The roll begins

The month end is bringing some rebalancing and profit taking in the market and crude oil prices look like its behaving in the same way as well on fairly low volume this london lunchtime. Given its almost the time of the month when the extremely transparent indices start rolling their futures, i thought the investigation of the USO roll by CFTC is worth mentioning. Whether anything comes out of this investigation is still to be seen but SFOT suspects it will take an uber long time before any half decent outcome. Stocks in storage in cushing is still very high, and this gives rise to the same opportunity of selling the front time spreads prior to the roll and then buying it back around the actual roll period.



SFOT is beginning to get comfortable with looking at equities, gold, jpy being highly correlated intraday but is unable to keep up with the news flow coming out from the US in the later session hence he is keeping positions in other asset classes light. While oil prices have been relatively stable, particularly in Brent crude where the monthly roll effect is nowhere as large as WTI, SFOT sees no reason for any breakout of the range 35-60 and is happy with the strangle in M9, particularly in Brent.

Relative value within the barrel

The key stats from DOE yesterday are 1) Crude stocks in US are starting to move. Cushing stocks are not building anymore as storage is probably very much full and imports of crude are no longer astronomical. 2) Gasoline demand/supply dynamics in the US is very bullish. This is not a one off and implied demand on a 4 week moving averge basis is now higher than last year, while stocks are drawing for this week in which typically it is a build. Both are very positive for the Gasoline season this year in spite of talks of demand destruction globally. Substitution of flying holidays by driving holidays are probably taking place increasingly in this environment.

Distillates demand/supply outlook is ugly, and will continue to stay ugly as we head away from winter peaks and stocks keep piling up. It may be the right time to get into the ever popular RBOB-Heat spread even at these level. SFOT understands that in order to achieve a higher gasoline yield, you would need to input sweet crude into complex refineries and the strength of gasoline would be a big boost to sweet grades like WTI over sour ones. In such a scenario, sweet/sour differential should widen out and it has begun to happen in both US and international crude like Brent-Dubai. SFOT will reassess his sweet/sour trade at this juncture but he is exiting his short WTI-Brent differential trade with a small loss as the dynamics that led him into the trade is shifting.

Gasoline Yield

Rbob-Heat in N9

Otherwise, as equities seems to have found its bottom and begins to recover from the mess of the last week, risk aversion eases off ( usd/jpy higher, gold lower, ), crude prices can continue to grind higher and SFOT holds his lengh in Z9 Brent as well as long M9Z9 Brent + Gasoil in europe.

Crude higher as equities bounce

Most notable moves today are in crack spreads, where fuel oil and gasoil cracks in europe lost almost $1 from the close of yesterday. In heavy fuel oil there seems to be a sense of profit taking as sweet/sour crude differential has retraced a little of late as well. On this, we have heard lots from minor Opec members but non from Saudis as yet, hence it is still not a certainty what they will do in the upcoming meeting. In middle distillates however, the short lived rally yesterday was probably due some end users further out the curve and sellers were quickly back in this am. Given Gasoline cracks remained stable, refining margins are now at its low of the year. With product stocks filling storage to the brim, demand falling off the cliff and crude stocks beginning to draw out, margins will likely stay low. This is further pressured by big refineries coming on line (eg, Reliance in India) later this year.


Crude prices are a little stronger today, following a bounce in equities yesterday. Given JPY weakness, gold going softer, this bounce may have some more room to run and will probably take crude prices a little higher. SFOT added a little more of Z9 Brent length. The DOE data today is another lottery, however, there is a sneaky feeling the data will be more bullish of Gasoline and Crude and less for distillates if API data released yesterday proves to be any good preview. This will clearly impact spreads as mainly in WTI. SFOT has no position here but is however tempted to be long of some of these front end spreads.

Its a mess, but there's always champions league at the end of the day

The theme yesterday in equities spilled over into the oil complex as we saw benchmark crude prices come off a touch even as we approach potential OPEC cuts. As SFOT peeped into his portfolio, he is most annoyed at his timing of dipping his toes into the integrated oil majors a touch too early. However, revisiting this trade he is likely to hold on to this for now as refining margins are still strong and the likelyhood of equities having a bouncy next few months are fairly high.

In WTI though, he is beginning to notice a similar play emerging in front end time spreads, i.e April/May09, as funds, traders, individual etc tries to front run the usual monthly roll coming up in about 3 weeks. Although a fairly microscopic trade, it will remain a profitable one as Cushing stocks stay high and more importantly, as long as the fund rolls are there to be exploited, they will be spared no pennies. For guys who want to benefit from a '+ve roll' type trade, any form of shorting front end WTI is essential a surety, however SFOT still prefers to be short WTI-Brent spreads, rolling May into June when the roll yield is attractive.

