Citigroup led the way yesterday as the beleaguered financial institution found itself backed by the US government- pulling both equities and commodities higher while the dollar lost strength on funding questions. January WTI pushed back towards $55 for its second consecutive rally as hedge funds shifted from a multi-year short position back to one of being long.
While the extend of the current rally may be debatable, consumer hedgers who have been taking advantage of cheap upside protection in the form of the February WTI $80 calls have enjoyed recent profits. While the $80 calls are now trading around $1,600 per 1000 barrels, the $70 call can be owned for even less premium by selling the Feb $90 call. This vertical call spread is currently offered at only $1,250 per 1000 barrels with a maximum payout of $18,750 should the rally in crude oil push the market back above $90.
Singapore, 07:30
Monday, November 24, 2008
Sunday, November 23, 2008
Consumer Protection Strategies
Energy markets continued to push lower Friday as December RBOB unleaded gasoline traded below $1.00 for the first time in two years. January WTI crude oil settled under $50, marking a fall of almost $100 in only 4 months. While a protracted global recession will continue to hamper demand well into 2009, supply-side problems that originally pushed oil towards $150 have not disappeared. Thus, it is imperative for consumer hedgers to take advantage of the myriad of bargains in the highly liquid WTI options market.
Using Average Price Options (Asians), the WTI 2nd half of 2009 $85 call is currently trading around only $3.25. That's maximum exposure of only $3,250 per 1000 barrels/month to be long at $85 for every month from July 2009 through December 2009. Even cheaper, the $85/105 call spread strip in the same tenor has been trading around $1.50. With max exposure of $9,000, this trade has a potential payout of $111,000 should crude move back above $105 in the second half of 2009.
For Bunker Traders short physical and looking to buy the Singapore 180 or 380 swaps, cheap downside protection can be had by partnering the long swaps with the purchase of the American-style January 2009 $35 puts for only about $400 per 1000 barrels. Crude need not trade below $35 for the puts to provide protection against long swaps, any move lower in the next 2 weeks will result in an increase in value of the puts, partially offsetting any losses from the long swaps.
Singapore, 21:00
Using Average Price Options (Asians), the WTI 2nd half of 2009 $85 call is currently trading around only $3.25. That's maximum exposure of only $3,250 per 1000 barrels/month to be long at $85 for every month from July 2009 through December 2009. Even cheaper, the $85/105 call spread strip in the same tenor has been trading around $1.50. With max exposure of $9,000, this trade has a potential payout of $111,000 should crude move back above $105 in the second half of 2009.
For Bunker Traders short physical and looking to buy the Singapore 180 or 380 swaps, cheap downside protection can be had by partnering the long swaps with the purchase of the American-style January 2009 $35 puts for only about $400 per 1000 barrels. Crude need not trade below $35 for the puts to provide protection against long swaps, any move lower in the next 2 weeks will result in an increase in value of the puts, partially offsetting any losses from the long swaps.
Singapore, 21:00
Thursday, November 20, 2008
WTI Drops Below $50
Energy markets mirrored equities once again yesterday as WTI crude oil pushed below the $50 level. The front-month contract has now fallen almost $100 in only 4 months in the face of crashing world-wide demand, no short-term supply problems, still elevated stock and inventory levels, depleted investor positions and renewed shorting by hedge funds.
First quarter 2009 puts continue to attract attention from both producer hedgers and traders. Using Asian options, the WTI Q109 $30 puts are still trading at relatively cheap levels, only about $600 per 1000 barrels of crude. For more immediate downside protection, producers can look to the Q109 $35/45 put spread strip. Currently trading around only $2,500 per month per 1000 barrels, this hedge offers a total payout of $22,500 at or below $35.
Singapore, 09:00
First quarter 2009 puts continue to attract attention from both producer hedgers and traders. Using Asian options, the WTI Q109 $30 puts are still trading at relatively cheap levels, only about $600 per 1000 barrels of crude. For more immediate downside protection, producers can look to the Q109 $35/45 put spread strip. Currently trading around only $2,500 per month per 1000 barrels, this hedge offers a total payout of $22,500 at or below $35.
