Energy markets gained fresh legs last week from a number of positive economic indicators enabling both WTI and Brent to settle firmly above the $70 level. The end of the week saw Chinese retail sales and factory output increasing substantially while the EIA released surprisingly bullish inventory data. The IEA added to the bullish trend by issuing a forecast for a rise in crude demand on the back of an expected increase in energy consumption in the US and China. While these numbers can certainly be viewed as optimistic in the short-term, it remains to be seen whether there is significant underlying strength (post-stimulus) in this economic recovery, particularly in regard to China’s private sector demand.
Expectations for this week center on the push by WTI and Brent to break through near-term resistance around the $75.85 level. Otherwise, expect a slow and painful drift lower. The fact remains that funds and various speculators have been piling into the market as of late (last week crude longs increased 3.5% to 206,000 while speculative longs surged more than 7% to 118,000 contracts according to the CFTC) and thus there is enormous paper length invested in a further move higher. From a psychological perspective, the more we rise the more those who missed most of the “fun” will feel pressure to jump in now and not miss any more of it. Expect significant upward pressure to continue.
Monday morning begins with market participants digesting bullish news of incumbent Ahmadinejad’s re-election victory in Iran. Given the lack of a significant retracement since bouncing off $66, many consumer hedgers and traders are reluctant to simply purchase swaps to protect/profit from further moves higher. Instead, call spreads and call spreads partially financed by put sales are more in demand. For instance, the Brent APO August $80/90 call spread can be owned for only about $1.75 ($8,250 possible payout vs only $1,750 of risk). Similarly, the Brent APO December09 $85/110 call spread can be owned for only $1,500/1000bbls when the $61.50 put is shorted to provide financing.
Singapore
Sunday, June 14, 2009
Tuesday, June 9, 2009
Crude Above $70; Singapore Fuel Oil 180cst Hedging/Trading
As predicted, crude surged above $70 early in the week before the market had a chance to succumb to weak longs and profit taking around the $68 level. Bullish US API data including a crude draw of almost 6M bbls only served to pull more longs into the energy complex. It also doesn’t hurt that the Dollar appears to have resumed its downward trajectory, falling 1% against the Yen and Euro and almost 1.5% against the Pound.
WTI settlement after NY trading yesterday above $70 was key to the move higher and any EIA reinforcement tonight of the already released API inventory data will serve to underpin $70 as support. Part of the reason for the crude draw was feedstock inventories pulled through by refiners to take advantage of profitable crack spreads. While the Singapore Fuel Oil 180cst crack may not strengthen much more in the short-term, it is expected to hold around its current level and thus the underlying should rise in parallel with WTI and Brent. As with $70 in the western benchmarks, expect the $400 level (if broken and settled above in July in the next 48 hours) to become psychological support for further moves higher.
Consumer hedgers/traders seeking to position themselves against a short-term push higher can look to own the Singapore FO 180 July09 $420 Call for zero cost by selling two $375 Calls in the same tenor. Similarly, the $450/500 call spread can be owned for zero cost by accepting a single price floor at $370.
Singapore
WTI settlement after NY trading yesterday above $70 was key to the move higher and any EIA reinforcement tonight of the already released API inventory data will serve to underpin $70 as support. Part of the reason for the crude draw was feedstock inventories pulled through by refiners to take advantage of profitable crack spreads. While the Singapore Fuel Oil 180cst crack may not strengthen much more in the short-term, it is expected to hold around its current level and thus the underlying should rise in parallel with WTI and Brent. As with $70 in the western benchmarks, expect the $400 level (if broken and settled above in July in the next 48 hours) to become psychological support for further moves higher.
Consumer hedgers/traders seeking to position themselves against a short-term push higher can look to own the Singapore FO 180 July09 $420 Call for zero cost by selling two $375 Calls in the same tenor. Similarly, the $450/500 call spread can be owned for zero cost by accepting a single price floor at $370.
Singapore
Sunday, June 7, 2009
Implied Vol Increases; Brent Vol Strategies
Energy markets gained fresh legs off last week’s rally from the Wednesday lows. The main catalyst for the price strength was job losses in the US slowing remarkably while the unemployment rate continued inching closer to 10%. Despite the often volatile trading, both WTI and Brent ended the week more than $2 higher than the preceding week and only about $0.40 lower on the day. Expect continued strength in the crude markets so long as the less-than-terrible economic news continues to flow and the Fund assault on $70 persists. This (psychological) level needs to be tested and broken immediately or else WTI and Brent will find themselves drifting back down to retest $65.50.
The steadily increasing yield on US Treasuries is not yet a major cause for concern as this remains an important indicator of economic activity returning to some level of normality. The 10-Year yield remains under 4%, not particularly alarming from a historic point of view, however the upward trend can be viewed as possibly an early alarm bell in debt markets signaling future trouble with capital raising (a la Latvia).
