A buying frenzy, driven by interest rates?

The theme for the past few days has been rising long interest rates in the US, particularly the long end. Just 2 days ago, S&P closed below 900 as yield begun its ascend, troubling some investors that rising long term rates at this juncture could harm recovery. Just where the recovery is coming from is another question SFOT could not bring to discuss at this moment. Having met a few contact from the HF world yesterday and hearing them arguing in the most convincing way why this rally in all asset classes have no legs, only to admit they are long in most asset class as the trend is so, suggests going against this upmove is treacherous. At this juncture, SFOT would guess rates should play a bigger role in determining global asset direction, i.e lower rates = all asset classes rallying, which is happening this morning in london.


In oil, we have seen another big draw in DOE crude inventories, which is the 4th consecutive draw in May. One would suspect this is the beginning of a trend which should see stock level continue to draw and it please OPEC to the extend they do not need to cut anymore production. Prices rallying to $66today also provide a better receipt than just 2 months ago for OPEC countries as they are now sitting more comfortably. SFOT sees stocks continue to draw down on crude, only due to supply cuts.

With prices here, the potential for demand to take further hits will be bigger and thus the economics for products that are already having a supply overhang is going to be worse, i.e middle distillates. Although SFOT is more bullish gasoline, he is now rethinking if prices at almost $2 /gal will have a bigger detrimental effect on demand. Looking at the charts below suggest that other than the last data point, we have not seen any seasonal pickup in Gasoline demand yet.

(chart 1 = typical gasoline demand pattern in a calendar year, chart 2 = YTD)

Crude technicals and continued Jet strength.

SFOT did some work and found that a lot of the strength in the front end of the Jet fuel curve has been due to physical traders buying Jet fuel for storage. The recent gasoline strength has cleared a lot of stocks in gasoline, particularly in ARA region. With spare storage space and an ever widening contango in middle distillates, particularly in Jet Fuel until recently, little wonder there is so much buying n the front end of Jet. As pointed out yesterday, real demand is not evident, and SFOT will now look at this opportunity to enter a short position, either on diffs or a time spread on the diff. He understands though this can be a brutal market at times as the number of participants are limited.


API numbers released yesterday shows another crude stock draw, and another improved demand/supply situation in gasoline, while distillates continues to build into another high in forward days cover. The crude draw perhaps is playing in participants mind, as WTI seems extremely well supported when EUR/USD was under pressure this am. Is it a sign we might have little downside now? or will profit taking come in during the afternoon post DOE? Or perhaps a cross of the 200-day moving average is now playing on everyone's mind and encouraging inflows into WTI financials?

Of course, i'd like to congratulate Barcelona with their supreme performance over a feeble Man Utd team yesterday. The better team, and arguably the best team in the world, rightly won. And of course with a few Arsenal alumnis in that team, SFOT is delighted at this result... second best outcome unfortunately. And now the football season is over, bring on the tennis season. Nadal or Federer in french open?

Poor air traffic numbers to continue, while summer continues to evade us

Back from long sunny weekend in Budapest, where things are beautiful and the word recession does not seem to exist in both sides of the Danube river, SFOT sees nothing but gloomy London, sub 20 degrees and raining. Though the one thing that has held British pride forever is the GBP, which is showing unbelievable strength. Readers will know SFOT has dipped into a small long in the GBP/USD pair and the target has been reached, hence will take off a little and leave the rest on a trailing stop basis. He still believes there are more stops out there to be taken out on the upside.
Back to oil, where the pressure today should have been on the downside, but nevertheless we are being drawn up here by the strength of EUR/USD. The only man that matters, Mr Al-Naimi of Saudi, reaffirms that there is no need for any production cut at this meeting. However, as per the past few weeks, or months, financial markets have been the key to this run up in flat price, and the theme shall continue. Guys trading the chart below might be tempted to be short Eur/Usd vs Brent, and SFOT cannot go against this trade at this moment.
Middle distillate cracks still look very weak, however there is a little development in Jet fuel over the past few weeks, where it seems airlines are preparing for increased summer demand and upped their hedging activities, pushing Jet fuel prices higher out to 1 year. Similar activities happened around this time last year, and the result was the collapsed of several airlines, notably smaller chartered companies. Jet differential was pushed up to an incredible $150 usd/tonne over gasoil in europe, whereas now the premium is around $45. SFOT understands that Jet fuel stocks are still in abundance, and therefore he cannot see how Jet fuel differential can continue to climb unless demand for summer holidays on planes really picks up. The latest release from IATA seems to point the other way unfortunately and SFOT will attempt to wear a little risk in selling Jet diffs here.

