Energy markets traded predictably higher on Friday after a tumultuous week which saw crude oil gain $5 and settle at 2009 highs. Traders often position themselves long (or at least buy protection against shorts) going into a long weekend (U.S. markets are closed Monday due to the Memorial Day holiday). Expect trading conditions to be subdued this morning as crude oil sits well above support (WTI having bounced off $60.50 last week) and traders begin the push later in the week for the 200-day moving average at $63.28. A strong move above this level would propel further fund buying, likely resulting in increased volatility and wider trading ranges as not much resistance is evident below $70 (which stands not as strong technical resistance but merely a psychological barrier).
Strong buying in the gasoline complex should continue to pull prices higher. The unleaded gas refinery margin continues its relentless march on $20 after finishing a very strong week above $15. Let’s also not forget about U.S. dollar weakness as well as creeping inflationary fears (funds have been buying crude as an inflation hedge). While inflation has yet to show itself, the short dollar long crude trade has worked well for several weeks now. This is part of the reason for the inflated put skew in crude markets. Traders have been buying downside protection in the form of puts while maintaining and in many cases increasing net longs in the swaps market.
Traders looking to enter the crude market before the next push higher can lock in limited losses with unlimited upside potential gains by buying swaps and puts or put spreads. Currently, the Brent APO July09 $53 puts are only $1.20/bbl. Similarly, $45/55 put spread is also trading around $1.20/bbl, offering more immediate protection but limited to $10.
Singapore, 08:00
Sunday, May 24, 2009
Thursday, May 21, 2009
Oil Market Volatility Index Falls To 1-Year Low
By Gregory Meyer
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--As the stock market's "fear gauge" retreated this week, an important measure oil-market jumpiness fell to its lowest in a year.
The Chicago Board Options Exchange's crude-oil volatility index, or OVX, on Wednesday dropped to 40.74, its lowest since last May. The decline came after the more closely watched VIX volatility index, which tracks the prices for options on the Standard and Poor's 500-stock index, slid below 30 for the first time since last September's collapse of Lehman Brothers Holdings Inc.
Stock pickers say the VIX reflects market anxiety, and tends to rise when markets fall and fall when stocks turn around.
For the oil market, lower volatility doesn't necessarily carry the same bullish implications. Commodities, with their messy cycles of supply lagging demand or vice versa, are inherently more volatile than stocks. But the crude index's decline suggests traders collectively think huge price swings are a thing of the past, at least for the time being.
The OVX also isn't a perfect gauge of oil market sentiment, as it tracks options traded on the United States Oil Fund LP (USO), an exchange-traded fund, rather than futures themselves. Because the U.S. Oil Fund is traded like a stock, the OVX may pick up some cross-contamination from bigger trends in the equity markets.
Nevertheless, traders say the oil market has gotten a shade less wild, even with prices climbing back above $60 a barrel. OVX topped 100 in December.
"Nobody expects crude to go through the roof anytime soon," said Chris Thorpe, managing director at Hudson Capital Energy, a New York oil-options dealer.
Thorpe said trading in options on U.S. crude futures currently imply prices could rise or fall about 45% in the next year - well below last year's peak of more than 100% implied volatility.
On a daily basis, oil-options trading reflects expectations U.S. crude could move by nearly 3% daily, or about $1.70 a barrel at today's $61 oil price, said Harry Tchilinguirian, oil analyst at BNP Paribas in London.
Some traders are apparently still betting prices could again go haywire, even as glutted oil inventories and ample spare capacity among producers suggest otherwise.
Traders said that in the past couple of weeks, people have acquired options to buy crude at $250 and even $300 a barrel in future years, meaning they can book a profit if oil prices rise above those astronomical levels. On Thursday, they said, one such $250 call option for crude to be delivered in December 2010 sold for 15 cents a barrel.
-By Gregory Meyer, Dow Jones Newswires; 201-938-4377; greg.meyer@dowjones.com
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--As the stock market's "fear gauge" retreated this week, an important measure oil-market jumpiness fell to its lowest in a year.
The Chicago Board Options Exchange's crude-oil volatility index, or OVX, on Wednesday dropped to 40.74, its lowest since last May. The decline came after the more closely watched VIX volatility index, which tracks the prices for options on the Standard and Poor's 500-stock index, slid below 30 for the first time since last September's collapse of Lehman Brothers Holdings Inc.
