WTI contract expiry and Gold weakness

Expiry of K9 options now out of the way, SFOT reckons M9 options would be a bit trickier given the open interest in June is historically much larger than May. Large layers of calls out to 60 and puts down to 40, with the biggest open interest at $50 again combining both calls and puts. The expiry of K9 futures in 2 days time may present some wild move in K9/M9 spread. It has broken through -$2 and looking likely to move higher still. SFOT will stay slightly long of some of these spreads as he still sees potential for an upside squeeze.

Gasoline cracks in the US has been the star recently and readers will know this is one trade SFOT likes to have on, either on its own or vs Jet cracks /other middle distillates. The situation has not changed, and a buy on dip strategy will be applied in this trade.

Jul09 Rbob Crack

Less of oil, but more of Gold and USD strength this morning vs EUR which catches the eye. SFOT owns some small units of Gold but now that it has broken the 10day moving average, and hearing from sources end user demand isn't there makes him tentative to buy more here. Buying no dip is NOT one strategy to be applied here at this moment. Perhaps a rally back above the 10day moving average would give him a little more comfort to add to the length.

This will be the last post this month as SFOT will be away in an island state near the equator for 2 weeks. Yes, sunshine, good food etc. However, he may check in occasionally the next 2 weeks and perhaps post an odd piece if he does get more inspiration from the sunny island. In the mean time, good luck and good trading

Sideway trading in distillates while Arsenal takes off.

It's been a relatively quiet morning in london so far, no real change in structure and markets seemingly pausing for thoughts, though may not be for long. Perhaps consumers activities this week had run out of steam temporarily. DOE numbers were not bullish. The crude numbers confirmed what SFOT has found in the API numbers, i,e floating storage coming onshore. Crude stocks does not look like it will stop building, particularly when refineries are cutting runs with a vengence. However, what it means for products is that the demand/supply balance will begin to even out. Perhaps a little quicker for Gasoline than for middle distillates but it will still take an awful long time. The market seems to like to get ahead of itself all the time. Prime example being equities, but energy is also behaving likewise. Distillate cracks should trade within a tight band as run cuts take stocks lower, leading to higher cracks, which in turn results in refineries churning out more products or stored inventories getting released, leading to lower cracks. Evidence of the impact of recent strength of middle distillates can be seen in terms of refinery yield of distillate in US. Hence SFOT will find an opportunity to trade this range until further evidence of a breakout one way or another. He is however still bullish on Gasoline, and will use any dips to buy.

Distillate yield on crude
2nd month Ice gasoil crack

Option expiry today for K9 contract. SFOT do not see how any of the big layers of 45p or 55c will be called into action given the uninspiring behaviour of this contract the past few sessions. Now that the fund roll is over and that cushing stocks seems to be clearing at a decent pace on a weekly basis, SFOT puts a non small probability for this k9/m9 contract to see some sort of squeeze up and he is tempted to be long of some of this here. Otherwise he maintains a bear view through shorting longer dated spreads in crude while keeping flat in most other assets while the market remains irrational and squeezes more pain trade holders out.

I shall leave a very interesting article from my colleague. Anyone for a fascinating crime story from moscow?

On the other hand, now we get Villareal out of the way, the real challenge begins. Bring on Man Utd for the semis. Oh a small matter of Chelski on saturday, should be a good stretch of legs for our returning players: Diaby, Edouado, and the bored Arshavin. The end of the season has not been as exciting for a long time, at least for an Arsenal fan. Let a repeat meeting of 2006 Champions league finalists come our way.

Gasoline and Jet revisited.

2 things this morning.