Singapore, 09:00
Wednesday, November 19, 2008
Short-term Producer/Long-term Consumer Strategies Highlighted
Oil futures on NYMEX pulled back yet again yesterday as commodity markets continue to mimic those of equities. As traders wait for further proof of Opec cuts (and debate the likelihood of another cut before year-end), the lack of any positive news on the demand front as well as continued global economic turmoil continues to result in a dearth of bullish news.
Despite crude prices having dropped more than $90 in only 4 months, bearish producer strategies remain the focus for hedgers. Those who bought the WTI December 2008 $50 or $80 (even better) puts for next to nothing only a few short months ago have been rolling their profits and protection down to new and cheaper strikes. As highlighted yesterday, the Q109 $30 and $40 puts are trading at prices around only several hundred dollars to be short 1000 barrels from those strike levels.
Even more interesting, consumer hedgers are taking advantage of the prospect of a rebound in late 2009 by buying cheap upside protection in the form of calls and call spreads. The 2nd Half of 2009 $90 call strip has been trading around only $3.50, while the $90/110 call spread in the same tenor also has traded around only $1.50. That's $1,500 of total premium at risk per month to be long every $90/110 call spread in the second half of 2009. These values are reminiscent of the $50 and $80 puts only months ago when crude was trading around $100.
Singapore, 08:00
Despite crude prices having dropped more than $90 in only 4 months, bearish producer strategies remain the focus for hedgers. Those who bought the WTI December 2008 $50 or $80 (even better) puts for next to nothing only a few short months ago have been rolling their profits and protection down to new and cheaper strikes. As highlighted yesterday, the Q109 $30 and $40 puts are trading at prices around only several hundred dollars to be short 1000 barrels from those strike levels.
Even more interesting, consumer hedgers are taking advantage of the prospect of a rebound in late 2009 by buying cheap upside protection in the form of calls and call spreads. The 2nd Half of 2009 $90 call strip has been trading around only $3.50, while the $90/110 call spread in the same tenor also has traded around only $1.50. That's $1,500 of total premium at risk per month to be long every $90/110 call spread in the second half of 2009. These values are reminiscent of the $50 and $80 puts only months ago when crude was trading around $100.
Singapore, 08:00
Tuesday, November 18, 2008
Slow Market Results in Cheaper Option Premiums
Oil markets refused to commit to a direction yesterday as front-month December WTI drifted around the $55 level. With no end in sight for the global economic turmoil, traders continue to focus on the lack of demand heading into 2009. While Opec recently lowered it's forecast yet again for year-on-year demand growth, it is becoming quite evident that demand may actually drop from 2008 to 2009.
The lack of movement in trading yesterday resulted in a sharp drop in implied volatility across the future's curve, resulting in cheaper option premiums. Using American-style options, the Q109 $30 puts are now offered around $0.60; that's $600 of total risk per month to be short from the $30 level in January through March 2009. While $30 may still seem far off, it's important to understand that the underlying futures do not need to trade below $30 for the buyer of this option to profit. Any sharp push lower in the next couple months would result in a spike in the price of the puts- allowing the hedger to sell them out at a profit.
Singapore, 08:30
The lack of movement in trading yesterday resulted in a sharp drop in implied volatility across the future's curve, resulting in cheaper option premiums. Using American-style options, the Q109 $30 puts are now offered around $0.60; that's $600 of total risk per month to be short from the $30 level in January through March 2009. While $30 may still seem far off, it's important to understand that the underlying futures do not need to trade below $30 for the buyer of this option to profit. Any sharp push lower in the next couple months would result in a spike in the price of the puts- allowing the hedger to sell them out at a profit.
Singapore, 08:30
Monday, November 17, 2008
Fundamental view - worth reading
DAVID PARKINSON
Globe and Mail Update
November 14, 2008 at 6:00 AM EST
Don't say Henry Groppe didn't tell you so.
Almost a year ago, when oil prices were humming along at close to $100 (U.S.) a barrel, the 82-year-old dean of oil analysts warned his clients that the price was destined for $60 before the end of the year. When it soared above $145 this summer, he stuck to his guns.
This week, oil fell below $60 a barrel.
It's that kind of prescience that gets guys labelled “guru” – a tag Mr. Groppe long ago earned in his almost six decades predicting the oil market. The soft-spoken Texan cemented his forecasting in the early 1980s, when he foresaw the collapse of oil prices from then-record levels of $40 a barrel.
