Energy markets continued their push higher yesterday on the back of optimistic stimulus news from China as well as that country’s outperforming industrial construction data.
Despite the need for several major Western banks (Citi, Wells & BofA) to immediately raise more capital, it is optimism that we have 'hit bottom' and the resulting financial flows into the commodity sector that continue to buoy the market.
However, look for profit taking on the recent run-up as June WTI is now trading around resistance at $54.50 as well as the top of the long-term $44-55 range. Singapore Fuel Oil 180cst looks to be trading at a similar resistance level ($320) after experiencing the same late April pullback and subsequent rally as that of WTI. Tuesday and Wednesday should make for interesting trading as US inventory numbers are released and we move closer to the next OPEC meeting where production quotas are expected to remain unchanged.
Implied volatility levels softened further as crude prices pushed to the top of the recent range. Expect Singapore Fuel Oil option premiums to be relatively cheaper in Asian trading Tuesday morning. Fuel Oil hedgers worried about further price rises (but cognizant of the market trading on recent highs) can look to buy upside protection in the form of the June Sing FO 180 $325 Call. A portion of the cost of this price ceiling can be negated by selling the June $280/300 put spread. Thus, the maximum downside exposure on this hedge is limited to $20 plus the required premium outlay for the call.