Tuesday 24 November 2009
The demise of middle distillate
As we move into winter in northern hemisphere, the industry is focused mostly on the weather. It is now well known to industry players that the winter so far has been mild and that the forecast in the next week is still appallingly warm. While this is great for us wanting a nice weekend out, it is proving costly for this industry as the supply is high and there is no demand to meet it. Spreads and cracks, in particular, has to weaken with crude prices moving up, driven by a host of new 'investment money' finding new home for their low interest earning money. Without any significant normalisation of the weather condition, we shall not see a recovery of these middle distillate which is oversupplied, and SFOT cannot see how crude prices can go much higher here. In fact, we are in a small bear move and heading lower still as i write. Is SFOT bearish? yes but not with a lot of conviction, is he tradin the range in the chart below? Yes, as most others are doing now and rightly so.
CL1
Gasoil crack in europe
Wednesday 11 November 2009
Non Inspirational
2 things of note over the past few days. 1) Total open interest is approaching the highs, as pointed out by many research houses and individual traders. Large traders are long, which normally means proces can creep up slowly, very slowly, until there are no longer any buyers, and then a big drop will follow. Will we see a scenario like this soon that will take us back into the low 70s or even mid 60s? Perhaps. However, it will be led by DXY, or equities, as expressed by the VIX. Equities futures making new highs are certainly not going to help WTI lower in the near term. Intraday trading is yet another matter.
Thursday 5 November 2009
God save the queen
US Distillate days forward cover
Jan09 Heat crack on Nymex
Wednesday 4 November 2009
Risk on!
What does all these do for oil? For one, we have our weekly industry inventories data out this afternoon london time, ahead of the FOMC. API release late yesterday showed us a large draw in crude and a products build. More importantly, the draw is NOT in PADD5, which is rather bullish crude than anything. However, notice that the market has been more focused on products stocks recently than crude, which means cracks spreads will be a lead indicator for flat price, at least for a short while before FOMC. Moreover, the Brent contango remains very depressed, and by now, i am sure most market participants will know that Brent represents a better gauge for global crude inventories rather than WTI. In other words, the stock situation is still dire, though may not be as bad as 6 months ago, and SFOT suspects that beyond extraordinarily large numbers, crude stock will not be the main driver post DOEs. Refining margins have been under severe pressure of late, and SFOT will presume that refinery runs should go lower this week, particularly after cracks in distillates suffered terribly over the past few days. SFOT continues to be bearish distillates, and industry sources reveals that that part of the barrel is seeing no recovery in sight. One hint we can get is the freight rates of clean tankers from the baltic exchange, which continues to show real depressed rates in the products. These thoughts will be out of the window when it comes to this evening though, as everyone watches the Fed. For the short run, SFOT will watch Gold and the VIX as a gauge where the next move in Oil will be. Good luck
Brent refining margin
Brent dec09/dec10 spread
Baltic clean tanker index
Wednesday 28 October 2009
Risk off everywhere but not in Oil
WTI refining margin
One thing of note, is this morning's news of a sabotage event on Iraq's export pipeline to Turkey. Any similar news last year would have sent timespread in Brent a lot stronger. However, it is not the case this time round, with timespreads in the prompt actually weakening since the news. Perhaps it is still a matter of too much floating storage globally. WTI prompt spreads, on the other hand, has strengthened a lot since early doors yesterday. This was before API numbers, and certainly before today's numbers in crude. Perhaps there is something the vast market knows nothing about but certain trade groups do. Whatever it is, SFOT has a sneaky feeling that we might be in for a Oil positive number. He is not short.
WTI prompt spread
Tuesday 27 October 2009
Back!
One of the the most amazing developement he has seen over the summer(other than the painful equity and GBP trade), has been the return of liquidity in the commodities market, in particular the oil sector. Readers will know SFOT indeed deals in this market by trade, and other markets by pure interest. However, he is in awe at how liquid the market in crude oil futures has become. Bid-ask spreads has come in to levels not seen since very early 2008 or 2007. This is clearly inviting speculators and it has indeed done so, with front month open interests back to the speculative height in 2008. This may not mean anything to most people in terms of p/l, however this would mean to potential specs in commodities, notably the CTA type funds to lever up again to participate in this market. Which leads to his first thoughts, should volatility in the low 30s be bought? Hopefully all had a great year, and better things to come ahead.