Implied volatility levels increased substantially across the energy complex after crude broke through and then retreated below the $70 level. As mentioned, an immediate assault on this price point needs to be launched again to prevent languishing around $66 for the next week. Brent traders looking to take advantage of the recent pop in implied vol to collect relatively high premiums can sell the Brent APO Aug09 $60 puts for around $1.00/bbl or perhaps the July09 $65 puts for approx $1.60/bbl. Traders looking for the market to remain rangebound between $65-72 may consider selling the Brent APO July09 $65/75 strangle for $3.20/bbl.
Singapore
The steadily increasing yield on US Treasuries is not yet a major cause for concern as this remains an important indicator of economic activity returning to some level of normality. The 10-Year yield remains under 4%, not particularly alarming from a historic point of view, however the upward trend can be viewed as possibly an early alarm bell in debt markets signaling future trouble with capital raising (a la Latvia).
Implied volatility levels increased substantially across the energy complex after crude broke through and then retreated below the $70 level. As mentioned, an immediate assault on this price point needs to be launched again to prevent languishing around $66 for the next week. Brent traders looking to take advantage of the recent pop in implied vol to collect relatively high premiums can sell the Brent APO Aug09 $60 puts for around $1.00/bbl or perhaps the July09 $65 puts for approx $1.60/bbl. Traders looking for the market to remain rangebound between $65-72 may consider selling the Brent APO July09 $65/75 strangle for $3.20/bbl.
Singapore
Thursday, June 4, 2009
Fresh Legs for Energy; Brent Crude Collar
Just as predicted, fund buying returned to the market yesterday and resumed the push to $70 in Brent and WTI benchmark crude. Support held firm around the $65.50 area and paper length saw Wednesday for what it was: an excellent buying opportunity, pushing July WTI to a 2009 high of $69.60. It didn’t hurt that GS yesterday introduced a newly minted bullish stance, both near- and long-term.
US unemployment data is due for release later today, and any surprise to the upside (read: not terrible news) should result in fresh paper buying. Psychological resistance will weed out some of the weak longs around $70, and a push above should bring us to the real ceiling around $71.85. Lastly, expect the typical Friday flattening up of short positions (as if we needed another reason unrelated to fundamentals to push higher).
Despite yesterday’s rally, implied volatility levels remain at Wednesday’s relatively inflated heights. Strong producer/hedger buying in the puts has resulted in the much talked about put skew- allowing for advantageous consumer collar buying. Traders looking for a near-term break above $70 can opt for the ICE Brent APO July09 $75 Call for zero cost by selling two $61 puts in the same tenor.
Singapore
US unemployment data is due for release later today, and any surprise to the upside (read: not terrible news) should result in fresh paper buying. Psychological resistance will weed out some of the weak longs around $70, and a push above should bring us to the real ceiling around $71.85. Lastly, expect the typical Friday flattening up of short positions (as if we needed another reason unrelated to fundamentals to push higher).
Despite yesterday’s rally, implied volatility levels remain at Wednesday’s relatively inflated heights. Strong producer/hedger buying in the puts has resulted in the much talked about put skew- allowing for advantageous consumer collar buying. Traders looking for a near-term break above $70 can opt for the ICE Brent APO July09 $75 Call for zero cost by selling two $61 puts in the same tenor.
Singapore
Tuesday, June 2, 2009
Energy Markets Re-trench; Singapore Fuel Oil Hedging/Trading
Energy markets traded without much direction yesterday as equities also looked undecided. Increasing fund flows have resulted in benchmark commodity contracts trading largely as an asset class (hedge against future inflation, hedge/trade against Dollar weakness) and with recent less-than-terrible economic news being reported (Chinese demand, ISM surveys) it appears there is too much long paper entering the market to call a top in energy futures. This also leads to the question as to whether the recent equity and commodity rally has over-compensated for the humble signs of recovery we have been observing. Basic energy supply and demand would tell us we have certainly gotten ahead of ourselves in the short-term, leading traders to not put much stock in the weekly US inventory data outside of the short spike in volatility seen immediately after the release of the numbers.
Despite yesterday’s lacklustre trading (and continuation of the implied vol implosion), the trend to the upside across the energy complex remains firmly intact. With recent IMF predictions of an 11% drop in world trade, one would expect bunker prices to remain mired near recent lows. This is not to be seen however, as Singapore Fuel Oil 180cst continues its assault on $400. As crude pushes for the inevitable break over $70, so FO follows to break through $400 and build support at that level. The current move higher began after breaking convincingly above $280, a price point briefly retested before the market pushed to today’s heady levels.
Consumer hedgers looking to protect against further near-term upside moves in bunker prices can own a zero-cost price ceiling in July Sing FO 180cst at $400 by also accepting a price floor at $370 leveraged twice. For those looking for limited downside risk, the July $420 price ceiling can be owned for zero cost by selling the $320/385 put spread in the same month. This hedge offers unlimited upside protection above $420 with $65 of risk on the downside.
