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Crude price correction long expected
2nd September 2009 15:30 GMT

The long-expected correction in crude and equity markets (can anyone tell the difference between the two these days?) appears to have begun this week. This despite relatively positive economic data permeating from across the globe - most recently positive ISM manufacturing data released in the US.

The issue appears to be too much of a run-up too fast, as the pressure from a historically weak September and October bears down on investors and traders.

Much of the current fear from traders this week can be traced to indications from the Chinese government of a curb in bank lending. On the surface, this can be expected to result in lower energy demand across the board and in the words of Australian Treasurer Wayne Swan, a potential “knee-capping” of the economic recovery seen since March.

If bearish sentiment continues, expect to see a potential break below support levels in WTI around $67.35. Further declines in shipping rates due to reduced Chinese demand can be expected to continue, as reported in a Bloomberg survey earlier in the week highlighting expectations for a 50% drop in freight rates in the next 4 months.

Despite the approximately 10% rise in bunker prices last month and strong price support exhibited recently at ports globally (relative to WTI & Brent), inventory holders worried about short-term protection should not take bunker price strength for granted. A $420 price floor in October Singapore Fuel Oil 180cst can be locked-in for zero cost by accepting a price ceiling in the same month around $445.

Similarly, suppliers holding inventory may wish to simply sell an upside price ceiling around the $480 level for around $15/MT. This type of hedge gives $15 of downside price protection while ensuring a payment of at most $15/MT upon an October expiration below $495.

Jonathan Kornafel,
2nd September 2009 15:30 GMT

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