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Trend to the upside remains
3rd June 2009 15:27 GMT

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.

Jonathan Kornafel,
3rd June 2009 15:27 GMT

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