1) US retails sales headline numbers were appalling. Digging deeper into the numbers where energy is concerned, gasoline station receipts were down around 35%. However, note that prices were around 50% higher on average in March last year vs this year, which from simple calculation will give us an increase demand of Gasoline by 15% YoY. This is just the first step of the equation. SFOT pointed out in one of his first few posts that he suspect gasoline demand will be up vs Jet fuel( part of middle distillates) simply due to consumers switching their holiday plans from flying to driving and this is exactly what has happened. While he is unable to get a number for March 2009 for comparison, the latest numbers dating back to 2008 december does not bode well for Jet demand going forward. Moreover, the latest results from Europe and UK air travel can be a guideline for US travels in this environment, and YoY comparisons for March is about 11% lower traffic on average. Jet fuel has definitely been the one product losing the most over the past 6 months or so, but it has since become the most attractive product to store as the contango in Jet stays at this level (around USD9/ton) and some support is seen in this product. Perhaps any more strength in this should be sold into as we approach the summer and airlines faces the horrible truth that air travel is going to be destroyed and charter airlines suffer the most.

European Jet crack to Brent

2) API numbers are weak again. For 2 weeks in a row, API shows a massive build in crude and this time a draw in Gasoline and build in Distillate. Examining the number in crude closely does not seem to make sense at first glance. Crude stocks build by around 930kb/d, imports were down by 811kb/d, production up 137kb/d while refineries cut runs by 380kb/d. This leaves an unexplained 400+kb/d to make up. SFOT can only attribute this to floating storage coming onshore. Indeed he has heard that a lot of floating storage has been cleared, mostly coming onshore for storage purposes. The more glaring number here would be the run cuts, which is a major signal that demand destruction is still going on and no end is in sight. Over the past few months, the main reason for cracks and prices recovering are the fact that contango is proving so attractive that physical houses has so much room to play with to find products for storage. However, there is also the emergence of funds and retail investors having a go at the reflation story, hence buying the back end of the curve. Only thing that still make sense now is be short the prompt vs the back and this is exactly what SFOT has at the moment. Rationality is however a massive pain trade as markets seems to stay irrational longer and longer these days.

Of course tonight we have the big match, Arsenal vs Villareal. All non Man utd fans would agree with me they have been extremely lucky in the past 2 premier league matches, but tonight i would hope for their luck to run out, and Arsenal to get a little more of those luck given we are missing a few key players. Sit tight, enjoy. We may not get an 8 goal feast per match, but you never know.

An alternative point of view

SFOT has decided to take the Easter long weekend off for the first time and ventured into some sort of hippie scene up North in the UK where there exist a famous football club and a somewhat odd band called the beatles came from. While the scene is hippie and alternative, SFOT has been offered some very interesting and creative view of things surrounding our everyday lives. Stepping back into reality today, the alternative way of live/views seems to have descended upon the market as well.

One of the most open economy in Asia showed a worse than expect GDP number of -11.5% YoY, perhaps one of the worse number ever seen. However, witness the impact of SGD strengthening almost immediately. Was there an even worse number expected on the streets of singapore or was this the maximum pain trade one can see? Can someone offer any alternative view?

Singapore GDP

SGD

If this is a preview of what Asia demand numbers might look like, then IEA's weaker demand forcast for Oil in 2009 should look overly optimistic. However, Oil seems to have shrugged off their lows within 2 hours of London coming back from vacation and roofs back up with a vengence. The strength this morning comes from middle distillate in Europe where cracks have rallied around USD1 from the low in about 3 hours. Where and why this buying is coming from, SFOT is yet to learn but will not go against what seems like an invisible hand at work at this moment. Perhaps it is best to let go of the pain trade before jumping into the bandwagon, if one can wait..

May09 ICE Gasoil crack today

Not bullish for middle distillates

This morning, flat price is strong in crude oil while middle distillate cracks have given back the gains they made yesterday over the excitement of a draw and somewhat better looking demand numbers. As suspected, most of these draw were attributed to increased exports of diesel. The chart below shows total distillate stocks and the diesel component within the reported headline number. Admittedly, SFOT was jumping into the assumption these were heading to europe for storage. It could well be S. America or Mexico etc. Wherever these oil are going, distillate numbers are not bullish in anyway until the days forward cover comes down to more realistic level.