Stock pickers say the VIX reflects market anxiety, and tends to rise when markets fall and fall when stocks turn around.
For the oil market, lower volatility doesn't necessarily carry the same bullish implications. Commodities, with their messy cycles of supply lagging demand or vice versa, are inherently more volatile than stocks. But the crude index's decline suggests traders collectively think huge price swings are a thing of the past, at least for the time being.
The OVX also isn't a perfect gauge of oil market sentiment, as it tracks options traded on the United States Oil Fund LP (USO), an exchange-traded fund, rather than futures themselves. Because the U.S. Oil Fund is traded like a stock, the OVX may pick up some cross-contamination from bigger trends in the equity markets.
Nevertheless, traders say the oil market has gotten a shade less wild, even with prices climbing back above $60 a barrel. OVX topped 100 in December.
"Nobody expects crude to go through the roof anytime soon," said Chris Thorpe, managing director at Hudson Capital Energy, a New York oil-options dealer.
Thorpe said trading in options on U.S. crude futures currently imply prices could rise or fall about 45% in the next year - well below last year's peak of more than 100% implied volatility.
On a daily basis, oil-options trading reflects expectations U.S. crude could move by nearly 3% daily, or about $1.70 a barrel at today's $61 oil price, said Harry Tchilinguirian, oil analyst at BNP Paribas in London.
Some traders are apparently still betting prices could again go haywire, even as glutted oil inventories and ample spare capacity among producers suggest otherwise.
Traders said that in the past couple of weeks, people have acquired options to buy crude at $250 and even $300 a barrel in future years, meaning they can book a profit if oil prices rise above those astronomical levels. On Thursday, they said, one such $250 call option for crude to be delivered in December 2010 sold for 15 cents a barrel.
-By Gregory Meyer, Dow Jones Newswires; 201-938-4377; greg.meyer@dowjones.com
Tuesday, May 19, 2009
Upward Pressures; Singapore Jetkero Hedging
Energy markets surged yet again yesterday, moving higher on the back of further optimism for US equities (GS, MS and JPM all applied to refund a total of about $45B in TARP funds), a weakening Dollar and several fires at large US refineries. The unexpected refinery problem caused a surge in the gas crack, pushing the July refinery margin well over $15 and closer to the $20 predicted by this column last week. Look for resistance in crude around $60.50, while a surprise build in US inventory numbers (analysts are predicting a draw at this point) could cause a return of profit-taking resulting in a re-testing of the $58.85 level. Although at these levels, a continued push higher is vastly more likely.
Product implied volatility remained mostly unchanged through yesterday’s rallies. California Jet Fuel prices looked strong and thus similar price action can be expected in the Singapore Distillates once crude begins its usual late-Asian trading day rally (currently the markets are unchanged to slightly lower due to retracement on the back of recent rallying and low liquidity, but expect strength later in the day).
While implied vols remained largely untouched yesterday, the put skew which first appeared several weeks ago was further strengthened. As the market pushed relentlessly higher shrewd traders have scooped up puts for the inevitable retracement lower, thus bidding up the right to short the market. Consumer hedgers of Singapore Jetkero can take advantage of the inflated put values by selling them to finance price caps for the remainder of the year. For instance, Sing Jetkero prices can be capped at $75 to as high as $100 for the second half of 2009 for about $3.00/bbl while unlimited protection can be bought at $80 for the same tenor by accepting a price floor at $60.
Singapore, 09:00
Product implied volatility remained mostly unchanged through yesterday’s rallies. California Jet Fuel prices looked strong and thus similar price action can be expected in the Singapore Distillates once crude begins its usual late-Asian trading day rally (currently the markets are unchanged to slightly lower due to retracement on the back of recent rallying and low liquidity, but expect strength later in the day).
While implied vols remained largely untouched yesterday, the put skew which first appeared several weeks ago was further strengthened. As the market pushed relentlessly higher shrewd traders have scooped up puts for the inevitable retracement lower, thus bidding up the right to short the market. Consumer hedgers of Singapore Jetkero can take advantage of the inflated put values by selling them to finance price caps for the remainder of the year. For instance, Sing Jetkero prices can be capped at $75 to as high as $100 for the second half of 2009 for about $3.00/bbl while unlimited protection can be bought at $80 for the same tenor by accepting a price floor at $60.
