Weak petroleum demand / Bullish markets

We note the API inventory data is again showing a large build in distillates (5.2 MN bbls).

Weak demand fundamentals in the US and Europe have driven petroleum cracks down to 12 month lows, forcing refiners to examine operating rates and length of planned turnarounds. High inventories have to be corrected at some point. Unless home heating demand is above average, we will need to see demand pick up in the rail, road diesel, aviation or maritime sectors to see a rebound in crack levels. Meantime, there is an opportunity to use NY heating oil or European gasoil options to hedge upside petroleum exposure in both crude and refining cracks.

Using the NY Heating Oil options (Asian) for a consumer hedge, the Q1 $2.00-2.50 call spread is offered at $0.1250/gallon. Adding a sale of the $1.70 put creates a structured 3-way option strategy for "zero" premium cost.

Please email or call to be added to the consumer hedge tear sheet blast.

New York, Sept 15.

September Bearish Pressure; Singapore Fuel Oil 180cst

The long-expected correction in crude and equity markets (can anyone tell the difference between the two these days?) appears to have begun this week. This despite relatively positive economic data permeating from across the globe- most recently positive ISM manufacturing data released in the US. The issue appears to be too much of a run-up too fast, as the pressure from a historically weak September and October bears down on investors and traders.

Much of the current fear from traders this week can be traced to indications from the Chinese government of a curb in bank lending. On the surface, this can be expected to result in lower energy demand across the board and in the words of Australian Treasurer Wayne Swan, a potential “knee-capping” of the economic recovery seen since March.

If bearish sentiment continues, expect to see a potential break below support levels in WTI around $67.35. Further declines in shipping rates due to reduced Chinese demand can be expected to continue, as reported in a Bloomberg survey earlier in the week highlighting expectations for a 50% drop in freight rates in the next 4 months.

Despite the approximately 10% rise in bunker prices last month and strong price support exhibited recently at ports globally (relative to WTI & Brent), inventory holders worried about short-term protection should not take bunker price strength for granted. A $420 price floor in October Singapore Fuel Oil 180cst can be locked-in for zero cost by accepting a price ceiling in the same month around $445. Similarly, suppliers holding inventory may wish to simply sell an upside price ceiling around the $480 level for around $15/MT. This type of hedge gives $15 of downside price protection while ensuring a payment of at most $15/MT upon an October expiration below $495.

Singapore, 08:00

Return to the $70 Pivot, Bunker Hedging Strategies

The $70 pivot in WTI crude proved too much of a magnet for the bears yesterday, as the October crude benchmark now stands firmly above $71. Dollar weakness on the back of encouraging European and Japanese economic data pushed equities and thus the asset class that we now know as crude oil higher. Nevertheless, the short-term focus remains on the US EIA data and whether or not the API’s shocking inventory draws will be matched.

The strong rally in Fuel Oil prices can be expected to continue for the foreseeable future as refinery run cuts and relatively strong bunker demand look to persist. By accepting a leveraged price floor in Singapore Fuel Oil 180cst at $380 (more than $50 below current levels), bunker consumers can gain a Zero Cost price ceiling at $450 (less than $20 above current levels) for the entirety of Q409. Similarly, by utilizing a limited price ceiling (protection from $450 to $500) consumers willing to accept the leveraged price floor at $380 can actually receive approximately $20/MT of premium reimbursements each month of Q409 so long as Sing FO 180cst settles above $380.

Singapore

Crude Markets Retrench; Singapore Fuel Oil 180cst Hedging

A stronger US Dollar finally brought the crude markets lower yesterday, pulling WTI crude below the psychological $70 support level and outside of its recent $70-72 trading range. Despite the wide gap between WTI and Brent (just under -$3.00), the spread between the two major benchmarks remained mostly unchanged during yesterday’s fall. For those watching the price of crude on a day to day basis, the US Dollar and equities (investor sentiment) remain the chief catalysts for moving the market.

Traders should remain wary of recently surfacing short-term bearish sentiment in crude markets (not only from investor sentiment but also as a result of the latest negative comments emanating from OPEC re oversupply of refined products and subsequent effects on feedstock demand). Plenty of time still remains in the Atlantic hurricane season and meteorologists are closely watching a storm cluster recently formed off the coast of West Africa. Given past encounters between oil producers/refiners and hurricanes in the Gulf of Mexico, ignoring the possibility of a price spike in the next few months can certainly prove costly.

Much to the chagrin of shipping companies around the world, bunker fuel prices remain firm despite recent weakness in major Western benchmarks. Therefore consumer hedging remains a major factor in controlling one’s fuel costs. Establishing a price ceiling in Q409 through 1H10 in Singapore Fuel Oil 180cst at $450 for Zero Cost is possible by accepting a leveraged price floor in the same tenor at around $380. Similarly, for those seeking a non-leveraged position, the $450/550 call spread in each of the 9 months beginning with Oct09 can be owned for Zero Cost by accepting a price floor around $390 in the same tenor. This hedge provides $100 of consumer protection per month in Q409 through 1H10 with no hedging losses at or above $390.

Singapore

Consumer Hedge Tear Sheet: 08-10-2009

Record levels of U.S. distillate fuel exports

The U.S. Energy Information Agency reports that monthly U.S. exports of distillate fuel are at record levels, driven partially by unusually high U.S. distillate fuel inventories.

EIA: Weekly U.S. Total Distillate Stocks