White= Total distillate
Red= low sulfur distillate
Distillate Days cover

In a similar way, stocks in cushing admittedly has been declining over the past several weeks. However, the fact that it had reached almost capacity weeks ago means this decline is just mechanical and should not be any bullish to the market. Moreover, as tigeram1 commented on yesterday(cheers for that btw), offshore crude can be called in easily. If we see more voluntary run cuts and higher than normal refinery outages, then crude stocks will swell again. WTI trading below Brent is a sensible market mechanism to reduce crude flow into the US( in theory we should look at LLS but will go into that later). The fact that WTI in the prompt remains well below Brent, cemented by k9m9 in significant contango is a tell tale sign that physical market has nothing bullish for crude, yet.

Cushing stocks WTI

IEA to publish even worse demand numbers were doing the rounds recently and at the moment, there seemed to be no real consensus as to how bad demand might be headed whereas there seemed to be a consensus that crude stocks will at least be balanced in the next few quarters. Perhaps when demand becomes clearer we will get a better picture of the next trend, but at this moment, SFOT has to say, the shorts might not have the power in this game.

The market has spoken, perhaps its time for shorts to throw in the towel?

DOE numbers today were not bullish. Although crude stocks did not build by much, SFOT was hearing seasoned professionals in equities, exotics, fx etc shouting, " oh look at the draw in distillates" and "oh its only a 1.6mio bbl build in crude". Notice in the physical trading window time ( London 4pm-4.30) that prices went to the lows. That was a telling sign the punters were buying blind, technical indicators broken to the upside for the intraday boys and more buying came in. The only guys that matter(physical trades) could only sell it down a mere 50cents.

With regards to the distillate draw, yes, diesel stocks had a decent draw, which is pretty interesting and SFOT will attempt to find out where this is coming from. However, given the bulk of the draw is diesel, and economics suggest European diesel was very well supported, SFOT suspects that the draw has a lot to do with exports to Europe, potentially for storage purposes.

More of these tomorrow, however, today's close shall be watched closely for if it stays above $50 in CL1, i'm afraid the shorts maybe prepared to throw in the towel and perhaps take it towards mid or high 50s very soon.

Risk aversion back in?

What a day yesterday was. If only SFOT had put all his posted views yesterday to positions in the market, he would have struck a winner in everything he opened. Life's not that straightforward i guess. So risk assets have given back some of their gains. Equities took a dive when Alcoa results disappointed. Gold got a small bid, Oil tanked but AUD and Rates hardly did much. German imports down this morning means export dependent countries in Asia can forget about a recovery in exports anytime soon. Factory orders in Germany just posted another all time low as well shows how ill Europe is right now. SFOT is watching the SPX and will attempt to play the downside if 800 is broken.


In Oil, we are hovering the $50 mark in Brent crude, which as readers know is the benchmark that SFOT watches. However, his short position is in WTI where we are well below $50. Inherent in his view is that K9 WTI has significant selling pressure, both against other crude as well as on its own curve, for reasons well documented( fund rolls, landlocked in cushing etc). As in the last week, front line crude prices recovered towards the end of the week. We shall see if it does so again this week but if DOE data today mirrors that of API yesterday, $45 can be taken out today.

May09 WTi-Brent spread

That crude inventories built over 6mio barrel, with demand down 1.4mio bbl is extremely bearish, probably explaining a good chunk of the weakness we are seeing this am. However, distillates drew while implied demand for distillates went up is providing some sort of support for distillate cracks at the moment. We shall wait for DOE to confirm some of these findings but it does not look good for now.

API stocks weekly

Champions league

Positive: Away goal for Arsenal, and in style it was done. Will post a link here for admirals when it can be found or if anyone has a good link, pls post! In good form now, i hope to go through to the semis. Perhaps its Porto, with their 2 away goals yesterday.

Negative: Lost William Gallas for rest of season. Arsenal has no luck with injuries of players yet again.

Some macro views

Today, SFOT would like to venture into the macro world and share some of his views(some of which he does have a position in).

Stocks: Bearish
From a very simple standpoint, if earnings outlook is negative, dividends are getting cut and hence yield is less attractive, global trade slowing, GDP globally being slashed down and the end of recession not in sight( economists are even pushing their forecast further out), SFOT cannot bring himself to believe in any sort of sustained rally.