Volatility have remained high and has indeed climbed all week . The VIX is also climbing, although it is still very far from it peak of 80. However, WTI vol following the VIX when flat price has effectively done nothing for 1 month bemuses me. Whether volatility here is too high or not remains in the opinion of the reader but it will come a point where being short strangle will begin to look interesting. 30/60 strangle perhaps in M9?






Now its the big day today for champions league. SFOT just received his tix to the Emirates tonight in the hope the minnows Arsenal can have a better game than a 0-0 draw with Sunderland. For the rest of it, not that Mourinho ranks highly on the favourites list but Man Utd ranks right on the top of SFOT's hate list, hence a big result for Inter will be very welcomed. Kick off!

Refining margins, product spreads and Champions league.

CFTC data this week paints a very dull picture overall, except that large trader have covered some shorts and gone a little longer in futures but have reduced net length when combined with options. SFOT is happy to be long of Z9 Brent futures still but finds it hard to add to this length at this juncture. While fuel oil has given back a little of the gains, gasoil continues to lose its value in crack terms. This is causing refining margins to weaken quite a bit from its peak this year.


One interesting thing he notes is that ARA gasoil stocks are being drawn down for the past 3 weeks. He does not know whether the storgage is making space for other oil like Jet or diesel or whether the economics are not working anymore but he suspects this is not a short term phenomenon and is exploring the risk-reward in buying some timespreads on the gasoil curve, i.e M9Z9 spread.




Given that Asia weakness is bound to continue and inventories over in Singapore for example are still at a fairly high level, it may also be tempting for those who can to be long of European gasoil vs Asia via the East/west spread. (SFOT notes this is also a function of freight and many other factors, hence will not be doing this himself). Well now, let the week unfold and see what financial havoc may bring to our energy space.




Finally, SFOT is saddened by Arsenal's failure to score in 3 straight games and chances of being in champions league next year now looks slim. However, he has a game against roma to to look forward to and is impressed by Asharvin's display this weekend. One can only hope the season will turnaround. Game of the week, Inter vs Man Utd or Real Madrid vs Liverpool. I'm a buyer of Inter(as SFOT cannot dislike Man Utd more than anything) and Real Madrid.

WTI weakness pauses

The equity carnage continues and macro economics numbers today continue to show europe and canada weakening. The Swiss are now having their own problem with Swiss banks and US authorities as pointed out by Mr FX. Crude prices are not spared as crude has lost over USD1 as we speak.


While SFOT do not put too much emphasis into his trading on weekly DOE data, the fact that Cushing has finally stopped building does suggest some sort of a peak in storage. Coupled with the fact that DOE will take in some 13mio barrels of crude over the next 2 months suggests that we have probably seen the lows in WTI-Brent spreads and WTI time spreads in the front end for now. The weak link again was distillates yesterday. With forward demand cover in distillates at multi year high, it seems unlikely we will have a product driven rally anytime soon, hence the range 30-60 probably will still hold for now in CO1. On volatility front, SFOT notes that WTI vol has been edging up over the past couple of days and it may be a telling sign the market is not comfortable in this range for now. He shall wait before adding to his length in COZ9.

Days forward cover

A possible bottom of Crude Oil?

Having kicked off this blog only a few weeks ago, readers might have noticed there has barely been a mention of price direction views. While SFOT is a relative value driven trader, he occasionally dips into flat price via technical signals or flows. There is nothing significant showing up on his proprietary price indicator now, however, the continued relative movements of differential within the energy complex may give a clue that we are approaching a bottom in price. Fuel oil cracks are gaining strength fast, and this is a direct result of less sour crude availability.

As we enter into the March OPEC meeting, noises from the smaller members points to another round of substantial cut. However we have yet to hear much from the one that matters, Saudis. Whether they do anything or not probably will not stop the fact that crude inventories globally, bar the US, is starting to clear out. It may still be a while but it is happening right now. The Brent-Dubai spreads and Fuel oil cracks are telling signs, in my view, that the market is tightening. However, demand is still weak. Middle distillates continue to weaken vs crude, while Gasoline and Naphtha have come off as well. Refining margins have recovered but still remain fairly high and refiners will work their economics to maximise profit, i.e taking more sour crude and less sweet. With this in mind, SFOT does not think Brent crude will fall below USD30 nor rise above USD 60 in the forseeable future( 1 day? 1 week? 1 month? 3 months?). However, he is fairly tempted to dip his toes into buying some upside on Dec09 Brent.

