Energy markets pushed higher last week after strong signs emerged that gasoline demand in the US has stabilized and even increased. WTI ended Friday trading in NY just below the one-month highs set on Thursday. Gasoline futures weakened on Friday after a strong week of gains with similar price action seen in Singapore refined products, such as the Sing Fuel Oil 180 and Sing Jetkero swaps, all posting gains on the week after bouncing off support levels less than 10 days previously. Continually weak forecasts for oil demand due to poor global economic growth will persist in weighing heavily on energy markets, preventing any near-term sustained move higher. Instead, traders are betting on Opec’s high level of compliance with previously announced production cuts on top of an expected announcement of a further decrease of +1M barrels/day in March to push crude and refined prices higher in the second half of 2009.
Hedgers looking to protect against depleted inventories jolting crude markets higher in 2H09 can lock in a price ceiling and floor with very limited mark-to-market volatility vs the standard long-swap hedge. The WTI 2H09 $60/80 call spread strip can be owned for zero premium by selling the $42 put in the same tenor. This hedge provides $20 of upside protection per month above $60 with zero premium at risk at or above $42. With the 2H09 calendar swap currently trading around $52, the hedge provides for almost $10 of breathing room on the downside. It should also be noted that the margin requirement on this trade may be significantly less than that required for a typical long swap.
Singapore, 09:00
Sunday, March 1, 2009
Wednesday, February 25, 2009
Refinery Utilization Pointers and FO Hedging
Energy markets pushed higher yet again yesterday on the back of surprising inventory numbers out of the United States. The main market driver was the 3.3M barrel draw in gasoline supplies partnered with a less than anticipated build in WTI crude oil. The relatively lower gasoline prices have helped cushion what had been declining consumer demand while lower imports and seasonally weak refinery utilization have helped to tighten the contango curve and propel front-month WTI back above $42. It should be noted that the relatively lower refinery utilization numbers of late should be looked at in the context of the introduction of new refining facilities worldwide. With new capacity coming online as well as the continued drop in consumer demand relative to years past, it would not be surprising to see relatively lower refinery utilization data for the next several years.
With Fed Chairman Ben Bernanke recently stating the current recession could be over by the end of 2009 and Opec production cuts now clearly being reflected in market data, Fuel Oil consumers should look to the medium to long-term to lock-in price caps. Historically speaking, implied vols remain elevated, making Zero-Cost structures much more appealing than owning naked caps. The Sing FO 180 Cal10 Zero-Cost strategies would include owning the $310 call for free by selling the $285 put in the same tenor. This strategy can be paired with the purchase of the April09-Dec09 $280/350 call spread for zero cost by selling the $207 put. The above strategies provide excellent upside protection with zero premium at risk at or above the short put strikes.
Singapore, 09:00
With Fed Chairman Ben Bernanke recently stating the current recession could be over by the end of 2009 and Opec production cuts now clearly being reflected in market data, Fuel Oil consumers should look to the medium to long-term to lock-in price caps. Historically speaking, implied vols remain elevated, making Zero-Cost structures much more appealing than owning naked caps. The Sing FO 180 Cal10 Zero-Cost strategies would include owning the $310 call for free by selling the $285 put in the same tenor. This strategy can be paired with the purchase of the April09-Dec09 $280/350 call spread for zero cost by selling the $207 put. The above strategies provide excellent upside protection with zero premium at risk at or above the short put strikes.
Singapore, 09:00
Tuesday, February 24, 2009
Airline Hedging with Sing Jetkero Options
A positive outlook on the US economic front from Fed Chairman Ben Bernanke gave impetus to a late-day equity surge. The crude complex followed higher, with the front month contract rallying close to $2.00 and significantly narrowing the 2009 contango curve. All eyes remain on Opec and whether or not the producer’s cartel will announce further production cuts of +1M barrels/day at the group’s next meeting on March 15.
