Crude markets moved higher yesterday on the back of a weaker US dollar and renewed economic optimism (both ArcelorMittal and Posco announced steel production increases owing to greater demand). The front-month WTI contract had fallen approximately 10% since last week before regaining some composure and ending a 5-day losing skid.  

It should be noted that as of 9am in Singapore, front-month WTI is down once again more than $1.00. Surprisingly, the unleaded gasoline crack did not lead the way higher (as had been the case for the recent 2-month rally) as stocks of that product showed another weekly build according to API data. Expect the Western benchmark feedstock contracts (WTI & Brent) to continue to trade as an asset class at least in the short-term, mimicking equities and moving inversely to the US dollar while ignoring near-term supply overhangs and lingering geopolitical issues.

Asian Fuel Oil prices will continue to ape those of the broader energy complex. Thus, while the Singapore Fuel Oil 180cst swap may not exhibit much of a trend in early trading, the contract will certainly be to a large extent beholden to trends in the heavily traded Western contracts, despite the selling pressure from refiners the previous week.

The WTI and Brent rally should prove short-lived as the market continues to exhibit consolidation signals and yesterday’s price action was only a reinforcement of this thesis. Traders looking to short near-term implied volatility in the Fuel Oil market may be interested in the August09 Sing FO 180 $350/425 strangle (selling a price floor and ceiling) at around $25.00/MT. Upon expiration, this trade yields $25,000/1000MT between $350 and 425, with breakeven at $325 and $450. Below $350 the trader is long from that price and above $425 short from that level.