Crude prices remain mired in the $64-66 range Wednesday despite Department of Energy inventory figures showing a draw of 1.8m bbls. The figure was largely in line with traders’ expectations, but conflicted sharply with that of Tuesday’s API report showing a build in crude stocks. The numbers in the DOE report were largely the result of a slight decrease in crude runs paired with drooping imports. Despite seven weeks of crude inventory draws, US stocks remain significantly above levels from the previous year.
July and August typically exhibit a moribund trading pattern with decreasing volumes but leaning more to the bullish side. Commodity traders expecting equity markets to pull crude prices higher may have to wait until holiday season is over, as both markets have experienced recent rallies and appear to have entered a holding pattern.
Bunker consumers seeking cheap but effective upside protection in the 4th Quarter of the year can look to a Singapore 180cst Fuel Oil costless 3-way structure. The Q409 $425 / 475 call spread can be owned for zero cost by accepting a price floor at $345. This hedge allows for $50 of upside protection per month above $425 with no premium at risk above the $345 level.
With the Q409 underlying trading just under $400 and implied vol in the mid-40’s, the $345 price floor is almost 5 standard deviations to the downside and a level not broken below since $350 became a solid price floor two months ago. Regardless, the hedge allows for more than $50 of downside price movement (good for the consumer) with $50 of upside protection above $425 with no premium at risk upon settlement at or above $345.