The Singapore Jetkero complex has mirrored other regional product markets with a drift lower during the recent consolidation phase. This type of movement allows Airlines and other consumer hedgers to lock in significantly lower caps on their future fuel purchases without having to pay upfront option premiums. The Sing Jetkero April09-Dec09 $70 call can be owned for zero premium by selling the $47 put in the same tenor. Similarly, the April09-Dec09 $70/95 call spread can be owned for zero premium by selling the $43 put. This 3-way structure allows for $4 of extra breathing room on the downside while limiting the upside protection to $25. Note that moving the call spread structure higher up the curve would also lower the put strike that would need to be sold to make the structure costless.
Singapore, 09:00
The Singapore Jetkero complex has mirrored other regional product markets with a drift lower during the recent consolidation phase. This type of movement allows Airlines and other consumer hedgers to lock in significantly lower caps on their future fuel purchases without having to pay upfront option premiums. The Sing Jetkero April09-Dec09 $70 call can be owned for zero premium by selling the $47 put in the same tenor. Similarly, the April09-Dec09 $70/95 call spread can be owned for zero premium by selling the $43 put. This 3-way structure allows for $4 of extra breathing room on the downside while limiting the upside protection to $25. Note that moving the call spread structure higher up the curve would also lower the put strike that would need to be sold to make the structure costless.
Singapore, 09:00
Monday, February 23, 2009
Opportunity for Consumer Hedgers
Focus yesterday in the energy markets turned once again to worries over demand destruction resulting from a continually faltering global economy. Past Opec production cuts partnered with a rumoured 1M barrel/day cut in March continue to be out-weighed by a lack of refinery action resulting in large feedstock builds in the United States. Over the past several months traders have watched as Fuel Oil cracks slowly strengthened. This is not to say that the FO price has remained bid, just that relative to a global benchmark such as WTI the price has experienced less sag, with March Singapore Fuel Oil 180 trading most recently between $250 – 270 before being offered late yesterday just below $250.
Yesterday’s price weakness has allowed consumer hedgers to enter into the market and secure short-term upside protection of the kind unavailable for the last several weeks using Zero-Cost Collars. The Q209 Sing Fuel Oil 180 $270 call can now be purchased for Zero-Cost by selling the $238 put in the same tenor. For those hedgers looking for less mark-to-market volatility (less painful margin calls), the Q209 $270/320 call spread can be purchased for Zero-Cost by selling the $205 put in the same tenor. Using a Q209 underlying reference price of approximately $249, this trade provides downside breathing room of approximately $44 in exchange for $50 of upside protection above $270.
Singapore, 09:00
Yesterday’s price weakness has allowed consumer hedgers to enter into the market and secure short-term upside protection of the kind unavailable for the last several weeks using Zero-Cost Collars. The Q209 Sing Fuel Oil 180 $270 call can now be purchased for Zero-Cost by selling the $238 put in the same tenor. For those hedgers looking for less mark-to-market volatility (less painful margin calls), the Q209 $270/320 call spread can be purchased for Zero-Cost by selling the $205 put in the same tenor. Using a Q209 underlying reference price of approximately $249, this trade provides downside breathing room of approximately $44 in exchange for $50 of upside protection above $270.
Singapore, 09:00
Sunday, February 22, 2009
Market Forces on Display
Consolidation entered back into energy markets last week as a surprisingly bullish US inventory report arrested the downward push in crude markets. With Cushing stocks nearing capacity, US imports are expected to decrease substantially and it is only a matter of time before refiners begin to draw-down the feedstock. Meanwhile, the short-term demand picture continues to look weak but is somewhat balanced by Opec supply cuts which currently adhere to approximately 70% of those previously announced.
With implied volatility remaining at elevated levels, safe and cheap consumer hedging strategies often involve either wide-strike costless collars or 3-ways. The recent contraction in the WTI contango market structure allows consumer hedgers to lock-in excellent near-term upside protection. Using Asian-style options, the WTI April ’09 through March ’10 $65 call strip can be owned for zero cost by selling the $38 put in the same tenor. The underlying calendar swap is currently trading just under $48, allowing for a buffer of almost $10 on the downside.
