Energy markets traded without much direction yesterday as equities also looked undecided. Increasing fund flows have resulted in benchmark commodity contracts trading largely as an asset class (hedge against future inflation, hedge/trade against Dollar weakness) and with recent less-than-terrible economic news being reported (Chinese demand, ISM surveys) it appears there is too much long paper entering the market to call a top in energy futures. This also leads to the question as to whether the recent equity and commodity rally has over-compensated for the humble signs of recovery we have been observing. Basic energy supply and demand would tell us we have certainly gotten ahead of ourselves in the short-term, leading traders to not put much stock in the weekly US inventory data outside of the short spike in volatility seen immediately after the release of the numbers.
Despite yesterday’s lacklustre trading (and continuation of the implied vol implosion), the trend to the upside across the energy complex remains firmly intact. With recent IMF predictions of an 11% drop in world trade, one would expect bunker prices to remain mired near recent lows. This is not to be seen however, as Singapore Fuel Oil 180cst continues its assault on $400. As crude pushes for the inevitable break over $70, so FO follows to break through $400 and build support at that level. The current move higher began after breaking convincingly above $280, a price point briefly retested before the market pushed to today’s heady levels.
Consumer hedgers looking to protect against further near-term upside moves in bunker prices can own a zero-cost price ceiling in July Sing FO 180cst at $400 by also accepting a price floor at $370 leveraged twice. For those looking for limited downside risk, the July $420 price ceiling can be owned for zero cost by selling the $320/385 put spread in the same month. This hedge offers unlimited upside protection above $420 with $65 of risk on the downside.
Singapore
Tuesday, June 2, 2009
Sunday, May 31, 2009
Strong Asian Demand; ICE Brent Hedging/Trading
In the course of the last couple weeks we’ve seen several new highs for the year, and Friday was no exception. Closing out the week on the back of increasing pressure from the gasoline market, a spiralling (lower) dollar and a rally in equities, crude markets ended the month of May with gains of upwards of 30%. Economic data is the predominant catalyst pushing energy markets higher, and it is Asia that appears to be leading the charge in this respect. Industrial Production results for Asia during the month of April were surprisingly optimistic, highlighting the strength of the hoped for and much-discussed Asian recovery. This is no more apparent than in China where motor-vehicle sales and increased Ethylene production (related to Naptha demand) reveal a boosted oil demand picture.
After last week’s archetypal production meeting, Opec decided not to adjust announced output levels while also stating they expect higher near-term prices in the range of $75-80. According to the CFTC, crude longs increased by more than 9,000 contracts last week to 187k while speculative net longs also increased approximately 8% to 101.6k. On further moves higher, aside from psychological resistance at $70, expect significant selling pressure from profit-takers around $71.85.
Implied volatility has decreased substantially across the entire feedstock and product complex. Despite soft At-The-Money vols, the put skew remains elevated in crude markets, thus allowing consumer hedgers to own relatively better priced upside protection by selling inflated-priced puts for financing. For instance, the ICE Brent APO 2H09 $80 call can be owned for zero cost by selling the $57.50 put in the same tenor. Similarly, the ICE Brent APO 2H09 $80 call can be owned for zero cost when the $50/60.50 put spread is sold. This position results in unlimited upside protection/gains above $80 with only limited loss potential on the downside ($10.50/month).
Singapore
After last week’s archetypal production meeting, Opec decided not to adjust announced output levels while also stating they expect higher near-term prices in the range of $75-80. According to the CFTC, crude longs increased by more than 9,000 contracts last week to 187k while speculative net longs also increased approximately 8% to 101.6k. On further moves higher, aside from psychological resistance at $70, expect significant selling pressure from profit-takers around $71.85.
Implied volatility has decreased substantially across the entire feedstock and product complex. Despite soft At-The-Money vols, the put skew remains elevated in crude markets, thus allowing consumer hedgers to own relatively better priced upside protection by selling inflated-priced puts for financing. For instance, the ICE Brent APO 2H09 $80 call can be owned for zero cost by selling the $57.50 put in the same tenor. Similarly, the ICE Brent APO 2H09 $80 call can be owned for zero cost when the $50/60.50 put spread is sold. This position results in unlimited upside protection/gains above $80 with only limited loss potential on the downside ($10.50/month).
