Finding values in calmness

A rather short post today as SFOT tries to refocus his thoughts on the several forces impacting oil complex this year. So, crude prices has been relatively dull of late. This favours option sellers collecting theta and small intraday trading, hardly sufficient to fill up a day of work. Would SFOT join the crowd in collecting theta? Probably not at such low volatility levels as risk reward isn't that great.

Brent Vol Mar12.

Afterall, there are better value plays to look at. For eg, the Wti-Brent spread. The tightening in the last few month have been driven mostly by talks of enbridge pipeline reveral which finally will take crude out of cushing, providing a way out. However, given this has recently been put back until at least June this year, we are not due a reveral of fortune for wti just yet. Significantly, we are now going to witness a build in cushing stocks for a while. This shall depress prompt WTI vs Brent spread but perhaps create an opportunity to get long of this spread on a deferred basis. Dec12 perhaps?

Dec 12 Wti-Brent spread

Bull Asia

So another day where Asia opens off to the races. Base metals, energy, equities all reacting to what is an equivalent of a 50bp cut by China in their reverse repo operation which has been rumoured for a while. Also to a smaller extent the mere 58% drop in Goldman earnings, which is less than what most had expected. However, note that liquidity is again very thin and SFOT has quickly learned that moves happens not in Asia but in the western timezone where he used to ply his trade. Nevertheless, these few days have relatively mpressive in terms of intraday volatility, particularly in the energy space but we are not breaking out of the 110/115 range anytime soon. Implied volatility is coming off and continues to go lower in this environment. While it is probably not cheap yet, SFOT is now beginning to think about getting long some of these longer dated vega putting them in the drawer in case of a real Iranian conflict. This is no less thanks to a few of his colleagues and the internet having put up more interesting history of the Iranian related middle east conflicts where you can find here and here.
Here in the energy space, the big news is about the closure of yet another refinery, this time in the US. After 3 years and an astonishing 1.3bn loss, Hess and PDVSA finally decided to shut this loss making venture. This is consistent with IEA's release late last night of a fall in oil demand since 2009 and also SFOT's own humble post yesterday. This leads us nowhere as Iranian premium still prevent this market from reacting much. Watch for spreads to continue establishing a firm contango for the mean time.

Ugly Europe

Whilst we are all buried in trying to find out the results of the next bono or btp auctions, perhaps it is timely to point out how the demand side of europe is doing at this point in time. As GDP, retail sales, IFO etc are good indicators, i suspect it would be helpful to a few macro punters to look at a more timely indicator of demand/supply as indicated by the structure of oil for example. Even though oil prices are sticky at the moment, in particular with the Iranian reutoric in recent days, it is interesting to note that we are experiencing a severe drop in demand in Europe. The numbers are not available as yet but the term structure give us a hint. European (ICE) Gas oil, futures curve has gone into contango for the second month in a row. This typically signals a fall in demand relative to supply and is taking place in spite of potential supply cut resulting from the closure of some petroplus refineries.

ICE Gasoil front spread

Similarly in the crude oil market, Brent's structure is weakening repidly, with the last contract expiring in contango. As Brent is primarily still a European based contract, this is a telling sign that refineries are taking less crude into their system and that end user demand in finished products like Heating oil is falling hard in europe. This isn't helped by a fairly mild winter so far and is a lagged effect of the very high price of oil in EUR terms. The likes of Greece and Italy must be feeling the pain even more now. Perhaps i am jumping too far ahead but January economic numbers in Europe could be bad. European sanctions on Iran might be good for the long run politically but Brent is only above $110 now for one reason. In any scenario of Iran easing off, oil price could finally come off and give Europe a small helping hand. I'd like to point out though that this weakness is a pure European phenomenon as Asian/US related oil product structures are still highly backwardated and demand is strong.

