Aside from February WTI, energy prices consolidated and in many cases pushed higher last week amid further evidence of follow-through on supply cuts from Opec producer nations. Consumer demand looks set to continue dropping through 2009 as the International Energy Agency fell into line with Opec and the US Department of Energy in predicting back-to-back years of falling oil demand. The combination of drastic supply cuts with continuing global economic turmoil leading to receding consumer demand will certainly inject uncertainty and thus volatility into the energy markets for some time to come.
For the moment, implied volatility has decreased due to last week’s underlying price action. Consolidation has resulted in cheaper option premiums, temporarily allowing hedgers to lock in long-term hedges at relative bargain prices. Using Asian options, the WTI Feb through December 2009 $65/85 call spread strip can be purchased for an average price of about $2,750 per 1000 barrels per month. By selling the $44 put in the same tenor, the call spread strip can be owned for Zero Cost thus providing the full $20,000 of consumer protection per month. The Feb-Dec underlying calendar swap is currently trading above $53.00, thus allowing for an average downside buffer of more than $9.00 paired with maximum upside protection of $220,000 per contract.
Singapore, 09:00
Monday, January 19, 2009
Wednesday, January 14, 2009
Singapore Fuel Oil 180 Options
Hudson Capital Energy is now making markets in Nymex cleared Sing FUEL OIL 180 Asian-style options. As with the newly clearing JetKero options, the ability to create and price structures such as Costless Collars in just seconds during Asian trading hours will help us provide shipping companies and bunker traders with enormous liquidity in this once opaque OTC-only market. This note is part of a Singapore Products Report our group will be distributing twice per week to possible counterparties who may be interested in trading Sing Fuel Oil 180 options.
Similar to the JetKero market, Singapore Fuel Oil 180 swaps rebounded in mid-December after falling from spectacular highs of around $800 per Metric Ton during the summer. The market seemed to find a bottom in early December before rebounding somewhat around the Christmas holiday. The futures curve now appears to be trending higher with the March 2009 contract forming a double bottom around the $200 level. As with WTI and similar energy markets, the trend now appears to be consolidation after 5 months of unrelenting price drops. It is this consolidation that has helped to bring about a relative drop in implied volatilities.
Hedgers who bought swaps during the market fall would have benefitted enormously from the purchase of cheap downside puts. It is this simple stop-loss strategy that may help hedgers who choose to short the market at these lower levels by selling swaps. Cheap upside calls are available to limit losses on short swap positions (limiting hedging losses regardless of physical exposure). The Feb09-June09 $300 call strip is valued around $31.00 with the underlying calendar swap settling just under $265. This option position does not need to be held until expiration, any sharp move higher in the FO market will result in an increase in value for these calls, which can then be sold out and the profits used against the losses from the short swap. Of course, as expiration approaches, the options will begin to lose value at an increasing rate. The call strip value can be cut almost in half to approximately $18.00 of exposure by selling the $200 put in the same tenor. This trade will result in the hedger getting long below $200, thus cancelling out the protection from the short swap at that point.
Singapore, 09:00
Similar to the JetKero market, Singapore Fuel Oil 180 swaps rebounded in mid-December after falling from spectacular highs of around $800 per Metric Ton during the summer. The market seemed to find a bottom in early December before rebounding somewhat around the Christmas holiday. The futures curve now appears to be trending higher with the March 2009 contract forming a double bottom around the $200 level. As with WTI and similar energy markets, the trend now appears to be consolidation after 5 months of unrelenting price drops. It is this consolidation that has helped to bring about a relative drop in implied volatilities.
Hedgers who bought swaps during the market fall would have benefitted enormously from the purchase of cheap downside puts. It is this simple stop-loss strategy that may help hedgers who choose to short the market at these lower levels by selling swaps. Cheap upside calls are available to limit losses on short swap positions (limiting hedging losses regardless of physical exposure). The Feb09-June09 $300 call strip is valued around $31.00 with the underlying calendar swap settling just under $265. This option position does not need to be held until expiration, any sharp move higher in the FO market will result in an increase in value for these calls, which can then be sold out and the profits used against the losses from the short swap. Of course, as expiration approaches, the options will begin to lose value at an increasing rate. The call strip value can be cut almost in half to approximately $18.00 of exposure by selling the $200 put in the same tenor. This trade will result in the hedger getting long below $200, thus cancelling out the protection from the short swap at that point.
