Energy markets held firm in the face of bearish inventory data yesterday as crude stocks in the United States were reported to have reached levels not seen since 1993. WTI and Brent both softened on the day but support remains fixed at the $50level. In short, the longer the market can remain above this price point, the weaker any retracement below it should prove to be. The reported draw in Distillates can be traced to an increase in demand from continental Europe, but so long as crude is able to hold above $50, expect Products markets to remain firm as well. As expected, California Jet Fuel experienced a late day rally and so
Distillate traders in Singapore should be on guard for any type of follow-through.
Implied volatility softened slightly in the Products yesterday as the market appears to be range bound and unable to break out firmly to either the upside or downside. Hedgers with near-term exposure to further upside moves in Sing Jetkero can look to lock in protection in the form of the April-Sept09 $70/90 call spread for only $3.00/barrel. The premium required for the call spread can be cut in half by accepting a price floor (short put) at $53.00.
Singapore, 09:00
Wednesday, March 25, 2009
Monday, March 23, 2009
Reaction to The Treasury's Plan and Fuel Oil Hedges
A quick note that Jonathan Kornafel, HCEnergy's Director of Asia will be speaking at the 6th Annual China Derivatives Summit in Shanghai on the topic of “Energy Market Volatility and Hedging & Trading Strategies” this Wednesday.
Commodity and equity markets in the West rose sharply yesterday after the US Treasury’s bad debt plan received a positive reception. Markets were thin however, as many traders were attending the annual NPRA conference in Texas. The link between oil and equities is important to note, as it serves to highlight the lack of fundamentals currently driving the market. The Treasury’s plan was greeted with approval for its size and scope, fundamentally a result of the absolute depths to which the global economy and demand have plunged. Any inflation/weak Dollar-induced rally needs to be taken with a grain of salt, as these issues will not confront the market for at least several quarters, most likely a year. There are however, a number of bullish supply-side issues currently demanding attention, such as the nationwide oilworkers strike in Brazil which is expected to immediately affect both Gasoline and Fuel Oil output, as well as a threatened three day strike of Nigerian oil workers.
While the Brazilian strike may add a short-term cushion to Fuel Oil prices, expect the products market to be the main catalyst to pull feedstock markets lower. Both California Diesel and Jet fuel differentials came under pressure yesterday during the rally. Singapore Fuel Oil is currently trading back up near the top of the range first established in late November 2008. This represents an excellent opportunity for producer hedgers to lock in solid downside protection that hasn’t been available for more than a month. The Sing Fuel Oil Q209 $245 price floor (put) is currently offered around $20.00 per MT and can be owned for zero cost by accepting a Q209 price ceiling (call) at $288. Physical traders currently long product and not fully hedged can sell upside calls to help defray added costs. The April Sing FO $280 calls are currently bid around $50,000 per 5000MT and expire on the last trading day of April.
Singapore, 09:00
Commodity and equity markets in the West rose sharply yesterday after the US Treasury’s bad debt plan received a positive reception. Markets were thin however, as many traders were attending the annual NPRA conference in Texas. The link between oil and equities is important to note, as it serves to highlight the lack of fundamentals currently driving the market. The Treasury’s plan was greeted with approval for its size and scope, fundamentally a result of the absolute depths to which the global economy and demand have plunged. Any inflation/weak Dollar-induced rally needs to be taken with a grain of salt, as these issues will not confront the market for at least several quarters, most likely a year. There are however, a number of bullish supply-side issues currently demanding attention, such as the nationwide oilworkers strike in Brazil which is expected to immediately affect both Gasoline and Fuel Oil output, as well as a threatened three day strike of Nigerian oil workers.
While the Brazilian strike may add a short-term cushion to Fuel Oil prices, expect the products market to be the main catalyst to pull feedstock markets lower. Both California Diesel and Jet fuel differentials came under pressure yesterday during the rally. Singapore Fuel Oil is currently trading back up near the top of the range first established in late November 2008. This represents an excellent opportunity for producer hedgers to lock in solid downside protection that hasn’t been available for more than a month. The Sing Fuel Oil Q209 $245 price floor (put) is currently offered around $20.00 per MT and can be owned for zero cost by accepting a Q209 price ceiling (call) at $288. Physical traders currently long product and not fully hedged can sell upside calls to help defray added costs. The April Sing FO $280 calls are currently bid around $50,000 per 5000MT and expire on the last trading day of April.