Singapore, 09:00
Monday, May 18, 2009
Crude Retracement; Hedging
Energy prices softened on Friday as profit-takers took the hint from bearish European economic data as well as recent Opec statements. The producer’s cartel recently warned of the excessive supply overhang in relation to consistently weak demand. While Open would certainly enjoy higher crude prices, the group is wary of the volatility high prices would engender at this stage of the global economic meltdown/bottom. Speculative money continues to prop up prices and support in WTI at $56 remains intact despite Friday’s market weakness.
Distillate cracks continue to look weak, especially in relation to the gasoline margin which settled above support at $14. Speculative inflows should help to push the gas crack towards $20 as we approach summer driving season in many large consumer countries.
Consumer hedgers looking to take advantage of Friday’s drop in underlying prices also have a softening of implied volatility working in their favor. Currently, the WTI Aug09 $60/70 call spread can be owned for only about $2.70/bbl or for zero cost by selling the $53.50 put in the same month. Similarly, the $60/70 call spread can be owned for only $1.00/bbl by selling the $50/55 put spread. Max loss on this trade is confined to the width of the put spread ($5) plus the $1 premium paid for the call spread.
Singapore, 09:00
Distillate cracks continue to look weak, especially in relation to the gasoline margin which settled above support at $14. Speculative inflows should help to push the gas crack towards $20 as we approach summer driving season in many large consumer countries.
Consumer hedgers looking to take advantage of Friday’s drop in underlying prices also have a softening of implied volatility working in their favor. Currently, the WTI Aug09 $60/70 call spread can be owned for only about $2.70/bbl or for zero cost by selling the $53.50 put in the same month. Similarly, the $60/70 call spread can be owned for only $1.00/bbl by selling the $50/55 put spread. Max loss on this trade is confined to the width of the put spread ($5) plus the $1 premium paid for the call spread.
Singapore, 09:00
Thursday, May 14, 2009
Short Covering, Singapore Jetkero Hedging
Traders are on edge coming into Friday morning’s trading session as the classic end of the week short-covering rally pushed crude markets higher yesterday. Sentiment appears to have shifted once again to the upside as bears couldn’t drive WTI below support at $56. The gasoline crack strengthened once again as it is the unleaded market which continues to provide the impetus for propelling the entire energy complex higher.
Yesterday’s move will provide further incentive for speculators and hedge funds to enter the market in greater numbers. As the Dollar continues to struggle expect to see a push in the next few days to break through Tuesday’s high of $60.08. The market persists in being propelled higher by further investment flows into the sector.
In the jetkero market, California jet differentials remained for the most part unchanged throughout the volatile trading. Several regional carriers have been reporting losses recently- Singapore Air has highlighted hedging losses from positions taken while crude prices were much higher, while globally airlines continue to battle sagging customer demand which hasn’t been helped by the ongoing battle against the H1N1 virus.
Consumer hedgers can currently take advantage of the inflated put skew (expensive puts) to enter into collars with relatively less downside risk than with the typical put skew pricing. The Singapore Jetkero 2H09 $80 call can be owned for zero cost by selling the $60.50 put in the same tenor. This hedge provides unlimited protection above $80 for every month in the 2H09 with downside risk in Sing Jetkero below $60.50 only. For those hedgers looking for less downside exposure, the $80 price cap can be owned for only $1.30/barrel per month when the $48/56 put spread is sold. The downside risk in this scenario is merely the width of the put spread ($8) plus the premium paid for the $80 call ($1.30).
Singapore, 09:00
Yesterday’s move will provide further incentive for speculators and hedge funds to enter the market in greater numbers. As the Dollar continues to struggle expect to see a push in the next few days to break through Tuesday’s high of $60.08. The market persists in being propelled higher by further investment flows into the sector.
In the jetkero market, California jet differentials remained for the most part unchanged throughout the volatile trading. Several regional carriers have been reporting losses recently- Singapore Air has highlighted hedging losses from positions taken while crude prices were much higher, while globally airlines continue to battle sagging customer demand which hasn’t been helped by the ongoing battle against the H1N1 virus.
Consumer hedgers can currently take advantage of the inflated put skew (expensive puts) to enter into collars with relatively less downside risk than with the typical put skew pricing. The Singapore Jetkero 2H09 $80 call can be owned for zero cost by selling the $60.50 put in the same tenor. This hedge provides unlimited protection above $80 for every month in the 2H09 with downside risk in Sing Jetkero below $60.50 only. For those hedgers looking for less downside exposure, the $80 price cap can be owned for only $1.30/barrel per month when the $48/56 put spread is sold. The downside risk in this scenario is merely the width of the put spread ($8) plus the premium paid for the $80 call ($1.30).
