Crude oil markets continue to defy gravity as the debate rages around the globe on austerity vs stimulus, not to mention the differing opinions on what our world will look like in 6 - 24 months. For the moment, corporate earnings look good; but the question remains, for how long? Particularly in the West, this question needs to be addressed, but at some point whether good or bad, there will be follow-though impact felt in the East.
Without a meaningful recovery (or bottom, at least) in the US housing market and Western employment, the current good times may not last much longer. Despite this point, energy markets continue to rally on the expectations (of some) of depleted supplies and increasing demand over the foreseeable future. Anemic implied vols in crude oil tell us not to expect too much from this current rally, and summer holiday trading volumes point to a pullback at some point soon.
While the prior consumer hedge suggestion of owning the 475/525 call spread with a price floor around 335 is working very well in the consumer's favor, Fuel Oil hedgers wishing to enter the market at this point can look to a similar structure in the Spore 180cst 4Q10-1Q11 $500/600 call spread vs a leveraged $385 price floor. Expanding on the prior proposal, this hedge allows for $100 of upside protection with no premium at risk at or above the $385 level.