GOLD, always believe in your soul, you've got the power to go!

SFOT is a little lazy today and looking forward to another long weekend in glorious sunshine. The strength in GBP and EUR vs USD continues today, or rather the weakness of the USD, and we shall see oil and GOLD move up accordingly. Who knows what this afternoon will bring given its position squaring time before the long weekend but one thing is for sure, more volatility will come this pm, and SFOT have a sneaky feeling we see new highs in GBP/USD and EUR/USD before perhaps a pullback later.

Heres another link to something of interests while waiting for the final afternoon of the week to end.. be patient and watch to the end. Wonders of nature.

http://www.youtube.com/watch?v=dd7S6fRv224

The mysterious GBP

2 quick things this morning. Correlations are kinda broken down, with Gold, Eur/Usd, Oil and stocks all going different directions from each other. The standout move has been the GBP. SFOT is aware that a lot of macro type traders/investors are leaning short and feeling the pain. And it has only given back a mere figure after a negative outlook by S&P on UK debt. Perhaps a short term punt towards 1.60 is worthwhile on this pullback, given that such negative news cannot stop this pair from going lower.


This week has already turned out to be an awesome week in terms of price action in SPX, and those sitting on the sideline waiting for the week to end won't have to wait long. While SFOT has bitten the bullet in his short time spread structure in crude, he still holds on to a short position in CLz0, which has seen him benefit from a strong curve in the prompter end. Target for z0 is now $65. He will add another unit to this position if it trades close to $70 again.

With respect to the DOEs yesterday, it was a mildly bullish set of number as total stocks drew, especially on a 4 week basis, however SFOT does not know that falls into the 'other oil' component which has seen a 13.7mio bbl build over 4 weeks. Perhaps the fall in gasoline crack spreads yesterday suggest these are some odd blending type component etc. Whatever the case, SFOT will use this dip to buy into Rbob N9 cracks spread for reasons detailed yesterday.

The strength of Gasoline and time spreads.

An ultra bullish set of API numbers overnight set the tone for CLN7 maintaining above $60 as well as another strong day for RBOB crack spread. The latest draw in crude oil would be confirmed by DOE today(according to estimates), which could signal we have seen the peak in inventories in crude oil. Does the narrowing contango in both land locked WTI and waterborned Brent makes sense now? While widely available data seems to tell us that spreads should narrow, however, a bloomberg article yesterday came to my attention re increased import on commodities by China and India, causing the Baltic dry to hit a 7 month high. For sure, the index does not lie, and that the 2 countries have increased imports over the past few months. However, underlying demand still remains weak. The imports were not due to consumption but are meant for storage. In fact, the world is now short of storage space, and what could be better than China and India opening up their country for these excess oil to find a home. Perhaps we have also seen the low in time spreads and SFOT shall think about stopping himself on his short spread position with conviction.

Gasoline is strong, and will remain so, perhaps a pullback is due but SFOT will buy into any dips. Readers will know he has been long Rbob against Heating oil in July, and soon those will become the front month contracts. Over the past few months, with weak middle distillate timespreads, the available storages, particularly in europe has been clearing its stocks for storing gasoil, jet or diesel. This leaves global inventories of Gasoline lower than what would have been ideal. If storage continues to be filled to the brim, then refineries will have to cut runs, as they still have to produce around 30% of middle distillates which cannot be sold. This will not help Gasoline, and as we approach the peak summer driving season, SFOT cannot help but wonder if we can put a lid on how high Gasoline cracks can go.

And finally, SFOT hopes the chaps asking for Arsene Wenger's head to stop. Crisis as it seems, we do have several players coming back from injuries for next season, and we should leave him to buy a top defender and a strong holding midfield. In case he fails to do so and we fail in our quest again next year, we can judge him then. SFOT is as frustrated as any Arsenal fan out there, but whats one more year after waiting 4 years. Perhaps we can make this an ultimatum?

The return of risk appetite and correlation, all within 1 day.

The extent of the move in equities was highly impressive, and even more so when it was done on pretty much no major news. The theme from yesterday continues into the morning here in London, risk assets seems bid(equities, GBP,AUD,BRL, Oil) while risk averse assets stayed sideline(Gold, JPY). The move yesterday on no news perhaps shows investors/traders afraid to sell into a market which has hurt sellers for much of this quarter. Though the week is still young, the precedence has been set and if we do not somehow end lower, more people will throw in the towel and SFOT fears we see an overshoot of an even greater magnitude.