“Essentially, all forecasting, no matter what's being forecast, is a straight-line extrapolation of what has been experienced very recently,” he said in an interview in Toronto yesterday.
“All of our work is aimed at forecasting changes of direction and discontinuity, because that is the reality of the world. For the last several decades, our forecasts are nearly always this contrast with the consensus.”
Despite his two big (and correct) calls of market downturns, Mr. Groppe is hardly an oil bear. In fact, he hasn't changed his tune much from when we last talked with him two years ago – a time when, ironically, many people felt he was being overly alarmist when he talked about prices being sustainable above $60.
His view is based on a fundamental belief that global oil production has peaked, and is destined to go into a slow but steady decline. At the same time, though, he also believes those higher prices will result in demand destruction as consumers shift to alternative fuels – thus keeping a lid on prices, albeit at higher levels.
“We're in a new era … in which oil production will be irreversibly declining,” he said. “The question then is, what price trend during that period will give you the matching demand destruction?”
“Our conclusion is that, on an average annual basis, [under] normal conditions, it's something that rises slowly from about $65-$70 to about $100. We think that will provide the necessary reduction in consumption.”
He said such a change in consumption is already happening, and not just because of a global economic slowdown. (The Organization for Economic Co-operation and Development yesterday slashed its 2008 and 2009 global demand estimates, citing declining estimates for world economic growth.) Power generators and major industrial consumers have already been switching away from oil and toward cheaper coal and natural gas, and many are in the process of retooling their equipment to lower consumption and shift to cheaper fuels.
While he's skeptical that worldwide vehicular consumption can be significantly reduced over the next 10 years through the use of alternative fuels, he believes fuel substitutions already happening among industrial users will be sufficient to offset the declining global oil production and keep average annual prices in that $70-$100 range.
“That's all been set in motion,” he said, noting that even China – which many forecasters point to as a major driver for continued long-term growth in oil demand – is changing its ways.
“In China, they're rapidly substituting – coal particularly.” Thanks to substitution, he said, “China can continue to grow vehicle population and gasoline/diesel consumption for many years without any increase in total oil consumption.”
Mr. Groppe blames the short-lived record surge in oil prices earlier this year on Saudi Arabia and the OECD's International Energy Agency. He said the Saudis, believing what proved to be an incorrect IEA forecast of a coming surge in non-OPEC oil production, cut its output in late 2006 and early 2007, a move that eventually led to a shortage of supply.
Now, he fears the Saudis may be making the same mistake again – cutting production amid forecasts of a recession-driven slump in demand.
He's forecasting that prices will rebound to average $83-$84 a barrel in 2009, as the current cheaper prices rejuvenate demand while the reduced Saudi production constrains supplies.
And what about oil stocks?
While some analysts point to the sharp decline in the forward strip in oil futures as evidence that oil stock price targets need to be slashed, Mr. Groppe thinks that's looking in the wrong direction.
“The strip has been the poorest forecaster of oil prices of anything that anybody has ever thought of using, yet that's what everybody has been using,” he said. As long as people are driving prices lower based on these forward-strip commodity price assumptions, “It presents the investment opportunity of a lifetime.”
Globe and Mail Update
November 14, 2008 at 6:00 AM EST
Don't say Henry Groppe didn't tell you so.
Almost a year ago, when oil prices were humming along at close to $100 (U.S.) a barrel, the 82-year-old dean of oil analysts warned his clients that the price was destined for $60 before the end of the year. When it soared above $145 this summer, he stuck to his guns.
This week, oil fell below $60 a barrel.
It's that kind of prescience that gets guys labelled “guru” – a tag Mr. Groppe long ago earned in his almost six decades predicting the oil market. The soft-spoken Texan cemented his forecasting in the early 1980s, when he foresaw the collapse of oil prices from then-record levels of $40 a barrel.
“Essentially, all forecasting, no matter what's being forecast, is a straight-line extrapolation of what has been experienced very recently,” he said in an interview in Toronto yesterday.
“All of our work is aimed at forecasting changes of direction and discontinuity, because that is the reality of the world. For the last several decades, our forecasts are nearly always this contrast with the consensus.”
Despite his two big (and correct) calls of market downturns, Mr. Groppe is hardly an oil bear. In fact, he hasn't changed his tune much from when we last talked with him two years ago – a time when, ironically, many people felt he was being overly alarmist when he talked about prices being sustainable above $60.