Singapore, 09:00
Wednesday, March 18, 2009
Sing JetKero
Energy markets continued their renewed push higher yesterday on the back of calls from Opec to increase compliance with already announced production cuts. WTI has now set a 3-month high in the push towards key resistance at the $50 level. Many traders have been caught off-guard with this post-Opec announcement rally and are looking for futures to turn within the week back towards $40. This prediction became all the more relevant yesterday as the API inventory numbers in the US came out overwhelmingly bearish.
Cracks showed considerable strength on top of the strong run-up in crude prices. California Jet Fuel differentials gained substantially, as did Nymex Heating Oil which is often used as a proxy by Airlines for hedging purposes. Singapore Jetkero and Distillate traders should be on the look-out for a near-term drive higher, while also guarding against the possibility that energy markets may turn and push lower. The Sing Jetkero 2Q09 $65 price cap (call strip) can now be owned for $1,500 per 1000bbls/month. Hedgers looking to offset half of the premium for this price cap while retaining some room for error on the downside can sell the $43.50 price floor (put strip) in the same tenor- resulting in a price cap premium of only $750. With the 2Q09 Calendar Swap currently trading around $55.00 this hedge results in breathing room of more than $11.50 on the downside, or more than six standard deviations.
Singapore, 09:00
Cracks showed considerable strength on top of the strong run-up in crude prices. California Jet Fuel differentials gained substantially, as did Nymex Heating Oil which is often used as a proxy by Airlines for hedging purposes. Singapore Jetkero and Distillate traders should be on the look-out for a near-term drive higher, while also guarding against the possibility that energy markets may turn and push lower. The Sing Jetkero 2Q09 $65 price cap (call strip) can now be owned for $1,500 per 1000bbls/month. Hedgers looking to offset half of the premium for this price cap while retaining some room for error on the downside can sell the $43.50 price floor (put strip) in the same tenor- resulting in a price cap premium of only $750. With the 2Q09 Calendar Swap currently trading around $55.00 this hedge results in breathing room of more than $11.50 on the downside, or more than six standard deviations.
Singapore, 09:00
Tuesday, March 17, 2009
Dow Jones Energy piece quotes HCEnergy
DJ Energy Options Volumes Fall As Traders Vanish
By Gregory Meyer
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--Activity in the market for oil and natural-gas options has died down, leaving some traders stuck with expensive positions and raising costs for companies keen to lock in prices for their commodities.
Energy producers have in recent years shown growing interest in using options to guard against price fluctuations. Energy options give holders the right, but not the obligation, to buy or sell oil or gas at a set price before a particular date.
Over the past year, however, companies including Chevron Corp. (CVX) and Marathon Oil Corp. (MRO) have pulled back on options trading. They did this to present clearer earnings reports to nervous investors, unlock cash or simply ride out a market that has oil and gas futures prices trading down some 70% from last summer's highs. The credit crisis also pushed some speculators, such as hedge funds, out of options markets.
Crude oil options volumes were down 38% in January and February from the same two months last year, data from the New York Mercantile Exchange show.
In the
same period, crude-futures trading was up 9%. Natural gas options volumes dropped 65% in the period, while gas futures volumes declined by 18%, according to Nymex, a unit of CME Group Inc. (CME).
"Banks, institutional traders, proprietary books of business, hedge funds - the bulk of that business and participation is just not there anymore,"
said Pete Anderson, chief executive of futures broker FC Stone Group Inc.
(FCSX). "There's a significant lack of liquidity, especially in the longer-tenured positions, compared to what there was a year ago."
Risk Appetite Abates
Market participants point to a variety of causes for the falloff, from options prices rising amid surging volatility in the futures markets, to banks'
newfound aversion to lending to speculators.
The slowdown is apparent in the Nymex energy options pit, home base for most exchange-traded oil and natural gas options. While most energy futures trading has migrated to computer screens, the complexity of the options market has kept activity largely on the exchange floor.
"We have some clients we just haven't heard from," said Raymond Carbone, president of Paramount Options, a Nymex floor broker. Remaining clients are "playing but they're playing with a much smaller risk appetite," he added. "We have bigger lulls in the day."
