Oil markets traded within a relatively tight band yesterday as all eyes are on Opec's emergency meeting today. Traders and analysts are almost unanimously predicting the cartel will announce a further production cut; most estimate between 1-1.5m barrels per day while many expect the cut to be closer to the 2m barrel level. Opec has a second meeting planned for December where further cuts can be made, once the market has had time to absorb any cuts announced today. Regardless of the announcement, volatility will certainly continue in the near-term, thus option protection strategies are the most sensible.
Traders and hedgers have been entering the market within the past week to buy downside protection in the form of cheap puts. While the value of these options has increased substantially, cheap protection strategies still abound. The November through December $65/50 put spread strip is currently trading around $3.00 using Average Price Options. That's $3,000 of maximum loss potential for $12,000 of protection per month below $65. This strategy helps the hedger avoid paying a large premium for downside protection while still locking in protection to the $50 level.
Singapore, 08:15
Thursday, October 23, 2008
Wednesday, October 22, 2008
Augmenting Fuel Oil Swaps with Highly Liquid WTI Options
Energy and equity markets dropped sharply yesterday as traders' focus remains on current and looming recessions in the western world. The crude oil market appears to have little faith in Opec's ability to put a floor in prices, as December WTI dropped below $70 to trade in the $66 range. Expectations for production cuts from Opec range from a minimum of 1m barrels to as high as 2.5m barrels, possibly spaced out over a period of 3-4 months.
A Fuel Oil hedger buying 5 lots of the 180 Swap around $370 early yesterday would have booked losses of approximately $185,000 according to settlement. Our recommendation was to augment the hedge by purchasing the November WTI $65 puts for $2.00. These puts are currently trading around $3.50, resulting in a gain of about $50,000 if the hedge was entered into on a 1:1 ratio. Thus, instead of exiting the market today with losses of $185,000, the prudent hedger would have saved himself $50,000.
Singapore, 09:45
A Fuel Oil hedger buying 5 lots of the 180 Swap around $370 early yesterday would have booked losses of approximately $185,000 according to settlement. Our recommendation was to augment the hedge by purchasing the November WTI $65 puts for $2.00. These puts are currently trading around $3.50, resulting in a gain of about $50,000 if the hedge was entered into on a 1:1 ratio. Thus, instead of exiting the market today with losses of $185,000, the prudent hedger would have saved himself $50,000.
Singapore, 09:45
Tuesday, October 21, 2008
Volatility Returns over Opec Questions
Volatility in oil markets returned yesterday after a short hiatus as crude prices drifted higher in early Asian trading, only to retreat sharply during NY hours. Traders had been banking on $70 (WTI) providing short-term support and as a result implied volatility began to retreat. However, doubts over Opec's ability to coordinate and follow through on what will surely be an announcement of cuts later this week, has caused traders to sell the market off and test the $70 level yet again. Opec's recently announced production cuts have yet to be greatly felt by the physical market and many analysts are concerned over the cartel's lackluster record in following through on its often bold announcements. Non-Opec producers Norway and Russia have declined to consider production cuts.
Hedgers can certainly expect the resurgent market volatility to affect their long-term outlook. Consumers looking to lock in prices at relative bargain levels need to be aware of downside risks should the physical market continue to push lower. Buying Singapore 180cst Fuel Oil Swaps around the $370 level should be paired with the purchase of highly liquid WTI puts. Using Average Price Options, the November 2008 $65 puts can be owned for only about $2.00 per contract. That's $2,000 of maximum exposure per 1000 bbls. If the Fuel Oil swap trends lower in the short-term, the consumer hedger can sell out the losing position which may be to a large extent compensated for by the profits on the long WTI puts. Hudson Capital Energy makes markets and acts as counterparty for both the Fuel Oil Swap and WTI puts without charging any fees. This is an optimal strategy to consider in these extremely volatile markets.
