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 (US markets were 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 US 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.