Volatility in the futures markets has meanwhile soared - oil's one-day price moves have regularly topped 5% this year, for example. That means energy futures have been more likely to hit certain options strike prices on any given day, potentially putting options "in the money," or at a point where holders can cash in. In response, options premiums have climbed, making them too expensive for some commercial hedgers, said Chris Thorpe, managing member at options dealer Hudson Capital Energy LLC in New York.
"It gets less attractive" with fewer participants in the market, Thorpe said.
Traders "can't get in and out of trades quickly. They take on more risk for less profit."
Stranded In A Thin Market
The effects of thinning options volumes have been in some cases extremely expensive, with some traders forced to unwind bets placed when markets were more liquid.
FC Stone last week said it expects to lose $54.4 million on a customer's energy trading account. CEO Anderson said the positions were "primarily"
in
natural gas options held by its customer, a market-making firm he declined to name.
Aside from options traded on exchanges, there's also a vast over-the-counter energy options market whose trading volumes are unknown. The value of options on commodities other than precious metals stood at $4.9 trillion in June, the latest month for which Bank for International Settlements data are available.
With some options-dealing Wall Street firms on shaky footing, more over-the-counter agreements have shifted onto exchanges through channels such as ClearPort, CME's system for sending over-the-counter trades to the exchange clearinghouse for settlement. Daily trades cleared on ClearPort rose 39% in February and 50% in January compared with the same months a year ago, according to CME.
"Nobody wants to do business with banks because of the credit risk on the other side," said Adam Robinson, director of commodities at hedge fund Armored Wolf. "When you ClearPort the trades, you're facing the exchange, not facing the bank."
-By Gregory Meyer, Dow Jones Newswires; 201-938-4377; greg.meyer@dowjones.com
By Gregory Meyer
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--Activity in the market for oil and natural-gas options has died down, leaving some traders stuck with expensive positions and raising costs for companies keen to lock in prices for their commodities.
Energy producers have in recent years shown growing interest in using options to guard against price fluctuations. Energy options give holders the right, but not the obligation, to buy or sell oil or gas at a set price before a particular date.
Over the past year, however, companies including Chevron Corp. (CVX) and Marathon Oil Corp. (MRO) have pulled back on options trading. They did this to present clearer earnings reports to nervous investors, unlock cash or simply ride out a market that has oil and gas futures prices trading down some 70% from last summer's highs. The credit crisis also pushed some speculators, such as hedge funds, out of options markets.
Crude oil options volumes were down 38% in January and February from the same two months last year, data from the New York Mercantile Exchange show.
In the
same period, crude-futures trading was up 9%. Natural gas options volumes dropped 65% in the period, while gas futures volumes declined by 18%, according to Nymex, a unit of CME Group Inc. (CME).
"Banks, institutional traders, proprietary books of business, hedge funds - the bulk of that business and participation is just not there anymore,"
said Pete Anderson, chief executive of futures broker FC Stone Group Inc.
(FCSX). "There's a significant lack of liquidity, especially in the longer-tenured positions, compared to what there was a year ago."
Risk Appetite Abates
Market participants point to a variety of causes for the falloff, from options prices rising amid surging volatility in the futures markets, to banks'
newfound aversion to lending to speculators.
The slowdown is apparent in the Nymex energy options pit, home base for most exchange-traded oil and natural gas options. While most energy futures trading has migrated to computer screens, the complexity of the options market has kept activity largely on the exchange floor.
"We have some clients we just haven't heard from," said Raymond Carbone, president of Paramount Options, a Nymex floor broker. Remaining clients are "playing but they're playing with a much smaller risk appetite," he added. "We have bigger lulls in the day."
Volatility in the futures markets has meanwhile soared - oil's one-day price moves have regularly topped 5% this year, for example. That means energy futures have been more likely to hit certain options strike prices on any given day, potentially putting options "in the money," or at a point where holders can cash in. In response, options premiums have climbed, making them too expensive for some commercial hedgers, said Chris Thorpe, managing member at options dealer Hudson Capital Energy LLC in New York.
"It gets less attractive" with fewer participants in the market, Thorpe said.
Traders "can't get in and out of trades quickly. They take on more risk for less profit."
Stranded In A Thin Market
The effects of thinning options volumes have been in some cases extremely expensive, with some traders forced to unwind bets placed when markets were more liquid.
