Crude oil pushed below $120 early in the trading session and while the market settled below that pivitol level the lows reached during Asian hours held strong. Traders were abuzz with news of a large Latin American producer entering the market to purchase downside protection in the form of the December 2008, $100 puts. It was the smart money that locked in these puts while the market was trading on its highs above $140. To purchase these puts now is a wise decision to protect from further downside moves, however, the even wiser move is to purchase the same protection when it is ultra-cheap. During the almost 2 weeks that the market traded above $140, the December 2008 $100 puts were trading around $1.00. Yesterday's purchases by an unnamed Latin American producer pushed the bidding price well above $4.00.
The incident described above can be applied to any hedger worried prices may move back towards the $150 level. The December 2008 $150 calls, once trading at more than $11.00, are now valued at around $4.00. With maximum exposure of only $4,000, a hedger can have unlimited protection above $150 should the market move above that level before the December options expire. With an uncertain hurricane forecast, weak inventory and supply data as well as an ambigious letter from Iran on the nuclear issue, buying upside protection after hitting 2-month lows looks like where the smart money is heading now.
Tuesday, August 5, 2008
More commodity weakness, USD stronger
The commodity selloff continued today although crude lows were set early in Singapore trading hours. The current feeling is we still have some more room to go on the downside. NG fought to go higher but in the end came off about $0.07. We will see what tomorrow's EIA numbers bring to petroleum markets Wed AM.
The Fed left rates unchanged as expected, citing inflation is still atop their list of concerns. Equity markets rallied, which also lifted the energy equities despite weaker petroleum prices. The USD strengthened against the Euro and other major currencies.
Vol remains firm awaiting the statistics Wednesday. For those long volatility, consider selling the options before the numbers. If numbers are bullish, we may see consolidation back to $120 and a vol sell off. Keep in mind, technicals are indicating support levels in the 113-116 area. If vol does come in, the short inventory players should consider hedging by adding some calls at the 130 or 140 level for October or Q4.
CT, New York. 4:30pm Aug 4.
The Fed left rates unchanged as expected, citing inflation is still atop their list of concerns. Equity markets rallied, which also lifted the energy equities despite weaker petroleum prices. The USD strengthened against the Euro and other major currencies.
Vol remains firm awaiting the statistics Wednesday. For those long volatility, consider selling the options before the numbers. If numbers are bullish, we may see consolidation back to $120 and a vol sell off. Keep in mind, technicals are indicating support levels in the 113-116 area. If vol does come in, the short inventory players should consider hedging by adding some calls at the 130 or 140 level for October or Q4.
CT, New York. 4:30pm Aug 4.
Monday, August 4, 2008
Possible Macro-Economic shock on the horizon leading to lower Energy Prices?
Energy prices plummeted yesterday on the back of new data citing increasing damage done to the wallets of US consumers. Unfortunately, it has not been increasing supply, safe and plausable energy alternatives, or simply a more conservative demand climate that is pushing the crude price lower. What we're seeing now is possibly the beginnings of a macro-economic shock resulting from the recent high prices that is now pulling all commodities lower.
Too many potentially bullish factors remain in the mix to delay locking in these lower prices. Every $125 call from September through January in WTI Crude Oil can now be purchased for Zero Cost by selling the $119 put for the same months. This trade puts a ceiling of $125 on your hedging costs for the remainder of the 2008 calendar year while also placing a floor in the market at $119.
JK, HCE Asia (Singapore)
Too many potentially bullish factors remain in the mix to delay locking in these lower prices. Every $125 call from September through January in WTI Crude Oil can now be purchased for Zero Cost by selling the $119 put for the same months. This trade puts a ceiling of $125 on your hedging costs for the remainder of the 2008 calendar year while also placing a floor in the market at $119.
JK, HCE Asia (Singapore)
Commodities liquidation
New York, 17h00 Monday Aug 4.
Many commodities experienced a sell off today including energies. Energy equities also experienced a steep single day sell off, potentially foreshadowing weakening market confidence. Although ending the day $4 lower with range of $6.5 / bbl, this could be considered a normal day. The September crude straddle valued at $9 on Friday was fairly valued given these ranges. NG was off 7% with an rumor off a major fund liquidating. CL vols were a little bid and HO vols were a little weak.
An early rumor of a conciliatory letter expected from Iran Tues and hurricane Eduardo being a non event were reasons cited for the CL selloff. While real demand destruction is being witnessed in North America, we cannot yet confirm the post Olympics shift in demand from China and related markets. We are seeing lower demand from Chinese importers, which may reverse post Olympic restrictions on industrial manufacturing.
Many commodities experienced a sell off today including energies. Energy equities also experienced a steep single day sell off, potentially foreshadowing weakening market confidence. Although ending the day $4 lower with range of $6.5 / bbl, this could be considered a normal day. The September crude straddle valued at $9 on Friday was fairly valued given these ranges. NG was off 7% with an rumor off a major fund liquidating. CL vols were a little bid and HO vols were a little weak.
An early rumor of a conciliatory letter expected from Iran Tues and hurricane Eduardo being a non event were reasons cited for the CL selloff. While real demand destruction is being witnessed in North America, we cannot yet confirm the post Olympics shift in demand from China and related markets. We are seeing lower demand from Chinese importers, which may reverse post Olympic restrictions on industrial manufacturing.
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