Singapore, 09:45
Hedgers can certainly expect the resurgent market volatility to affect their long-term outlook. Consumers looking to lock in prices at relative bargain levels need to be aware of downside risks should the physical market continue to push lower. Buying Singapore 180cst Fuel Oil Swaps around the $370 level should be paired with the purchase of highly liquid WTI puts. Using Average Price Options, the November 2008 $65 puts can be owned for only about $2.00 per contract. That's $2,000 of maximum exposure per 1000 bbls. If the Fuel Oil swap trends lower in the short-term, the consumer hedger can sell out the losing position which may be to a large extent compensated for by the profits on the long WTI puts. Hudson Capital Energy makes markets and acts as counterparty for both the Fuel Oil Swap and WTI puts without charging any fees. This is an optimal strategy to consider in these extremely volatile markets.
Singapore, 09:45
Sunday, October 19, 2008
Basis Risk Strategies for Volatile & Illiquid Markets
Energy and metal prices failed to rebound in Friday trading as the current market volatility shows no signs of abating. Equities also failed to recover lost ground with the Dow sinking back below the 9000 level. Traders are watching Opec nervously as the oil group has called an emergency meeting for November ahead of its regularly scheduled December gathering. Late last week the cartel moved up the hastily assembled meeting to next Friday. As recently as early October with WTI crude oil trading closer to $90, some of the more hawkish members of the group issued statements claiming the world was oversupplied by between 0.4 - 0.5m barrels per day. As the market momentatily broke below $70, those extra barrels of supply were revised upwards by the group to 1m.
As traders view an Opec production cut as a fairly solid bet, it is pertinent for consumer hedgers to enter the market to take advantage of the more than 50% drop in many energy markets since only mid-July. Singapore bunker traders can protect against an Opec-inspired jump in prices while also limiting downside exposure by purchasing the Singapore 180CST Fuel Oil Swap in December at about $360. In order to avoid unlimited downside losses, the prudent hedger would purchase WTI puts (WTI options are the most liquid energy options in the commodity trading world, and help avoid the twin traps of counterparty credit risk and limited counterparties that Fuel Oil options currently entertain. These twin risks result in large bid/offer spreads making it extremely difficult to profitably exit bilateral Fuel Oil option deals). Using Average Price Options, the WTI December $65 puts are currently trading around $3.75 per contract. That's maximum risk of only $3,750 per 1000bbls of crude oil which provides unlimited downside protection should both Fuel Oil and Crude Oil continue lower. The above combination strategy represents unlimited upside protection gained from Fuel Oil swaps, with cheap unlimited downside protection from Crude Oil puts.
Singapore, 18:30
As traders view an Opec production cut as a fairly solid bet, it is pertinent for consumer hedgers to enter the market to take advantage of the more than 50% drop in many energy markets since only mid-July. Singapore bunker traders can protect against an Opec-inspired jump in prices while also limiting downside exposure by purchasing the Singapore 180CST Fuel Oil Swap in December at about $360. In order to avoid unlimited downside losses, the prudent hedger would purchase WTI puts (WTI options are the most liquid energy options in the commodity trading world, and help avoid the twin traps of counterparty credit risk and limited counterparties that Fuel Oil options currently entertain. These twin risks result in large bid/offer spreads making it extremely difficult to profitably exit bilateral Fuel Oil option deals). Using Average Price Options, the WTI December $65 puts are currently trading around $3.75 per contract. That's maximum risk of only $3,750 per 1000bbls of crude oil which provides unlimited downside protection should both Fuel Oil and Crude Oil continue lower. The above combination strategy represents unlimited upside protection gained from Fuel Oil swaps, with cheap unlimited downside protection from Crude Oil puts.
Singapore, 18:30
Thursday, October 16, 2008
Sharp Drop Draws Out Bargain Hunters
Recessionary fears pushed crude oil below $70 in NY trading yesterday as market volatility again pushed to new heights. Energies rebounded in early Asian trading as consumer hedgers and investors looked to gain from the drop of more than 50% in crude prices since only mid-July. Not just commodities, but shipping costs as well have experienced large and rapid price falls, with the Baltic Dry Index trading at its lowest level since November 2002.
The early morning rally in crude prices has opened up fresh producer hedging opportunities. Using Average Price Options, the WTI December 2008 $55/70 put spread is currently trading at only about $4.50. That's $4,500 of total premium at risk with 43 days to profit from further downside moves in crude oil. The hedge can be owned for Zero Premium by selling the $82.50 call in December. This trade provides a full $15,000 of downside profit potential with zero premium at risk at or below the $82.50 level.