Asian economy and Asian middle distillate crack spreads

Following the extremely weak Q4 GDP in Japan, Taiwan has also shown an extremely horrendous Q4 GDP figure this morning coming in at -8.36%. These are numbers well publicised in the press as multi year lows and possible even depressionary type.

As highlighted by macroman in his blog today, Indonesia and Hong Kong have not been spared the brutality of this global contraction. In the oil barrel, one of the biggest victim to this is the middle distillates. SFOT has highlighted before that the crack spreads in Jet, Heating oil and diesel (which makes up middle distillates) have been the weakest link in this meltdown, however, what goes up highest must fall the hardest proves itself right again as what happened in spring 2008 was something that was never seen in the oil world before. China became importers of Diesel as the Olympic fever struck everyone, and hedgies were rushing to stop out of the good old favourite long Gasoline vs Heat trade. This sent Asian distillate cracks to astronomical levels , 3 months before WTI peaked. Since then, witness the dramatic decline in Asian cracks. Although it is currently at a 3 year low, SFOT sniffs that recovery is far away and will be short of this crack a little further out the curve for a convergence play. Do take note though SFOT realize that this might be a very crowded hedgie position to date.

As mentioned yesterday, SFOT has bought some Mar/Apr WTI spreads for a short term punt, however he has made his $1 usd worth of p/l and taken his profit. He is still very much in the game for the Jun-Dec brent spreads which has so far moved in the right direction.

Dipping into equities and fx

Despite this recent weakness in crude prices, refining margins for oil remains strong. Heavy fuel oil and light ends(naphtha, gasoline) remains the key support while middle distillate continues to weaken. Given this theme seems likely to continue for the near term, SFOT likes dipping into the equity world and get long of BP or Exxon with this pullback.

Otherwise the very much criticized front months WTI contract are beginning to look interesting on the long side. This is a beast we all agree and a very badly managed one by the exchange given how much open interest is held by indexed funds. However, with the rolls out of the way and a good volume of remaining lengths would probably like to take delivery of the crude for storage, it is interesting to see how much higher the Mar/Apr spreads will go. Judging by what happened in the last expiry, SFOT is tempted to dip his toe into being long this spread on any dip for a very short term punt/gamble/trade, or call it whatever you like.

One thing of interest lately has been the baltic dry index. As an aside, SFOT likes to be short the EUR as he views europe as the weakest link compared to the US and even UK in terms of recovery and potential breakup, threats of protectionism etc. However, if Baltic dry index is truely recovering, being short the Eur against the AUD might begin to look interesting.

Sour crude and time spreads.

The continued strength of the sour crude complex continues as we ease into another potential OPEC output cut in March. At the moment, it is not just middle east crude that is leading the charge. European and US sour crude differentials to sweet crude is also at its narrowest ever. When analysing this, we have to take into account the massive distortion in WTI as this is normally a sweet benchmark. Rather, we should look at a more suitable replacement for sweet in US, which is LLS( Louisiana light sweet).

Brent-Urals differential

LLS-Mars Blend differential

Usually, if Gasoline cracks are strong, sweet crude will generate greater demand than sour crude as the yield on Gasoline is much higher. This time round it does not seem to be the case as OPEC output cuts weigh on more reduction of sour crude availability. I suspect now that the massive amount of crude oil in storage are mainly sweet crude and at some point, it would become viable to draw on these stocks vs using the more expensive sweet crude. SFOT will endeavour to find out the potential of this happening. In the mean time, SFOT is beginning to favour going long Brent timespreads as a function of very strong Dubai spreads in the middle east. Otherwise, it should be a quiet week for today marks the start of IP week in london. Good luck to the party-goers!

Brent Jun09-Dec09 spread

Margins and Fuel oil and "Big PNL"?