Brent crude front spreads

Brent crude in EUR

Greetings from the east

Happy new year to all. Having endured much turbulence in the oil space in 2011, SFOT has emerged relatively ok and is now residing in another part of the world where trading the oil market means going to bed at 3am. He has much to adjust to but one thing that needs no adjustment is the random volatility of crude prices. Just when prices look to be dominated by potential Iranian crisis, daily range narrowed and converged before both upside and downside stops got taken out all in a matter of 4 hours. That should leave a few wounded but also presents opportunities to get involved.

Mar12 Brent

While the likes of Goldman and other research houses have cited various upside target, SFOT is inclined to think this move will be yet to materialize. The main reason being that Iran will have to negotiate a buyer(china) at depressed prices initially while the other factors for a push towards a real spike in oil prices are not in place just yet. Smart money though, is on buying very low delta longer dated calls. You just never know what can pan out in the coming year with potential trouble in Nigeria, producing double the output of Libya, while european woes are still very much in the foreground with oil demand in europe falling fairly quickly.
The recent problem with refiner Petroplus is just another drag on demand in europe, amongst a weak EUR and a very mild winter, but met with some good news when they managed to secure temporary credit for some of their refineries. This recent episode has really given refining margins a boost which, in my view, is short lived. While we have a good amount of refinery maintenance going on in the next 3 months or so, there are enough capacity out there to warrant a cap in margins. However, downside would be limited unless demand falls even faster in the coming months.

Dubai Crude cracking margin Singapore

Forties crude cracking margins Europe

While rumours of a RRR cut by China pre chinese new year is circling round the market and will certainly give the market a small boost, one doubt there is very much appetite for risk at this time of low liquidity. Well good luck for the day and i shall endeavour to have more useful stuff back here soon.

Nutter of a week so far

It's only Tuesday and SFOT is already feeling like a Friday, fairly drained out with dramtic happenings everywhere. First up, the famous GS vs SEC headline, taking WTI down by 2.5% on Friday and continuing the slide into Monday. One wonder why equites were down less than oil on that Friday. Does GS fighting a case for the next 2 year actually mean we lose 1 million per day or demand in oil? Then came the news that really matter, that volcano in Iceland. By now it is very well written in bloomberg and FT on the impact on Jet fuel demand. However, the move really happened on monday morning when Jet fuel prices lost almost $4 per barrel at one stage before stabilizing. At this moment, it is still unclear how are the backlog of jet fuel can be cleared and SFOT is not going to bet on that. True that there can be cash and carry opportunities or that jet can be blended with the other middle distillate pool but there can only be so much to be done. While SFOT is not entirely bearish Jet on the whole, he cannot be bullish right now and will be sitting on the sideline waiting for the physical traders to clear up the excess.
The move in WTI spreads is still on the lips of many players,, gettting in, stopping out etc. Many readers here would have felt the pain or joy no doubt. However, whhat is not pointed out is that the moved in middle distillate spreads have been even more violent, underperforming the move of crude timespreads in this downmove. The correction has been overdue, and perhaps is an overshoot. When crude spreads rallied up earlier this year, middle distillate spreads (ICE gasoil in this case) were outperforming crude but was not given a mention at all. This correction in spreads are totally led by middle distillates and the above mentioned case in Jet fuel does not help the cause. Now, would this be an opportunity for punters to get into a long middle distillate vs crude timespread trade?

Dec10-Dec11 ICE gasoil vs Ice brent timespread performance in usd/bbl


Elsewhere, in outright prices, SFOT is still targetting low 80s in CLM0 before assessing a buy level. The happy numbers from banks, in particular GS's big results today only masks the fact that UK FSA, Germany and US might be targetting more than just one bank. This surely cannot be good for equities in the short run, and certainly not financial assets like WTI?

Rumble in WTI time spreads

The move in timespreads in crude has been the major talking point. What looked like a healthy correction initially quickly turned into a terrible stoploss situation for market participants. Trading spreads in the past week had a reminiscence of late 2008/early 2009. The rebound proved equally dramatic yesterday and the volatility of these spreads are creating a havoc situation for SFOT and his counterparts relying on the crude curve to hedge multiple exposures. However, SFOT is watching this with a curious thought. Is this the opening to get into the big backwardation trade a major US bank is suggesting?


