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The path of least resistance
12th January 2011 10:58 GMT

Energy markets this week have continued the new year trend of pushing higher.  Brent is currently sitting less than a standard deviation away from $100 while the laggard, WTI, has pushed firmly above $90.  Product markets are no less strong with Singapore Fuel Oil bid well above $525, European Gasoil trading over $800 and the Heating Oil and Rbob cracks in NYC exhibiting considerable drive.

The question remains, is this rally a flash in the pan, or a new and sustainable move out of previous static ranges?  Analysts seem to favor the latter, as a new bullish prediction seems to hit the presses daily.  Also in focus is the widening Brent/WTI spread- the Cushing benchmark continues to rally, but appears to be going higher kicking and screaming as its competitor drags it up in its wake.  Most of the analysis on this widening spread focuses on passive investment moving from WTI to Brent and Gasoil or the flood on Canadian crude into an already bloated storage area.  Let's not forget the Brent side of the picture though; long-term production sustainability issues, increasing Asian demand and a shift in the focus of Russian exports away from Europe and toward the East.  This results in a less competitive pricing environment for North Sea crudes, and is the almost mirror opposite of WTI's North American problem of more crudes for refiners from which to choose.

Whatever your views on future price movements, a number of things are clear.  The upside appears to be the path of least resistance and basic crude fundamentals appear to be having less and less of an impact on pricing.  Thus, as price prediction becomes more difficult, the importance of a proper hedging program becomes clear.  Bunker consumers looking to hedge against further price rises but conscious of a possible retreat in the next few months may look to own a price ceiling around the $550 level in the second half of 2011 using the Singapore Fuel Oil 180cst benchmark.  This price ceiling, covering each month from July through December can be owned for zero cost by accepting a leveraged price floor around the $450 range.  This results in unlimited upside protection above $550 with no premium at risk at or above $450.

Jonathan Kornafel,
12th January 2011 10:58 GMT

Comments on this Blog
Kashif Khan - PNSC
2nd February 2011
i am new to this. can you please list the strategies available for Bunker hedging

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