Gold: Bullish
One of the most technical and flow driven asset class to trade. SFOT still believes in the store of value use of Gold, and its traditional use as a form of inflation hedge. The opportunity cost of holding Gold is next to nothing with rates at zero and other asset classes not providing any better returns( unless you have managed to capture that 50% bounce from financials every other month)

AUD: Bearish.
SFOT does not look at currencies on a daily basis but he does keep track of a few he likes to watch. AUD happens to be one and readers will know he has venture into the currency pair AUDCHF and opened a long position not too long ago. However, he admits that has not managed his position well and made a mess out of this. Now that AUD has gone ultra bid against almost any currencies, and in particular the CHF, SFOT is revisiting this pair again. The main reason is that the Baltic dry index, while looking very strong in the irst 2 months, has now lost its shine and gone back to levels seen in mid Jan. I.e, global trade in goods is slowing down again the past month. However, there is a hell lot of noise in there and SFOT will attempt to be short of AUD when the seemingly strong bidding hand has gone away... whenever that might be.

Baltic dry index

Bonds: neutral

SFOT had a great run in being long of bobls late last year and took it off before year end. Since then, it has seemed less clear to SFOT to be long or short govies here. However, he is watching swap spreads, credit

spreads closely as the recovery will not take place before credit spreads tighten, and it has to tighten a lot.

Oil: Bearish
Spread bearish, own puts, more in the short end, and will sell spreads into strength for reasons discussed in the past few weeks from inventories, demand, and financial flows. The baltic dirty tanker index below shows
freight rates for crude has collapsed to multiyear lows. That said, tankers are very cheap to hire for storage space and it seems that the floating storage is beginning to build again in crude oil. Refined products are the ugliest in terms of inventories on water and the low freight rates will probably help give some 'fake' demand when physical guys take advantage of the contango to buy materials for storage.

Baltic dirty tanker index

Arsenal: Bullish
Today we play Villareal away. They are a tough team, holding Man Utd to 2 draws and we do have a soft spot for them as Robert Pires is having a great time over there. However, i expect the fit again Fabregas and Adebayor to take us through to face, hopefully Porto but probably Man Utd. Bring them on!.

Risk assets rule for now, but for how long?

Equities have still got a bid over the weekend, continuing its bear market rebound(or its bull run if you are in the other camp). Eur/USD has also edged back up above 1.35 and JPY shooting above 101, the combination is again giving oil prices the underlying bid tone to begin the week. The more eye catching move in comodities have been Gold in the last few sessions. It seems there is now a view gold will take a back seat, as trader/investor group focus on the weak underlying demand and momentum in equities. However, given how the Gold/Oil ratio trade has moved over the past few months, SFOT will not be involved in this ratio group, but look to perhaps buy some Gold on this down move. The sea is calmest before the storm, and we sure look to be fairly calm now in all markets when safe haven currencies like JPY, CHF are being sold off so hard. It might not be wise to go against the flow, but SFOT will look for cheap downside strategies in all risk assets.


This move up in crude oil prices is harming refining margins again, and this is probably why the integrated oil companies have not performed much in this move up dominated by the financial. The first round of run cuts have done what was expected, increased crude stocks and create a bigger contango in crude. Refined product stocks remains harmed by the lowered demand and run cuts have not even drawn down inventories. Traders are happy to keep products in storage and running the very profitable cash+carry trade. The situation will continue to stay like this and spreads are going to stay weak while flat price cannot establish a new higher range than current.

One thing of interest is the dislocation of the front WTI again. The time spreads in the front are weak again, due to the roll period of the indices peaking sometime this week, while WTI-Brent spreads are wildly negative again in the prompt. The small draw in cushing stocks seems unable to to take prompt WTI higher, and SFOT believes in a shift of investor behaviour, from the ever losing USO ETF to indices that invests longer out. One just need to look at how the forward curve has behaved in the run up in prices to tell that most of these investments have gone 6 months out.

So we kick off champions league actions this week, and SFOT is queitly confident of Arsenal's return to form recently. They have not lost a single match in the premier league in 2009, and looked in form on saturday. Now, we may not be able to win the league, however, we have a say in where it goes when we have to play the top 3 still. And fingers crossed, we shall remain on target for 2 cups. Write us off at your own peril.....