Singapore, 09:00
Volatility falls off a cliff
Crude volatility was down sharply, 10% today, down from 86 to 76. February crude options expired today and the Feb-March crude spread remains wide at $7.00. Financial markets in general were down sharply with negative news from the retail sector and major banks.
Heating oil inventory builds were much higher than expected (+6MN bbls) following weekly data released today. The strong distillate cracks have been supported by European natural gas tightness and cold weather systems both in Europe and northeastern United States. With this large build in distillates, the market took heat cracks off by $1.75. The RBOB improved by $1.5, pushing it very high versus the last 3 months.
We feel that there is limited downside here and calls will become more expensive versus puts soon. This is a good time to think about buying calls as the general market sentiment remains bearish (for now). We may test new lows, but that reinforces a call or call spread buying strategy versus long futures or swaps.
New York, 16hoo.
Tuesday, January 13, 2009
Singapore JetKero Options
Hudson Capital Energy is now making markets in Nymex cleared Sing JetKero Asian-style options. The ability to create and price structures such as Costless Collars in just seconds during Asian trading hours will help us provide Airlines and interested hedgers with enormous liquidity in this once opaque OTC-only market. This note is part of a Singapore Products Report our group will be distributing twice per week to possible counterparties who may be interested in trading Sing JetKero options.
Singapore JetKero swaps rebounded in late December after falling from highs of greater than $180 per barrel during the summer. The February contract bounced off the $55 level and later built support at $60, after hitting this level twice (the second week of December and again late last week). Looking further back along the contango futures curve, August09 bottomed out just below $65 and looks to be building support around the $70 level. It is this consolidation (not only in JetKero, but also in similar regional products markets) that has resulted in a decrease in implied volatilities, thus making option structures more attractive.
Fiscal stimulus in China will eventually impact consumer demand, increasing travel and therefore JetKero demand. The same is true in both the United States and Europe. Airlines looking to protect their fuel requirements for the remainder of 2009 can look to the Sing JetKero Feb09-Dec09 $57/90 Costless Collar. With the calendar swap trading above $69.00, this hedge provides a downside average buffer of approximately $12.00 with unlimited upside protection above $90.
Singapore, 10:00
Singapore JetKero swaps rebounded in late December after falling from highs of greater than $180 per barrel during the summer. The February contract bounced off the $55 level and later built support at $60, after hitting this level twice (the second week of December and again late last week). Looking further back along the contango futures curve, August09 bottomed out just below $65 and looks to be building support around the $70 level. It is this consolidation (not only in JetKero, but also in similar regional products markets) that has resulted in a decrease in implied volatilities, thus making option structures more attractive.
Fiscal stimulus in China will eventually impact consumer demand, increasing travel and therefore JetKero demand. The same is true in both the United States and Europe. Airlines looking to protect their fuel requirements for the remainder of 2009 can look to the Sing JetKero Feb09-Dec09 $57/90 Costless Collar. With the calendar swap trading above $69.00, this hedge provides a downside average buffer of approximately $12.00 with unlimited upside protection above $90.
Singapore, 10:00
Implied Vols Retreat
With just a few days until expiration, February ’09 WTI pushed back up towards $40 as political pressure has increased for a larger US government stimulus package and direct capital injections. Despite trading below $40, the possible effect of any stimulus package is evident in the contango futures curve, with the entire WTI curve beyond April ‘09 trading above $50. The Brent curve trades above $50 after March ’09. Floating storage to be released upon the market throughout 2009 will continue to have a price dampening effect, while geopolitical issues such as the as yet unresolved Russia/Ukraine gas spat and the tinderbox-like war between Israel and Hamas in Gaza persist in requiring a premium of the energy markets.
The lack of sharp movement in the last few trading days has resulted in a drop in implied volatility. Consumer hedgers searching for bargains can look to the WTI Feb09-June09 $60/75 call spread strip, currently trading around an average price of $2,600 per 1000 barrels per month. The hedge can be made costless by selling the $43 put in the same tenor.