OPEC has lowered their oil demand forecast again, this coming just one month before they are scheduled to meet again. I guess this will probably tilt their decision to cut output further in the March meeting given they have been unable to stop the imbalance of excess crude stocks with their previous cuts. This is panning out fairly well within SFOT's scenario that OPEC has to implement more cuts to initally stop stocks from building further, therafter stocks to start drawing. As i am unable to make any estimate as to how long it will take, i prefer to let the market lead the way as Brent timespreads would have to recover a lot more than its current weakness for stocks to begin drawing down. While the market prepares for another round of OPEC cut, sour crude will remain strong. Brent-Dub spreads are trading at their strongest for 6 months, which is a key factor supporting strong Fuel oil cracks. Note that the loss on selling residual fuel oil has come in from over $40 to now just $8 per barrel eqivalent. SFOT continues to favour being long sour crude vs sweet in this scenario. Brent is valued at $3.50 premium over dubai in Q209, which is an attractive option to hold. Otherwise, as refineries start their turnaround and/or cut their oil input, stocks of end products will cease building, and this will benefit both Gasoline and residual fuel oil further. Hence, being long of Fuel oil and Gasoline cracks still remains attracive to SFOT.

Having seen many reports about the insanity of WTI spreads, SFOT has decided, with many other participants, that it is best to look at Brent as a global crude price benchmark rather than WTI. That Mars crude, a much heavier crude with higher sulfur content is trading at a $7 premium to WTI makes the world crude oil benchmark a laughing stock. SFOT notes that there has been small buying in Jet fuel since he posted the article yesterday, presumably by guys with some storage space or refineries about to enter maintenance.

A colleage of mine managed to capture this shot in Mayfair, London yesterday. Seems like there is sstill a little bit of decadence around. Good luck and good trading to the BSD owner of the above.

Gasoline, Jet Fuel, WTI and ski?

It is a big surprise to many that Gasoline stocks have drawn yesterday in the US. However, that demand has been responding to the lower prices is not a surprise, and that refining margins will be strong due to Gasoline and heavy fuel oil are set to continue for the forseeable future. Yesterday's data in the US not only highlights the supply/demand picture in the US, but similar pictures are also seen in Europe and to a certain extent, Asia. Middle distillates are under pressure from extremely high stocks globally, and in particular, Jet fuel will remain extremely weak until at least the summer months. If airlines are unable to lower airfares into the summer, not only will this affect Jet Fuel demand, this will push consumers into more driving holidays, in both US and Europe, which will in turn strengthen gasoline cracks and also Diesel in Europe.

On the subject of WTI time spreads and WTI-Brent differential, SFOT remains very puzzled by suggestions that some 60-70% of front contract open interest are held by index related funds. If this is true, investors are indeed losing their value every month on the roll, worsened by day traders who front run these rule based rolls. Why the investors are not stopping out or switching into Brent contracts truely puzzles me.

Having been back from 4 days of snowboarding in the popular area of Avoriaz, i realize 2 things. 1) never go skiing during half term holidays if you can avoid it, 2) the war between snowboarders and skiers will never end, thanks to the skier that ramped into my board whilst i got off the chairlift. Good luck with the ski season.



Gasoline days forward cover





Jet demand/Supply

Collapse of middle distillate

The eye catching move today is the weakness of the middle distillates. European gasoil cracks are now at its lowest in 1 year. Stocks of Jet and heating oil in both Asia and Europe are reportedly filling storage to the brim and this having serious pressure on crack spreads in front end with probably no end in sight.


Reports are in showing strong Baltic dry index over the past few days, which has given a boost to the likes of AUD as it mostly reflects raw material trades. However, oil freight rates are going nowhere, or lower if anything and thus suggests that trades in oil related products are still not improving. Bearing in mind China was diesel thirsty last year and has now returned to being flat or next exporter of diesel, SFOT remains short of the middle distillates. However, he is taking this opportunity to take off a small portion of his short position. (sing - US gulf clean freight rates below)



Refinery margins remain strong due to Naphtha strength in the far east and Gasoline in both US and Europe. Heavy high sulphur fuel oil has also been resilient. SFOT maintains his view of a strong fuel oil crack to crude and continues to favour Brent over WTI. Note that a lot of emphasize is placed on the roll today of indices and pressure to the front WTI contract. SFOT still does not like the potential intraday volatility of the front contracts and maintain his tactical short in the 3rd WTI-Brent differential

Central banks, unemployment and oil

Whilst we are digesting DOE data, BOE has cut rates by 50bps while ECB has stayed unchanged. ADP payroll on wed was better than expected but nevertheless weak, and friday's NFP will be another ugly number. Yesterday's improve Gasoline demand on the week suggest we might be heading for a gasoline crack recovery, but sources suggest the small stock build was mainly due to refiners stocking up due to the potential strike.