His view is based on a fundamental belief that global oil production has peaked, and is destined to go into a slow but steady decline. At the same time, though, he also believes those higher prices will result in demand destruction as consumers shift to alternative fuels – thus keeping a lid on prices, albeit at higher levels.
“We're in a new era … in which oil production will be irreversibly declining,” he said. “The question then is, what price trend during that period will give you the matching demand destruction?”
“Our conclusion is that, on an average annual basis, [under] normal conditions, it's something that rises slowly from about $65-$70 to about $100. We think that will provide the necessary reduction in consumption.”
He said such a change in consumption is already happening, and not just because of a global economic slowdown. (The Organization for Economic Co-operation and Development yesterday slashed its 2008 and 2009 global demand estimates, citing declining estimates for world economic growth.) Power generators and major industrial consumers have already been switching away from oil and toward cheaper coal and natural gas, and many are in the process of retooling their equipment to lower consumption and shift to cheaper fuels.
While he's skeptical that worldwide vehicular consumption can be significantly reduced over the next 10 years through the use of alternative fuels, he believes fuel substitutions already happening among industrial users will be sufficient to offset the declining global oil production and keep average annual prices in that $70-$100 range.
“That's all been set in motion,” he said, noting that even China – which many forecasters point to as a major driver for continued long-term growth in oil demand – is changing its ways.
“In China, they're rapidly substituting – coal particularly.” Thanks to substitution, he said, “China can continue to grow vehicle population and gasoline/diesel consumption for many years without any increase in total oil consumption.”
Mr. Groppe blames the short-lived record surge in oil prices earlier this year on Saudi Arabia and the OECD's International Energy Agency. He said the Saudis, believing what proved to be an incorrect IEA forecast of a coming surge in non-OPEC oil production, cut its output in late 2006 and early 2007, a move that eventually led to a shortage of supply.
Now, he fears the Saudis may be making the same mistake again – cutting production amid forecasts of a recession-driven slump in demand.
He's forecasting that prices will rebound to average $83-$84 a barrel in 2009, as the current cheaper prices rejuvenate demand while the reduced Saudi production constrains supplies.
And what about oil stocks?
While some analysts point to the sharp decline in the forward strip in oil futures as evidence that oil stock price targets need to be slashed, Mr. Groppe thinks that's looking in the wrong direction.
“The strip has been the poorest forecaster of oil prices of anything that anybody has ever thought of using, yet that's what everybody has been using,” he said. As long as people are driving prices lower based on these forward-strip commodity price assumptions, “It presents the investment opportunity of a lifetime.”
Sunday, November 16, 2008
Consumer Protection from Opec-Induced Spike
Energy markets pushed to lows not seen since January 2007 last week as the dollar continued its rally amidst the global financial turmoil. Producer hedgers who took advantage of cheap downside puts when crude oil was trading in the $90 range have now begun to roll their positions down to the $30 level. WTI February American-style $30 puts are currently offered as low as $700 per 1000 barrels.
Traders may once again take more notice of Opec, as the cartel has once again called an emergency meeting, this one scheduled for November 29th in Cairo. The group is expected to announce further cuts in production, possibly as much as 1.5-2m barrels per day on top of the 1.5m barrels already announced.
Consumer hedgers looking to protect against an Opec-inspired price spike should look to the WTI December Asian-style $65/85 call spread, currently offered at about $2,250 per 1000 barrels. That's $2,250 of maximum risk with a possible payout of $17,750. The buyer of the call spread would profit on a short-term price spike- thus providing cheap protection against a near-term bounce higher.
Singapore, 16:00
Traders may once again take more notice of Opec, as the cartel has once again called an emergency meeting, this one scheduled for November 29th in Cairo. The group is expected to announce further cuts in production, possibly as much as 1.5-2m barrels per day on top of the 1.5m barrels already announced.
Consumer hedgers looking to protect against an Opec-inspired price spike should look to the WTI December Asian-style $65/85 call spread, currently offered at about $2,250 per 1000 barrels. That's $2,250 of maximum risk with a possible payout of $17,750. The buyer of the call spread would profit on a short-term price spike- thus providing cheap protection against a near-term bounce higher.
Singapore, 16:00
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