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Tail wagging the dog in crude market
24th November 2010 09:53 GMT

Speculation prior to the US QE2 announcement regarding crude price direction proved on-the-money as the crude rally towards $90 showed to be more "buy the rumor and sell the fact" than a fundamentally driven push.  

In fact, political risks have increased (MEND back on the offensive and targeting Shell pipelines in Nigeria), demand appears to be relatively solid (Chinese implied oil demand grew more than 11% during October versus last year) and crude inventories in the US look set to continue falling.  Not to mention the ongoing shortage of distillate in China.

Crude prices dropped approximately 7% whilst each of the above bullish fundamental issues became prominent.  

Financial flows continue to be the tail wagging the dog as the dollar looks to reassert itself post Fed announcement and the realization that Greece was not the end of the Euro's problems (and neither is Ireland).

Nevertheless, a move higher continues to be the path of least resistance for energy prices.  Therefore, consumers looking to hedge future fuel costs may wish to purchase a price ceiling (call) in Singapore 180cst Fuel Oil 1H11 around the $500 level.  This ceiling can be owned for zero cost by accepting a leveraged price floor in the same tenor around the $425 area.

Jonathan Kornafel,
24th November 2010 09:53 GMT

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