Singapore
Despite yesterday’s lacklustre trading (and continuation of the implied vol implosion), the trend to the upside across the energy complex remains firmly intact. With recent IMF predictions of an 11% drop in world trade, one would expect bunker prices to remain mired near recent lows. This is not to be seen however, as Singapore Fuel Oil 180cst continues its assault on $400. As crude pushes for the inevitable break over $70, so FO follows to break through $400 and build support at that level. The current move higher began after breaking convincingly above $280, a price point briefly retested before the market pushed to today’s heady levels.
Consumer hedgers looking to protect against further near-term upside moves in bunker prices can own a zero-cost price ceiling in July Sing FO 180cst at $400 by also accepting a price floor at $370 leveraged twice. For those looking for limited downside risk, the July $420 price ceiling can be owned for zero cost by selling the $320/385 put spread in the same month. This hedge offers unlimited upside protection above $420 with $65 of risk on the downside.
Singapore
Sunday, May 31, 2009
Strong Asian Demand; ICE Brent Hedging/Trading
In the course of the last couple weeks we’ve seen several new highs for the year, and Friday was no exception. Closing out the week on the back of increasing pressure from the gasoline market, a spiralling (lower) dollar and a rally in equities, crude markets ended the month of May with gains of upwards of 30%. Economic data is the predominant catalyst pushing energy markets higher, and it is Asia that appears to be leading the charge in this respect. Industrial Production results for Asia during the month of April were surprisingly optimistic, highlighting the strength of the hoped for and much-discussed Asian recovery. This is no more apparent than in China where motor-vehicle sales and increased Ethylene production (related to Naptha demand) reveal a boosted oil demand picture.
After last week’s archetypal production meeting, Opec decided not to adjust announced output levels while also stating they expect higher near-term prices in the range of $75-80. According to the CFTC, crude longs increased by more than 9,000 contracts last week to 187k while speculative net longs also increased approximately 8% to 101.6k. On further moves higher, aside from psychological resistance at $70, expect significant selling pressure from profit-takers around $71.85.
Implied volatility has decreased substantially across the entire feedstock and product complex. Despite soft At-The-Money vols, the put skew remains elevated in crude markets, thus allowing consumer hedgers to own relatively better priced upside protection by selling inflated-priced puts for financing. For instance, the ICE Brent APO 2H09 $80 call can be owned for zero cost by selling the $57.50 put in the same tenor. Similarly, the ICE Brent APO 2H09 $80 call can be owned for zero cost when the $50/60.50 put spread is sold. This position results in unlimited upside protection/gains above $80 with only limited loss potential on the downside ($10.50/month).
Singapore
After last week’s archetypal production meeting, Opec decided not to adjust announced output levels while also stating they expect higher near-term prices in the range of $75-80. According to the CFTC, crude longs increased by more than 9,000 contracts last week to 187k while speculative net longs also increased approximately 8% to 101.6k. On further moves higher, aside from psychological resistance at $70, expect significant selling pressure from profit-takers around $71.85.
Implied volatility has decreased substantially across the entire feedstock and product complex. Despite soft At-The-Money vols, the put skew remains elevated in crude markets, thus allowing consumer hedgers to own relatively better priced upside protection by selling inflated-priced puts for financing. For instance, the ICE Brent APO 2H09 $80 call can be owned for zero cost by selling the $57.50 put in the same tenor. Similarly, the ICE Brent APO 2H09 $80 call can be owned for zero cost when the $50/60.50 put spread is sold. This position results in unlimited upside protection/gains above $80 with only limited loss potential on the downside ($10.50/month).
Singapore
Thursday, May 28, 2009
Opec Statement; Brent Hedging/Trading
Traders took their cue from Saudi Oil Minister Ali Naimi’s comments yesterday that the world economy is strong enough to endure $75-80 oil. The cartel’s de facto spokesperson provided fresh legs for what looks like the beginning stages of a push into the high $60’s for WTI and Brent. Look for resistance around $65.00 (mostly psychological), more specifically $64.85 and $65.20. Above these levels, look to scoop up some cheap puts around $67.12 as the market will encounter severe resistance at this point.
Energy markets may continue to ignore the enormous supply overhang in the short-term as inflationary pressures (manifest in rising long-term U.S. Treasury yields) have found a home in crude oil. Consumer hedgers and traders looking to be on-board for the next possible move higher can take advantage of the recently inflated put skew to finance the purchase of calls. For instance, the ICE Brent August09 $70 call can be owned for around $2.50/bbl or for zero premium by selling the $58 put in the same tenor. Similarly, the Brent December09 $70/85 call spread can be owned for zero cost by selling the $58.50 put.
Singapore
Energy markets may continue to ignore the enormous supply overhang in the short-term as inflationary pressures (manifest in rising long-term U.S. Treasury yields) have found a home in crude oil. Consumer hedgers and traders looking to be on-board for the next possible move higher can take advantage of the recently inflated put skew to finance the purchase of calls. For instance, the ICE Brent August09 $70 call can be owned for around $2.50/bbl or for zero premium by selling the $58 put in the same tenor. Similarly, the Brent December09 $70/85 call spread can be owned for zero cost by selling the $58.50 put.
Singapore
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