FC Stone last week said it expects to lose $54.4 million on a customer's energy trading account. CEO Anderson said the positions were "primarily"
in
natural gas options held by its customer, a market-making firm he declined to name.
Aside from options traded on exchanges, there's also a vast over-the-counter energy options market whose trading volumes are unknown. The value of options on commodities other than precious metals stood at $4.9 trillion in June, the latest month for which Bank for International Settlements data are available.
With some options-dealing Wall Street firms on shaky footing, more over-the-counter agreements have shifted onto exchanges through channels such as ClearPort, CME's system for sending over-the-counter trades to the exchange clearinghouse for settlement. Daily trades cleared on ClearPort rose 39% in February and 50% in January compared with the same months a year ago, according to CME.
"Nobody wants to do business with banks because of the credit risk on the other side," said Adam Robinson, director of commodities at hedge fund Armored Wolf. "When you ClearPort the trades, you're facing the exchange, not facing the bank."
-By Gregory Meyer, Dow Jones Newswires; 201-938-4377; greg.meyer@dowjones.com
Trades to mitigate premium in periods of high volatility
Looking back over the last 20 years, we have very few periods of implied volatility to match what we have seen in the last 6 months. The two Gulf wars are the only examples that come close, and they were very short lived versus this most recent prolong volatility in petroleum markets. See graph.
The best way to combat the cost of option volatility in terms of options premium is by trading using a spread. This can be done using a collar (long put, short call or vice versa), in affect doing a volatility "neutral" trade. This can also be achieved with a put spread or call spread, to decrease risk or take a uni-directional hedge.
With the current market conditions continuing to be difficult to trade, we suggest buying put spreads to hedge inventory that is already in tank, or buying call spreads against future purchases for consumers. For Jet and Diesel consumers, the distillate crack is very well offered now, so heating oil call spreads are very attractive. A second half 2009 asian heat $1.50-$2.00/gal call spread is now worth $13 cents.
Monday, March 16, 2009
Opec Decision and Sing FO Hedging
Energy markets showed strength in late-day trading on Monday, recouping much of the losses from early Asian trading. WTI in particular surprised many traders by pushing higher on the day. This was after being offered more than one full standard deviation lower than unchanged, a volatile move which initially was a kneejerk reaction to Opec’s announcement of no more immediate cuts. Instead, the cartel took the much more shrewd step of stating it would focus on the remaining 800,000bbls/day it had previously announced it would remove from the market. By not announcing further production cuts, Opec took a gamble on not talking the market up with rhetoric that would see them have to remove more oil than necessary from the market to retain their hard-won credibility. Instead, by simply pushing to enforce greater accountability to recently announced cuts, the group’s compliance level should rise towards the 90% level; thus giving them greater pricing power in the long-term than simply taking the bait from the market and announcing more cuts than are necessary. Once digested, the market responded appropriately.
Consumer hedgers if not before, should now be on high-alert for futures prices to trend higher. Further cuts in Middle Eastern crude, especially of the heavy, sour variety will lead to increased upward pressure on Fuel Oil prices. Ali Naimi, the Saudi Oil Minister, has specifically stated that a WTI price of between $60-75 is crucial to allowing marginal producers to continue producing heavy oil. Bunker hedgers looking to protect against a near-term rise in Fuel Oil prices can look to owning a 2Q09 $255 price cap in Sing FO 180 for zero cost by accepting a price floor of $240 in the same tenor. This hedge provides for unlimited upside protection (just as with a swap) with the added benefit of less painful margin calls should the market trend lower (vs a swap hedge).
Consumer hedgers looking for immediate protection without risk accumulating immediately on the downside can own an option structure from April09 through Dec09 which pays out $800,000 per 10,000MT per month in Sing FO 180 if the underlying swap settles at the end of each month above the current price of approximately $255. If the underlying was to move lower, the hedge continues to pay out upon monthly expiration so long as the underlying settlement is not below $207. Below this level, losses begin to accumulate. Settlement at or above the current swap price of $255 results in payout each month of $800,000 per 10,000MT, equating to $80 of upside protection regardless of whether the underlying expires at the current price of $255 or $80 higher or anywhere in-between.