In the bigger scheme of things, given the unemployment figures expected to come in the next few months, SFOT fails to see how net demand will pick up. As in a study done by a respected energy institution, unemployment rate is a key driver of Gasoline demand, particularly into the driving season. Yesterday's data, though suggest that Gasoline now has the best demand/supply dynamics, as represented by days forward cover. Jet stocks, on the other hand has continued its stock build amid falling demand for air travel. The world's biggest consumers need a holiday neverthelss, and demand is there for a cheaper holiday. SFOT thinks that most will likely stay home for a cheap driving holiday rather than spending their much stronger currency now in europe, hence, is tempted to be long of RBOB vs Jet(or gasoil) using simple futures on pullback of this spread.

Data Day

It's DOE day and i can't help but think the significance of this is now reaching the equivalent of our monthly NFP, only that we have this on a weekly basis. That China has begun its strategic oil reserves should be a significant boost to the market in a neutral/bull run, but alas, the market seems very tired of late. Whilst API reported a massive 8mio bbl build in crude stocks, of which 2mio was in Padd2, SFOT is skeptical to use API as a direction for today's number. History shows that discrepancies can be big and frequent between API's number and DOE.

We will concentrate on not just crude number today but Gasoline as well of course as we approach refinery turnaround peaks in the US. That April RBOB crack is now higher than March RBOB cracks is starting to make more sense to SFOT. Whilst SFOT cannot see Gasoline crack recover to extreme levels in the 2007, Gasoline cracks may have some more upside to run.

With regards to wti-brt relationship, SFOT finds the volatility of the differentials amazing, compared to the historical volatility of the individual contracts. More work needs to be done here but certainly an area to keep SFOT occupied for a while.

In the mean time, Arshavin is the new number 23 in Arsenal, finally. Whether this saves Arsenal's season remains to be seen. However, drawing with Everton and West Ham has not made fans like me happy so a new big signing may just be what we need to boost some much needed confidence.

Refining margins are strong

Crack spreads in gasoline and heat has given up part of its strength, presumably on profit taking and words that strikers are making progress in negotiations with Shell in the US. These though are masking the fact that refining margins have been extremely strong, and remains very much so. Physical traders have pointed out Naphtha as the leader in strength, followed by high sulfur fuel.

Whilst SFOT has no idea why asia is buying so much petrochemical, it seems that fuel oil strength comes from the fact that OPEC has fulfilled a good part of their announced cuts, hence favouring the heavy product that comes mainly from sour crude. With more evidence of compliance from OPEC members, SFOT can only believe fuel oil cracks will remain strong. In the meantime, middle distillate stocks are very well supplied and storage is reported to be almost to the brim in Northwest Europe. Middle distillate has a higher elasticity of demand, hence base effect should lead to demand falling dramatically vs year ago. SFOT will be long fuel against heat/gasoil cracks in this scenario.

Finally, a bit of a football transfer deadline award.. a colleague of mine insist we have to give an award to Robbie Keane for being the trader of the month. Having done a 6 months repo trade from Spurs to Liverpool and back, pocketing a handsome 3mio pound(if its true player gets 10% of transfer fee). Nicely done. Is storing crude for 6 months worth that much for the hassle given?

First Chapter

WTI or Brent:

One of the most talked about issue now being the status of WTI being a price leader. Much has been written about this recently, even appearing in an FT article http://www.ft.com/cms/s/0/354bec6a-e36f-11dd-a5cf-0000779fd2ac.html. This, in my view, will be an on going discussion for many months as Brent is declining in production and replacing WTI with Brent will only be a short term solution. Stocks in cushing, the delivery point of WTI, has been scrutinized by almost anyone that has even a slightest interest in this market. The last time cushing stocks peaked was in early 2007 where 4 mio bbl of extra crude in storage resulted in WTI losing over $4 relative to the waterborned Brent crude. This time round it is even more severe as the contango structure leads to ever increasing interest to store crude. Brent crude is also in deep contango, however it has the characteristics of having sour crude oil priced off it. Given OPEC has indeed implemented its cut by a far greater degree of compliance than before, and that another round of cuts are likely in March, SFOT likes to be short the 2nd or 3rd month ti-brt spread as it is less volatile than the front month arb.

Sour crude will be strong.

The fact that Brent is used to set sour crude coming from the middle east gives me comfort in holding on to Brent vs WTI as we know OPEC has cut mainly sour crude and potentially another round of cuts are coming in March. SFOT likes the Brent/Dub diff in q209 as it is still cheap compared to current fixings.

The beginning

Here is it, the birth of yet another blog. As this is an oil trading related blog, contents in here will be very much oil specific, with references to other asset classes on a macro theme at times. A short description can be found in the 'About me' section.