Singapore, 09:00
With implied volatility remaining at elevated levels, safe and cheap consumer hedging strategies often involve either wide-strike costless collars or 3-ways. The recent contraction in the WTI contango market structure allows consumer hedgers to lock-in excellent near-term upside protection. Using Asian-style options, the WTI April ’09 through March ’10 $65 call strip can be owned for zero cost by selling the $38 put in the same tenor. The underlying calendar swap is currently trading just under $48, allowing for a buffer of almost $10 on the downside.
Singapore, 09:00
Friday, February 13, 2009
Front month rally - International Petroleum Week
The story of the day was the major reversal in the March April WTI spread, contracting to $4.40 from $8.00. The fund rolls have most likely been completed which may decrease the pressure on March selling. Furthermore, the spread to Brent seem to have been extreme and refiners with the ability to buy at Cushing would clearly do so before forcing lifting out of Rotterdam for inferior quality barrels.
There is a high likelihood that the April contact will follow suit. Long crude strategies may be better placed in May or farther out on the curve to mitigate the risk of further contango, when front futures contracts are lower than longer dated contracts. The May $50 call is now worth $2.75. A call spread of $50-60 in May would cost $2/bbl, which would be a good low cost strategy to protect against unforseen rallies.
Some Hudson Capital Energy will be available in London during International Petroleum Week. Please contact us to set up a meeting at your convenience.
cthorpe@hudsoncapitalgroup.com
hsheng@hudsoncapitalgroup.com
jkornafel@hudsoncapitalgroup.com
There is a high likelihood that the April contact will follow suit. Long crude strategies may be better placed in May or farther out on the curve to mitigate the risk of further contango, when front futures contracts are lower than longer dated contracts. The May $50 call is now worth $2.75. A call spread of $50-60 in May would cost $2/bbl, which would be a good low cost strategy to protect against unforseen rallies.
Some Hudson Capital Energy will be available in London during International Petroleum Week. Please contact us to set up a meeting at your convenience.
cthorpe@hudsoncapitalgroup.com
hsheng@hudsoncapitalgroup.com
jkornafel@hudsoncapitalgroup.com
Tuesday, February 10, 2009
Sing Jetkero Hedging Strategy
A weak equity market proved the catalyst to finally pull front-month WTI firmly back under $40. Worries that the new US stimulus package will not be able to strengthen the still weakening economy undid the recent consolidation in both energy and equity markets. Sing Fuel Oil and Jetkero markets are expected to push lower during Asian trading hours, also reversing a recent, albeit fragile trend higher.
With an enormous amount of stimulus entering the world’s largest economies, traders are focused on energy markets beginning to recover in the second half of 2009. An almost unlimited number of Sing Jetkero hedging structures are available to protect against this possible upside push. The July 2009 through June 2010 Sing Jetkero $100 call strip can now be purchased for an average price of only about $2,250 per 1000 barrels per month. Owning this call at this inexpensive level allows for unlimited protection above $100 for the entire 12 month period. The $100 call strip can even be purchased for Zero Cost by selling the $54 put in the same tenor. With the July09-June10 calendar swap currently trading around $69.00, this hedge provides unlimited protection above $100 with Zero premium at risk unless the underlying swap moves below $54- about $15 below the current value.
Singapore, 09:00
With an enormous amount of stimulus entering the world’s largest economies, traders are focused on energy markets beginning to recover in the second half of 2009. An almost unlimited number of Sing Jetkero hedging structures are available to protect against this possible upside push. The July 2009 through June 2010 Sing Jetkero $100 call strip can now be purchased for an average price of only about $2,250 per 1000 barrels per month. Owning this call at this inexpensive level allows for unlimited protection above $100 for the entire 12 month period. The $100 call strip can even be purchased for Zero Cost by selling the $54 put in the same tenor. With the July09-June10 calendar swap currently trading around $69.00, this hedge provides unlimited protection above $100 with Zero premium at risk unless the underlying swap moves below $54- about $15 below the current value.
Singapore, 09:00
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