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Fuel oil takes a breather
17th June 2009 16:06 GMT

The weakening trend begun early Monday is expected to continue into Asian trading today. Crude appears to have found both support and resistance levels firmly within $2 of $70, while price action in Singapore Fuel Oil 180cst should look quite similar.

Unable to break through and settle consistently above the psychological $400 mark, energy markets including Sing FO look to be taking a breather. It is specifically this type of consolidation which will allow for further moves higher. The danger being, of course, of a slow grind lower where WTI and Brent break through support levels on their way back to a 5-handle (pricing in the $50 range) with Fuel Oil exhibiting similar short-term weakness and trending below $300. However, even with considerable Western-benchmark weakness, Fuel Oil cracks may remain strong as a result of OPEC production cuts (which consist predominantly of the heavy-sour crude).

Consumer hedgers looking to protect against Sing FO 180 pushing above $400 can also use hedging to profit from a Brent weakening (and thus a further narrowing of the price differential between light, sweeter crude and heavy-sour crude).  The August09 Sing FO 180 $410/460 call spread can be owned for only $3.00/MT when the $350 put is sold.

Similarly, the August09 Brent $55/65 put spread can be owned for zero cost by selling the $79 call for financing. This type of trade positions the consumer hedger to profit from a narrowing of the sweet-sour spread. It also functions to provide protection against a strengthening of bunker fuel as a result of production and refining fundamentals vs a weakening of Brent/WTI due to a slowing of investment flows.

Jonathan Kornafel,
17th June 2009 16:06 GMT

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