ($1,900 of total risk against $18,100 of profit potential per month).

Singapore, 06:30

Renewed Push Lower for Crude Oil

Crude oil prices dropped sharply on Tuesday, reversing much of the gains enjoyed in the 2-day rally surrounding the weekend. The downward move pushed implied volatilities higher as producer hedgers moved to protect their downside. The 10% rally that began late last week enabled those traders that are long physical to buy downside puts (which become cheaper as the market moves higher). The lower implied volatility of the past few days only added to the incentive to lock-in cheap protection.

As the market has now retraced much of the recent gains, a renewed emphasis is on how low this market can push in the short-term. Bargains remain in near-term downside protection: using Asian options, the WTI January $40 puts are trading around $1.00 ($1,000 max exposure for 1000 barrels of protection). WTI crude need not trade below $40 for these puts to be profitable, any near-term movement lower may result in a sharp jump in the premium of this option. Traders can also opt for the January $30/45 put spread, currently trading around $1.10.

Singapore, 08:00

Citi Rescue Sparks Commodity Rally

Citigroup led the way yesterday as the beleaguered financial institution found itself backed by the US government- pulling both equities and commodities higher while the dollar lost strength on funding questions. January WTI pushed back towards $55 for its second consecutive rally as hedge funds shifted from a multi-year short position back to one of being long.

While the extend of the current rally may be debatable, consumer hedgers who have been taking advantage of cheap upside protection in the form of the February WTI $80 calls have enjoyed recent profits. While the $80 calls are now trading around $1,600 per 1000 barrels, the $70 call can be owned for even less premium by selling the Feb $90 call. This vertical call spread is currently offered at only $1,250 per 1000 barrels with a maximum payout of $18,750 should the rally in crude oil push the market back above $90.

Singapore, 07:30

Consumer Protection Strategies

Energy markets continued to push lower Friday as December RBOB unleaded gasoline traded below $1.00 for the first time in two years. January WTI crude oil settled under $50, marking a fall of almost $100 in only 4 months. While a protracted global recession will continue to hamper demand well into 2009, supply-side problems that originally pushed oil towards $150 have not disappeared. Thus, it is imperative for consumer hedgers to take advantage of the myriad of bargains in the highly liquid WTI options market.

Using Average Price Options (Asians), the WTI 2nd half of 2009 $85 call is currently trading around only $3.25. That's maximum exposure of only $3,250 per 1000 barrels/month to be long at $85 for every month from July 2009 through December 2009. Even cheaper, the $85/105 call spread strip in the same tenor has been trading around $1.50. With max exposure of $9,000, this trade has a potential payout of $111,000 should crude move back above $105 in the second half of 2009.

For Bunker Traders short physical and looking to buy the Singapore 180 or 380 swaps, cheap downside protection can be had by partnering the long swaps with the purchase of the American-style January 2009 $35 puts for only about $400 per 1000 barrels. Crude need not trade below $35 for the puts to provide protection against long swaps, any move lower in the next 2 weeks will result in an increase in value of the puts, partially offsetting any losses from the long swaps.

Singapore, 21:00