Monday 6 July 2009
Summer break
Wednesday 24 June 2009
Bearish API crushes cracks while crude holds due weak USD.
Tuesday 23 June 2009
FOMC meeting holding back risk taking....commodities not spared
Back into middle distillates, Egypt's 100kb/day Midor refinery had a serious fire and had to import gasoil from europe. It seems this is a bigger problem than originally thought and is lending a little strength to gasoil in the prompt. Also, part of the middle distillate component is Jet fuel, and the prices of Jet in Europe have seemed to stabilized a little higher across the curve, with the differential staying in the 50s. Readers will know that SFOT has been a big watcher of this part of the barrel, and if the recovery starts here, perhaps there is hope for proper demand driven oil price recovery. At the moment, there is nothing to point to any recovery, except traders playing the cash and carry trade, waiting for the flip to backwardation that may take a long time to come....
Monday 22 June 2009
On the way down...
Friday 19 June 2009
Thursday 18 June 2009
Opportunity to short distillate cracks?
However, distillate cracks are high, and with days forward cover on its own reaching another high, SFOT cannot see this strength continue for much longer, and will add a unit of short in this area. This is especially the case when crude stocks are being drawn down and the balance of play is probably now to be long of crude and short of distillates, and long of crude spreads vs short of distillate spreads on weakness.
Wednesday 17 June 2009
Bullish on bottom of the barrel?
The API numbers were a little surprising, in particular Gasoline inventories building by over 2mio bbl. While SFOT touched on this topic yesterday, it is too early to say Gasoline has indeed topped out and is starting to harm its own demand just yet as API did show a strong rebound in demand too. Best to wait for DOE this afternoon for further clues. However, the volatility of these kind of series means some sort of average would be most helpful in finding trends, and SFOT will look at the 4 week average rather than 1 weekly number for further conclusion.
API Gasoline supply
Another topic touched on recently is the strength of sour crude and the weakness of fuel oil cracks. Indeed, the cracks are still under pressure as we speak, while sour crude premium, express in brent-dubai diff, is now trading at its narrowest, almost flat to each other. Causes discussed were OPEC's cut, but also new larger and more sophisticated refineries are able to process sour crude more easily, and then able to feed heavy fuel into the cracker to break it down further. Perhaps this situation will persist for a while, and if so, SFOT is tempted to be long of some fuel oil cracks in the prompter period, and he shall do so.
1% fuel oil crck europe
Brent/Dubai diff
Right, a few more days to go before the start of wimbledon tennis. Being in london, SFOT is naturally surrounded by the enthusiasm of a British winner this year. However, he can see how the pressure and the form of Federer may play a big part in that not happening. Whatever the case, we shall have another 2 weeks of fun next week, more thrilling 5 setters and hopefully good weather!
Tuesday 16 June 2009
Is Gasoline getting to strong for its own good?
Gasoline has made another turn for the highs, and retail gasoline prices are now the highs of the year. Perhaps its speculative strength, perhaps its the fear of hurricanes, perhaps it is fear of further run cuts that will take Days forward cover to another low. Whatever the case, cracks and spreads are definitely bullish but it is at this point SFOT is contemplating taking off length in gasoline. The main reason being he sees no more reason for cracks to head higher, and spreads to be much stronger as the high price may start to eat into demand numbers, although he sees no real evidence as things taking place just yet. Any comments here welcomed...
aug/sep rbob spread
Rbob crck Jul9
US Gasoline days cover
Friday 12 June 2009
Refining margins are crushed, led by middle distillates and recent Fuel oil weakness.
Within the barrel, although SFOT has been pointing out the weakness of the middle of the barrel, one thing that has been consitently weakening is the bottom of the barrel, fuel oil. While this has been the strongest product earlier this year, the recent shine on Gasoline took its outperformance away. Bearing in mind this product is still around some 20% of the barrel, its effect on refining margins is not negligible. The low sulfur fuel oil, which is used for power generation, is a direct competitor to coal and gas. As oil prices keep going higher, fuel oil prices are dragged up, and at some point, coal and gas(which has been underperforming), will be a cheaper alternative. SFOT hears this might be the case now, and end users are switching their input, which is putting a damper on Fuel oil cracks, particularly the low sulfur type. Coupled with good supply coming out of the black sea region, fuel cracks may continue to see a cap. With middle distillate also weak, refining margins are now coming under significant pressure. This is a clear example that the recent rise in price is fairly unwelcomed, and while momentum can overshoot flat price, the faster and higher it goes, the faster and stronger any pullback will be.