Singapore, 09:00
Tuesday, May 12, 2009
Energy Markets take a Breather, Singapore Fuel Oil Hedging
Energy markets took a breather yesterday, experiencing mostly sideways trading as equities in western markets trended lower. Despite the weakness in stocks, crude oil held firm above support levels leading to an increase in implied volatility as traders try to glean insight into the market’s next direction. Pressure remains to the upside as both WTI and Brent are poised to break through the $60 level. While signs are starting to emerge signaling market weakness (a significant flattening of the Fuel Oil contango indicates an imminent correction) expect one final push higher before short-term supply/demand fundamentals result in a much-needed correction back towards support around $53 in WTI and $320 in Singapore Fuel Oil 180cst.
The cost of owning downside puts has increased markedly in the past few days as producer hedgers have entered the market to take advantage of the recent price run-up. This put skew blow-out has effected product markets as well, producing a scenario quite favorable to consumer hedgers. Traders short physical bunker fuel can use a collar structure to protect against further price rises while also taking advantage of the increase in put option prices. The Sing FO 180cst June $350 call can now be owned for Zero Cost by selling the $330 put in the same month. Similarly, the June $350/380 call spread can be owned for Zero Cost by selling the $313 put. This hedge provides $30 of upside protection with no premium at risk at or above $313 if the hedge is held to expiration.
Singapore, 09:00
The cost of owning downside puts has increased markedly in the past few days as producer hedgers have entered the market to take advantage of the recent price run-up. This put skew blow-out has effected product markets as well, producing a scenario quite favorable to consumer hedgers. Traders short physical bunker fuel can use a collar structure to protect against further price rises while also taking advantage of the increase in put option prices. The Sing FO 180cst June $350 call can now be owned for Zero Cost by selling the $330 put in the same month. Similarly, the June $350/380 call spread can be owned for Zero Cost by selling the $313 put. This hedge provides $30 of upside protection with no premium at risk at or above $313 if the hedge is held to expiration.
Singapore, 09:00
Sunday, May 10, 2009
Optimism Continues/ WTI Hedging & Trading
Front-month crude continued the push on Friday for new 2009 highs on the back of unemployment data out of the US that was less-bad than expected. The optimistic trend for both commodities and equities that began more than a month ago gathered new legs last week as results from the bank stress-tests proved also to be less dreadful than anticipated. Financial flows into ETF’s and also from hedge funds continue to be the main catalyst in this rally. Watch for profit taking as WTI and Brent edge closer to $60 as this price belies the short-term supply glut, demand weakness and producer spare capacity. Also, expect less aggressive moves for storing physical product, as the strong rally has significantly narrowed the contango futures curve.
Opec cuts, being largely from Saudi Arabia, the UAE and Kuwait, have been in the medium to heavy sour grades. This is where price stabilization and the current move higher first began. However, it has clearly been financial flows which have pushed near-term crude prices (even those of the light, sweet variety) to new highs for the year.
Implied volatility has softened daily for the past two weeks as crude inched higher. While At-The-Money options and upside calls have become relatively cheaper (in implied vol terms), the put skew has recently been gaining attention. Many traders long from the mid-$40’s have taken advantage of the unabated push higher to purchase downside protection in the form of puts. Buying puts remains a safer strategy than simply selling swaps, even with the elevated put skew. The WTI July $40/50 put spread is currently trading around only $0.80/bbl and the July $45/55 put spread can be owned for zero cost by selling the $65 call.
Singapore, 09:00
Opec cuts, being largely from Saudi Arabia, the UAE and Kuwait, have been in the medium to heavy sour grades. This is where price stabilization and the current move higher first began. However, it has clearly been financial flows which have pushed near-term crude prices (even those of the light, sweet variety) to new highs for the year.
Implied volatility has softened daily for the past two weeks as crude inched higher. While At-The-Money options and upside calls have become relatively cheaper (in implied vol terms), the put skew has recently been gaining attention. Many traders long from the mid-$40’s have taken advantage of the unabated push higher to purchase downside protection in the form of puts. Buying puts remains a safer strategy than simply selling swaps, even with the elevated put skew. The WTI July $40/50 put spread is currently trading around only $0.80/bbl and the July $45/55 put spread can be owned for zero cost by selling the $65 call.
Singapore, 09:00
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