CLM0/CLZ0 spread

Doe figures contradicts API numbers , suggesting stocks drawing in crude, gasoline while building in distillates. We are into the traditional driving season, it is heating oil that has outperformed gasoline until recently. Perhaps it was another theme of too fast too furious but with continued draws forecasted in gasoline stocks, coupled with refinery shutdowns across the board due to maintenance, days cover has improved dramatically in US gasoline. Perhaps it is an increasingly good idea to buy into August Gasoline crack (XBq0 vs CLq0). For those trendy traders, beautiful trend line isn't it?

US Gasoline days cover

US Rbob crack Aug10

Record volume in CL in the past few days has definitely been the case of new financial money piling into this 'asset class'. While the earning season has seen a great start by UBS, JPMorgan, UPS etc and very good US + China data signalling recovery is full steam ahead, SFOT cannot help but think this move in CL has gone too fast. Failing to break the high in CLM0 might see a double top correction towards 80, very quickly. A cheap short term downside play is certainly worth a shot.

Back in the Hunt

Greetings to all. It has been a while and SFOT has finally settled down enough to think of restarting this blog. It will probably not be on a daily basis, however, i will do my best to provide as much basis for discussions as possible. Quite a lot has changed since the last post back in November. SFOT has begun his first full year with his new firm, has broken a rib while snowboarding in Japan, has recovered and gone back to the slopes last week with amazing powder, has seen his team bow out of champions league having been taught how football should be played by the best player in the world. May Arsenal win the remaining games and pray the other 2 drop points.
Well, on the oil side, things aren't similar as well. Many investors are getting more clued in about how to trade energy, through a variety of ETFs for eg. They have also gotten smarter and understand the industry a lot better, with help from many blogs, bloomberg data etc and many banks publishing very detailed research on inventories, demand and seaonal patterns. This market is getting very interesting and very transparent compared to just 2 years ago.
SFOT would like to take note of 2 current issues. 1) The narrowing of crude timespreads. The move has been a major talking point for many, and for eg, just looking at CLZ0/CLZ2 spread, it has moved about $3 this past quarter alone. A lot has been published on the clearing of floating storage, and many research houses have forecasted a clearing of access floating stocks in crude and products between q3 and q4 this year. However, in the last 2 days, we have seen crude spreads giving back about 1/4 of the move. Is this a pullback temporary or is this a prelude of more contango to come? With refineries globally going through maintenance, crude runs are significantly reduced. As such, there will be an expected pullback in timespreads, perhaps for another few days, or even weeks. However, SFOT will be in favour to bet on a narrowing spread again when the refineries are finished with their turnaround. A few things could come in the way of a big outperformance of this though. 1) OPEC compliance might start to deteriorate if prices continues it's upward march towards 90. 2) Stop losses by major players might exagggerate the correction. SFOT will bide his time before stepping in.



2) Crack spreads in middle distillate have performed extremely well this past week, having been an under performer for the most part of this year and all of last year. What is driving this sudden outperformance of middle distillates? SFOT thinks there are 2 reasons. The first is that the excess inventories have been in middle distillates through all of 2009. As such, the correction of the global inventories are going to come from this part of the barrel, and it has been as such. Even though the inventory levels are still high, spreads in middle distillates are firming as a result and we have cracks overshooting on the upside. Another reason is that there is a big correction on crude and more importantly, heavy fuel oil structure. This gives a synthetic support to middle distillates as refiners need to make a profit from somewhere.




In SFOT's view and ideal world, there will be a correction in crude structure and a fall in middle distillate crack spreads, relative to a recovery in heavy fuel oil cracks while light ends like Gasoline and Naphtha will be supported. This will maintain the refining margin needed for refiners to keep running. However, once we get over the next few months of volatility in the energy space, we should continue to tighten up in crude timespreads while cracks will recover to higher levels. Crude prices should also correct in the meantime, perhaps to low 80s and set a new range 80/88 ( as SFOT do not see how we can get above 90 just yet).
Good luck