Proxy Brent crude refining margin
Low sulfur fuel oil crack at the year's low
Thursday 11 June 2009
China effect and Oil.
Wednesday 10 June 2009
Stay long crude for now, and gamma positive.
Jul9/Aug9 WTI spread
As for pt 2), The theme is now clear that specs are looking at the eur/usd pair to trade WTI and the trend now is on the upside. In particular, with Fed fund pricing in a chance of 50bps rate hike only 2 days ago and reversing a chunk of the move within 48 hours, there is room for USD to weaken and this perhaps is a continuation of the global reflation trade.
Technically, the bull trend begun when the 50d mov average crosses the 100day, however, that was with hindsight of course. The longer end of the curve has been the leader of this latest spike up, and with only pockets of consumers out at the moment, the move up is driven up more by hedgefunds/prop type players rather than real users. If we continue to get see data, both macro wise and oil specific terms of supply/demand balance, in particular from China, SFOT fears consumers might be forced into hedging and push the back end even higher vs the prompt. However, the fear of last year should still be sitting on their minds, especially those who hedged above usd $100. Hence SFOT cannot see this happening soon. Back end still sit stable, while prompt should move about a lot more, especially if we do see a pullback. Gamma in the front end is still recommended here.
Brent z10/z12 spread shows z12 higher than z10 by $1 over past few weeks.
Tuesday 9 June 2009
Sour crude harming margins, while European Gasoil expiry looks very weak.
Brent-dubai diff vs Oman refining margin
Monday 8 June 2009
Time for gamma long in crude?
1) Headlines in the CITY AM paper today: "BROWN CRUSHED AS VOTERS DUMP LABOUT". GBP continues its slide 4 days on the trot, coming off 5% from its high. This is dragging the EUR down at the same time and we need no longer go into the discussion what the impact on WTI is due to EUR strength.
2) Short rates in US rose over 40bps in 2 days. While the macro punters were having nice MTMs due to reflation play, curve steepners, owning inflation assets like WTI in Dec10 and Dec11, this latest spike in short rates seemed totally unwelcomed. A rate hike fully discounted by year end?? Little wonder equity markets are not happy over this as well. Whatever the case, vol in most asset classes should start to pick up a little as this situation seems like a little preview of what can happen if those 'greenshoot' trades are overdone.
Friday 5 June 2009
Short term overshoot in WTI on card, while airlines' woes continue
The event of yesterday was a ding-dong GBP around lunch time in london yesterday on rumours of Brown resigning/not resigning. That labour party is seemingly falling apart with yet another resignation this morning. The GBP is a difficult thing to trade now, but major correction underway could also undermine the EUR vs USD for the short term, and could entice players to trade WTI around this pair. It is treacherous territory now, especially for intraday. Good luck and good weekend.
Thursday 4 June 2009
Upside for Gasoline crack determined by flat price
US Gasoline fwd days cover
US distillate fwd days cover
Wednesday 3 June 2009
API date signals poor middle distillate economics to continue
The set of API numbers were not exactly inspiring, and the catching number is the big build in distillate stocks, with falling implied demand. Middle distillate cracks reacted and lost around $0.50/bbl overnight. However, SFOT is aware there has been a lot of consumers stopping into this rally the past few days, and distillate cracks remain well off their lows. SFOT is happy to sit on this short position, but he is a little undecided as to what he would like to do for RBOB at this moment. The API numbers does not provide a strong colour and he shall await the DOE to decide. Another thing to note about the API number is that refinery run rates are still low (spike down in chart due hurricane last yr). With low runs, increasing inventories in middle distillate can only signal a doomed complex economically for the forseeable future. Run cuts also confirmed SFOT's believe that crude spreads should be weaker and he is also happy to sit on his short position initiated a few days back.
Tuesday 2 June 2009
Gasoil a sell? Where and when are the cash coming in?
CL1 Vol
Uk Mortage Approval
Front Euro gasoil crack