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Inventory levels weigh on product markets
7th October 2009 16:29 GMT

The weak US dollar continues to be a powerful factor influencing crude oil prices worldwide. Further pressure on the greenback was added by yesterday’s decision by the Reserve Bank of Australia to raise interest rates, furthering the notion that some sort of regional economic recovery is underway. Rumours of the Gulf Arab states holding secret meetings with producer states with the objective of replacing the dollar as the currency crude is priced in must be taken with a grain of salt; while pricing may undoubtedly be moving in this direction, such action would take at least a decade to be implemented.

Meanwhile, continued weakness in the middle of the barrel (witness benchmark heating oil cracks) will continue to weigh on refiners while fears of a warmer than normal winter pressure not only crude feedstock, but also natural gas as a heating alternative.

Certainly the enormous global inventories of crude and distillate continue to weigh on the market, but the much looked for collapse in prices has yet to occur. This is most likely a result of inflation fears and increasing asset allocation towards commodities. Any sort of demand pick-up in the final months of the year will certainly help push bunker prices higher.

Singapore Fuel Oil 180cst continues to trade in an ever-tighter range between $400 and $450, thus allowing consumers to take advantage of option strategies enabling free protection above certain levels. The December $450 call, for instance, can be owned for zero cost by accepting a leveraged $350 price floor. For a 1:1 ratio, $50 of upside protection (from $450 to $500) can be owned in December for zero cost by accepting a price ceiling in the current front-month of November at $450.

Jonathan Kornafel,
7th October 2009 16:29 GMT

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