Singapore, 09:00
Consumer hedgers if not before, should now be on high-alert for futures prices to trend higher. Further cuts in Middle Eastern crude, especially of the heavy, sour variety will lead to increased upward pressure on Fuel Oil prices. Ali Naimi, the Saudi Oil Minister, has specifically stated that a WTI price of between $60-75 is crucial to allowing marginal producers to continue producing heavy oil. Bunker hedgers looking to protect against a near-term rise in Fuel Oil prices can look to owning a 2Q09 $255 price cap in Sing FO 180 for zero cost by accepting a price floor of $240 in the same tenor. This hedge provides for unlimited upside protection (just as with a swap) with the added benefit of less painful margin calls should the market trend lower (vs a swap hedge).
Consumer hedgers looking for immediate protection without risk accumulating immediately on the downside can own an option structure from April09 through Dec09 which pays out $800,000 per 10,000MT per month in Sing FO 180 if the underlying swap settles at the end of each month above the current price of approximately $255. If the underlying was to move lower, the hedge continues to pay out upon monthly expiration so long as the underlying settlement is not below $207. Below this level, losses begin to accumulate. Settlement at or above the current swap price of $255 results in payout each month of $800,000 per 10,000MT, equating to $80 of upside protection regardless of whether the underlying expires at the current price of $255 or $80 higher or anywhere in-between.
Singapore, 09:00
Wednesday, March 11, 2009
Refinery Action and Fuel Oil Hedging Strategies
Crude oil experienced significant price weakness yesterday on the back of profit-taking and a larger than expected inventory build. This occurred while Cushing WTI inventories indicated a slight draw due to turnaround season refinery demand. This is not to indicate refinery demand is relatively strong; in fact refinery runs are quite soft and the Singapore Fuel Oil market continues to witness a similar reduction in supply as refinery action continues to mitigate. The Fuel Oil market has felt an even more direct impact from Opec production cuts which have substantially removed medium and heavy sour crude from the market. While bunker fuel demand remains under pressure, the supply losses remain the foremost driver of market sentiment.
Sing Fuel Oil implied volatility remained unchanged yesterday after weakening significantly on Tuesday. The considerable drop in front-month FO enables consumer hedgers to lock in price caps or sell price floors at a level close to the bottom of the current near-term price range. An April Sing FO 180 $250 price cap (call) can now be owned for Zero Cost by accepting a price floor (put) at $231. Taking a different route, 10,000 MT of the $220 price floor (put) can be sold at $15.00 which indicates total premium received of $150,000 IF April Fuel Oil expires at or above $220. Below $220 the seller of the price floor still receives premium upon expiration so long as the underlying contract does not expire below $205 ($220 - $15 of premium received), below this point the hedge incurs losses equal to being long the underlying swap from $205. Similarly, if the underlying Fuel Oil swap moves higher the hedger will receive $150,000 of protection after expiration, basically mimicking a long swap position from $240 which is sold out at $255.
For a consumer hedger worried about a short-term rise in prices, the above strategy provides $15.00 of upside protection while not experiencing losses until the market moves below $205. With the tight trading ranges as of late, consumers with actual physical risk may opt for this strategy to reduce daily mark-to-market volatility seen with using only swaps for protection.
Singapore, 09:00
Sing Fuel Oil implied volatility remained unchanged yesterday after weakening significantly on Tuesday. The considerable drop in front-month FO enables consumer hedgers to lock in price caps or sell price floors at a level close to the bottom of the current near-term price range. An April Sing FO 180 $250 price cap (call) can now be owned for Zero Cost by accepting a price floor (put) at $231. Taking a different route, 10,000 MT of the $220 price floor (put) can be sold at $15.00 which indicates total premium received of $150,000 IF April Fuel Oil expires at or above $220. Below $220 the seller of the price floor still receives premium upon expiration so long as the underlying contract does not expire below $205 ($220 - $15 of premium received), below this point the hedge incurs losses equal to being long the underlying swap from $205. Similarly, if the underlying Fuel Oil swap moves higher the hedger will receive $150,000 of protection after expiration, basically mimicking a long swap position from $240 which is sold out at $255.
For a consumer hedger worried about a short-term rise in prices, the above strategy provides $15.00 of upside protection while not experiencing losses until the market moves below $205. With the tight trading ranges as of late, consumers with actual physical risk may opt for this strategy to reduce daily mark-to-market volatility seen with using only swaps for protection.
Singapore, 09:00
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