Energy markets began to pull back on Tuesday as traders question the legitimacy of the recent commodity/equity rally. The US Dollar certainly looks oversold at this stage and it wouldn’t be surprising to see a greenback rally force crude prices lower through the month of August. Yesterday’s trading in the western benchmark crudes displayed significant technical weakness while demand for black gold is expected to remain weak throughout the third quarter.
However, there are several factors that could easily lead to one more price spike before the market pares back its gains: weak July/Aug trading volumes paired with the ever-present threat from hurricane season in the Gulf of Mexico remain an underlying bullish threat.
Mirroring equity markets, most commodities have pushed over or near highs for 2009 mainly on the back of anaemic fundamentals. That is with the exception of bunker fuel, much to the chagrin of tanker operators and other consumers of the crude by-product. Much has been written as of late regarding Fuel Oil’s recent rally - actually with some fundamental backing to it (refinery upgrades and producer cuts of heavy, sour crude lead many traders to believe bunker prices will continue to power upwards for the foreseeable future).
With this level of uncertainty in the market, it would benefit bunker consumers to hedge a portion of their fuel needs both in the swaps and options markets. Aside from positioning themselves to lock-in future prices at today’s levels by buying swaps, costless collars and similar structures provide some downside advantages while also providing full upside price protection above a certain price.
For example, in Singapore Fuel Oil 180cst, unlimited upside protection above $450 can be owned in Sept through December ’09 by accepting a price floor at $390. Similarly, consumer protection between $450 and $500 can be had by accepting a much lower price floor of around $355. This strategy currently avails the consumer of approximately $60 of downside price movement paired with $50 of protection above $450.