Singapore Fuel Oil hedgers looking to protect their downside can combine the above strategy with the sale of the 180 Fuel Oil Swaps in the WTI/Fuel Oil crack, currently trading around $19.50.
Singapore, 10:30
The early morning rally in crude prices has opened up fresh producer hedging opportunities. Using Average Price Options, the WTI December 2008 $55/70 put spread is currently trading at only about $4.50. That's $4,500 of total premium at risk with 43 days to profit from further downside moves in crude oil. The hedge can be owned for Zero Premium by selling the $82.50 call in December. This trade provides a full $15,000 of downside profit potential with zero premium at risk at or below the $82.50 level.
Singapore Fuel Oil hedgers looking to protect their downside can combine the above strategy with the sale of the 180 Fuel Oil Swaps in the WTI/Fuel Oil crack, currently trading around $19.50.
Singapore, 10:30
Wednesday, October 15, 2008
Drop in Energy Prices Results in Consumer Buying Opportunities
Equity and commodity markets fell sharply yesterday, quickly erasing Monday's gains, as traders focus on the near-term economic fallout of the current banking crisis. Opec, meanwhile, spoke out yet again on the impact on demand from the economic turmoil. It is a near certainty at this point that the cartel will cut production at its emergency meeting on November 18th. This usually bullish announcement had no impact on the market, as front-month November WTI crude has pushed below $73.50 in early Asian trading.
Despite the increase in implied volatility, consumer protection strategies have become increasingly cheaper as the market moves lower. It is now possible to lock-in crude prices below $100 for the entirety of the coming year by purchasing the Cal09 $90 calls for only $7.25. Also, the Cal09 $100 calls can be owned for Zero Cost by selling the $65 puts in the same tenor. This strategy puts no premium at risk at or above $65 and provides unlimited upside protection above $100.
Singapore, 09:30
Despite the increase in implied volatility, consumer protection strategies have become increasingly cheaper as the market moves lower. It is now possible to lock-in crude prices below $100 for the entirety of the coming year by purchasing the Cal09 $90 calls for only $7.25. Also, the Cal09 $100 calls can be owned for Zero Cost by selling the $65 puts in the same tenor. This strategy puts no premium at risk at or above $65 and provides unlimited upside protection above $100.
Singapore, 09:30
Tuesday, October 14, 2008
Cheaper Premiums Allow Hedgers to Enter New Protection at Discounted Levels
Yesterday saw a sharp turnaround in energy markets as traders begin to focus on the possible after-effects of the current banking/liquidity crisis. The trickle-down effect to the main-stream economy is expected by many analysts to cause several quarters of recession in the United States which may spread eastward. Early Asian trade had markets sharply higher, and several producer hedgers entered the market to purchase cheap downside protection in the form of put spreads. These mid-day Asian-hours hedges paid off swiftly as the market sold off sharply during late-day trade in NY.
Implied volatility softened early yesterday, thus allowing consumer and producer hedgers to enter the market today to lock in significantly lower premiums. As the bearish pressure looks to be unrelenting in the short-term, calendar hedges such as the Q408 through 1H09 $60/75 put spread strip are being purchased to protect against a further drop in prices. This strip is currently trading around $4.00, thus providing $11,000 of downside protection per month after the $4,000 average cost is factored in. To gain the full $15,000 per month of protection, bearish hedgers can make the trade zero-cost by selling the $96 call in the same tenor. This hedge offers no premium at risk below the $96 level.
Singapore, 07:40
Implied volatility softened early yesterday, thus allowing consumer and producer hedgers to enter the market today to lock in significantly lower premiums. As the bearish pressure looks to be unrelenting in the short-term, calendar hedges such as the Q408 through 1H09 $60/75 put spread strip are being purchased to protect against a further drop in prices. This strip is currently trading around $4.00, thus providing $11,000 of downside protection per month after the $4,000 average cost is factored in. To gain the full $15,000 per month of protection, bearish hedgers can make the trade zero-cost by selling the $96 call in the same tenor. This hedge offers no premium at risk below the $96 level.
Singapore, 07:40
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