Singapore
Thursday, May 28, 2009
Opec Statement; Brent Hedging/Trading
Traders took their cue from Saudi Oil Minister Ali Naimi’s comments yesterday that the world economy is strong enough to endure $75-80 oil. The cartel’s de facto spokesperson provided fresh legs for what looks like the beginning stages of a push into the high $60’s for WTI and Brent. Look for resistance around $65.00 (mostly psychological), more specifically $64.85 and $65.20. Above these levels, look to scoop up some cheap puts around $67.12 as the market will encounter severe resistance at this point.
Energy markets may continue to ignore the enormous supply overhang in the short-term as inflationary pressures (manifest in rising long-term U.S. Treasury yields) have found a home in crude oil. Consumer hedgers and traders looking to be on-board for the next possible move higher can take advantage of the recently inflated put skew to finance the purchase of calls. For instance, the ICE Brent August09 $70 call can be owned for around $2.50/bbl or for zero premium by selling the $58 put in the same tenor. Similarly, the Brent December09 $70/85 call spread can be owned for zero cost by selling the $58.50 put.
Singapore
Energy markets may continue to ignore the enormous supply overhang in the short-term as inflationary pressures (manifest in rising long-term U.S. Treasury yields) have found a home in crude oil. Consumer hedgers and traders looking to be on-board for the next possible move higher can take advantage of the recently inflated put skew to finance the purchase of calls. For instance, the ICE Brent August09 $70 call can be owned for around $2.50/bbl or for zero premium by selling the $58 put in the same tenor. Similarly, the Brent December09 $70/85 call spread can be owned for zero cost by selling the $58.50 put.
Singapore
Tuesday, May 26, 2009
Rally gets Fresh Legs, Singapore Fuel Oil Hedging
After dropping more than $2.00 in late Asian trading yesterday, crude prices rebounded to fresh 2009 highs. It was once again equities that propelled energy markets higher as investors chose to ignore a record drop in US housing prices, surging foreclosures and the now routine nuclear bomb explosion in N Korea. The only thing that can stop crude prices looks to be the commodity’s own self-fulfilling prophecy of higher prices resulting in yet another global economic slowdown. This phenomenon looks to be far off in the distance however, as traders now set their sights on the $70 mark (still less than half the heights from one year ago). The U.S. Dollar faired surprisingly well yesterday as traders are now focused on the growing crisis in the European banking system.
Yesterday’s decisive move higher after bouncing off lows more than 1 standard deviation to the downside may have removed the last of the doubters to this rally. Expect strong price action this morning in Asia, despite enormous inventory overhangs of both crude and products. Paper length appears to be in the driver’s seat and Singapore bunker fuel consumers may wish to hedge their upside against the inevitable push towards $400. Currently, traders can take advantage of the inflated put skew to help pay for a relatively better price ceiling than in recent months. For instance, the Sing FO 180cst 3Q09 $380 price ceiling (call) can be owned for zero cost by accepting a price floor (put) around the $340 level. Similarly, the 3Q09 $370/430 call spread can be owned for zero cost by selling the $325 put in the same tenor.
Singapore, 09:00
Yesterday’s decisive move higher after bouncing off lows more than 1 standard deviation to the downside may have removed the last of the doubters to this rally. Expect strong price action this morning in Asia, despite enormous inventory overhangs of both crude and products. Paper length appears to be in the driver’s seat and Singapore bunker fuel consumers may wish to hedge their upside against the inevitable push towards $400. Currently, traders can take advantage of the inflated put skew to help pay for a relatively better price ceiling than in recent months. For instance, the Sing FO 180cst 3Q09 $380 price ceiling (call) can be owned for zero cost by accepting a price floor (put) around the $340 level. Similarly, the 3Q09 $370/430 call spread can be owned for zero cost by selling the $325 put in the same tenor.
Singapore, 09:00
Sunday, May 24, 2009
Long Weekend, Markets Push Higher; Brent Hedging
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
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
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
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