Singapore, 09:00
The lack of sharp movement in the last few trading days has resulted in a drop in implied volatility. Consumer hedgers searching for bargains can look to the WTI Feb09-June09 $60/75 call spread strip, currently trading around an average price of $2,600 per 1000 barrels per month. The hedge can be made costless by selling the $43 put in the same tenor.
Singapore, 09:00
Opportunities in a Contango Market
The geopolitical premium continues to bleed out of crude prices as Russia and Ukraine look to settle their dispute and resume gas flows. Last week’s poor US unemployment figures continue to reinforce weak consumer demand while traders await further data this week with a sense of trepidation. Along with CPI and PPI numbers, retail demand and industrial production data look set to drag equity and commodity markets lower. The only bright spot in terms of consumer demand may be that as worse economic data is released, the US Congress may be motivated to push for faster action on a larger stimulus plan.
Opec production cuts, near- to medium-term consumer demand destruction and excessive crude inventories contribute much to the current contango market structure. Traders looking for continued weakness in the near-term with the possibility of recovery in the longer-term can take advantage of structures such as the Feb09 through June09 $35 put strip with the July09 through Dec09 $85/95 call spread strip. The combined structure is currently trading around only $2,800 per 1000 barrels per month. This trade provides near-term downside exposure (the Feb-June underlying calendar strip is trading just below $49.00) while also providing long-term upside exposure (July-Dec underlying calendar strip is trading around $55.50) with only $2,800 per month at risk.
Singapore, 09:00
Opec production cuts, near- to medium-term consumer demand destruction and excessive crude inventories contribute much to the current contango market structure. Traders looking for continued weakness in the near-term with the possibility of recovery in the longer-term can take advantage of structures such as the Feb09 through June09 $35 put strip with the July09 through Dec09 $85/95 call spread strip. The combined structure is currently trading around only $2,800 per 1000 barrels per month. This trade provides near-term downside exposure (the Feb-June underlying calendar strip is trading just below $49.00) while also providing long-term upside exposure (July-Dec underlying calendar strip is trading around $55.50) with only $2,800 per month at risk.
Singapore, 09:00
Monday, January 12, 2009
Opec Follow-through Seen in Brent/Dubai EFS
Crude prices ended last week in negative territory with WTI looking set to test the $40 level in early Asian trading Monday morning. Meanwhile, Brent, the North Sea benchmark also traded lower on the week but the WTI/Brent spread has now widened to almost $4 with Brent premium. Similarly, the Brent/Dubai spread has moved into negative territory. These atypical contract moves are a result of follow-through on the part of the Opec producers; the cartel has reduced the supply of their heavy, sour crude oil to the market, while the light, sweet contracts (WTI in particular) are suffering from a supply glut.
The above situation may take several months to play itself out, but the pattern is clear: less oil is coming to the market and those contracts directly concerned are rallying. Hedgers are beginning to take advantage of this phenomenon by buying upside protection for the 2nd half of 2009. Often the protection is cheap enough that it can be made Zero-Cost by selling a put significantly lower than the current market. For instance, the 2H09 WTI $75/90 call spread strip is trading around $2,800 per 1000 barrels per month. For a Zero-Cost strategy, sell the $40 put in the same tenor. With the 2H09 calendar strip trading above $57.50, this consumer hedge provides an average of more than $17.50 of room on the downside.
Singapore, 05:00
The above situation may take several months to play itself out, but the pattern is clear: less oil is coming to the market and those contracts directly concerned are rallying. Hedgers are beginning to take advantage of this phenomenon by buying upside protection for the 2nd half of 2009. Often the protection is cheap enough that it can be made Zero-Cost by selling a put significantly lower than the current market. For instance, the 2H09 WTI $75/90 call spread strip is trading around $2,800 per 1000 barrels per month. For a Zero-Cost strategy, sell the $40 put in the same tenor. With the 2H09 calendar strip trading above $57.50, this consumer hedge provides an average of more than $17.50 of room on the downside.
Singapore, 05:00
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