Uninspiring

Already a choppy trading day in Crude oil this london morning, with very low volumes. It looks again today will be dominated by the weight of the financial markets. More fresh money, more sell side analysts calling for the bottom of oil prices and indeed we shall go higher. If there is anymore doubt to physical dynamics still looking poor, one only need to look at spreads of prompt vs 6 months out, in Crude oil and European heating oil. In the run up over the past 2 days, these spreads have done little, and in the case of heating oil, actually weakened. Perhaps it has to do with weekly stocks in europe showing a week on week build. This would suggest that the recent strength has been due to physical traders looking for stocks to put into storage, making full use of this contango. And now cracks are giving back its strength, slowly. SFOT will be riding on his trade of shorting Heating oil spreads vs Crude spreads here a little bit longer. However, he is struggling to find many new trades to put on at this moment but wait for better opportunities in this choppy intraday environment. Put aside non farm payroll and unemployment rate, we shall be having a fun ride into the last friday afternoon of trading. Will we end the week close to 55 or 50, or even below 50 in either WTI or Brent?

Well, premier league football resumes this weekend, which is probably the highlight of the weekend now. Let's see Liverpool take more points off Man Tud?

Brent Jun/Dec09 spread
Gasoil europe Jun/Dec09 spread

Gasoil/Crude box trade

Not very pretty

DOE stats were fairly ugly in its own right. Start with crude oil. The amount of crude in US mirrors crude situation around the world. Perhaps we had a few major selling out some of the crude in the north sea last month that created some noise that floating stocks might be cleared. However, the truth is, crude oil is still in heavy contango and does not look like recovering anytime if stock situation remains dire, especially due to real lack of demand. Perhaps stocks in Cushing, having drawn for 7 of the last 8 weeks, are providing some bulls with confidence but CLK9/M9 spread being weaker is not a representation of demand. SFOT notes that we are in the roll period of these major indices and these spreads will come under initial pressure, as always.

DOE Crude stock


In the middle of the barrel, we have little change in stocks. However, the implied demand has fallen off drastically, in line with API's stats. We are talking about 5 year low at this point. All things point to middle distillate dynamics remaining ugly for the foreseeable future and gasoil crack spreads should be weaker, relative to perhaps gasoline or fuel oil. Diesel, however, is providing some strength within this part of the barrel. It looks like news of Russia's reduction in diesel supply in April is taken to be bullish. What this probably mean is that some of the ever growing US diesel stocks will start to move to Europe and we could see the demand numbers recover a little.

DOE distillate demand


European Diesel vs Gasoil

Now for today, as of noon in London FTSE up over 3%, S&P fut up over 2%, EUR/USD 1.3360, risky currencies being bid up, in particular AUD. Perhaps the new overnight from down under that trade surplus ballooned has got Asia excited as well and took Singapore's index(STI) up almost 6%. The feel good factor is back. As a colleague wisely put it, the Recession is officially over. Risk are being put on. With the start of Q2, funds are piling money into ALL asset classes. Consumers are initialting new hedging programme in the energy space as SFOT has gathered. What this means is that we shall be dictated again by fund money in flat price, while the relative values within the barrel continue to look weak overall.

Aussie trade balance

Singapore Straits times index

First thoughts of the oil barrel in Q209

A bearish set of APIs dictated the relative underperformance of distillate vs crude oil this morning. The more eye catching data from APIs were probably the implied demand numbers for me. While distillate stocks built, distillate implied demand is falling off rapidly and if DOE stats were to mirror APIs, middle distillate crack spreads will fall hard and fast in the prompt months. However, refineries are responding to the supply dynamics of middle distillate, as represented by both run cuts in general, and lowering the yield on distillates. The lower yield will probably slow down stock builds in middle distillate, given we are entering into seasonal stock building period for distillates. On the other hand, Gasoline has been very quiet. There hasn't been any clear pattern yet for whether we have a demand/supply imbalance for the driving season which officially starts today. Refineries are not tweaking yield much in that part of the barrel and SFOT guess they are all taking a wait and see approach given the dramatic collapse in Gasoline crack last year.