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Fundamentals cannot be ignored
23rd April 2009 15:35 GMT

US crude stocks now sit at a two-decade high as yesterday’s inventory data pointed to a further increase of 3.9m barrels. Refinery utilisation rose 3% resulting in surprise builds for both distillates and gasoline stocks. 

Curiously, the build in crude stocks was greater than most analysts anticipated, even with the increase in refinery utilisation. Furthermore, WTI prices actually rose slightly after a day of lacklustre trading yesterday. This scenario points to the strong connection between crude prices and equities, as the energy market appears to be trading as a proxy for short-term global economic health. This has been true for more than a month now, as crude prices topped $55 recently on the back of better than expected earnings from the financial sector. 

Regardless, fundamentals cannot be ignored forever and recent statements from the IMF regarding the 'remote' likelihood of a rapid rebound in commodity prices were felt on trading floors yesterday as a near-term push lower in crude prices is looking all the more plausible.

Singapore 180 Fuel Oil traders looking to protect against a near-term drop in prices can still take advantage of the recent push towards $300 by buying a May09 price floor (put) at $270 for Zero Cost by selling a price ceiling (call) at $299. This Collar trade is a safer play than simply selling swaps as it provides almost $15 of breathing room on the upside before losses accumulate.  Similarly, the price floor provides for unlimited downside protection below $270.

Jonathan Kornafel,
23rd April 2009 15:35 GMT

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