Oil prices at $60 now certainly will not help a global economy looking at a L-shape recovery, or does it not matter anymore? The recent rise of crude oil prices have collapsed refining margins globally and had Gasoline not been so strong, margins would have been even uglier. The best example is shown in the sour crude market, where its own strength has brought margins down to almost nothing. Crude prices simply cannot have a lot more upside unless product demand increases and feeds into higher product prices globally. If Oil is going to play a major part in global recovery, price has to stabilize for a sustained period, and not go up in a straight line, or 40% in 2 months. However, the return of high positive correlation between oil and equities is certainly going to create continuous daily noise, and if the overshoot in equities continue, perhaps we may be talking about a W-shape recovery soon.


Brent-Dub diff Oman Crude ref margin
Front line Brent

Is middle distillate doomed for the year?

So the correction in oil begins right after option expiry, or have i spoken too soon? Reading a few articles from sell side and buyside analysts, this week seems to be a big week for equities. Where we finish the week seems to be a determinant as to where we will head going forward. Gold seems to have a little breakdown in correlation on its own vs equities, oil and eur and perhaps that is where most macro chaps will have a bit more fun in the coming days. However, 2 things that comes to my attention in the oil barrel.

1) The continued strength in the crude curve, particularly the front end, should be a key alert that perhaps inventories in crude oil globally are easing. While in the US it seems the momentum for a build is stalling, SFOT is not too sure about the global waterborn crude situation to make an exact call at this moment but the spreads are certainly approaching a level where he thinks attention should be paid. Nigeria's Mend group's actions will also be watched now that spreads seems to have taken a bit of momentum.

Jul/Dec09 Brent spread

2) While crude curve has strengthen, product curves, particularly distillates continue to weaken. The situation in middle distillate looks horrible to say the least. Refining margins continue to look healthy, supported by rising Gasoline and Fuel oil cracks, which in turn leads to refiners not cutting as much run as they could. This will lead to more and more middle distillate being produced and stored away, as the latest ARA data shows. The european gasoil time spreads for eg are at its weakest for a while and does not look like conditions, demand/supply dynamics will get better anytime soon.

Jun/Dec09 ICE Gasoil

European gasoil inventory

A sustainable down move or just a breather?

SFOT was proven wrong yesterday, when a seemingly bullish set of numbers by DOE could not take $60 out in CL1. The same reason that brought CL1 to $60 is the same reason that is bringing it back down below 57, and hence the questions posted yesterday has been answered. Where next? Looking at the SPX chart, sitting nicely above its 20day moving average. Perhaps if broken, it will take a dive towards the 50day moving average. However, in this run up, many dips have been followed by a reverse to print higher highs, hence SFOT is not about to bet too much on this correction. Perhaps a p/s in CLN9 is now worth checking out. 48/53 costs just over $1.

One thing the DOE numbers have moved is the continued strength of Gasoline vs middle of the barrel distillates. This spread in N9 contract on Nymex is now printing new highs, and with days cover in distillate still moving higher and heading into peak driving season in US, we have yet to see the highs in this spread just yet. SFOT still keeps a unit of this on as physical demand from Africa and the Hurricane season approaching will continue to support Gasoline.

Looking at the bottom of the barrel, in heavy fuel oil, SFOT is aware that bunker fuel demand is still relatively high, especially from Asia. In this run up in oil prices, Fuel oil has remained very strong, whereas bottom of the barrel was very much unwanted in the run up to $147 in CL1. If we do see a drop back towards $50 or below, then fuel cracks will continue to inch higher, possibly having a crack at positive level(pun not intended)? This is also consistent with the fact that sour crude has been extremely strong, due to OPEC cutting sour crude supply, limiting heavy fuel oil production.

Today sees the expiry of Brent M9 contract on ICE, and the performance since the open has been amazing. Whatever the reason is, the recent strength in time spreads in the prompt months has given incentives for some of the floating storage North sea oil to be sold. We shall see if there are decent buyers. SFOT does not think the strength in spread will last, however if proven wrong, the strengthening structure will in time provide a base for the market to rally back towards $70. Not just yet, unless SPX shoot way above 1000.

Anyone any interest to take a cruise in Somali? Im sure this will interest all......

http://www.somalicruises.com/

Greenshoot or overshoot, part 2

Distillate cracks are under pressure early london morning, and rightly so given that API data shows a large crude draw of 3mio barrels. A closer look to the API numbers shows something amiss. Crude has drawn but the implied demand has decreased by around 1mio barrel, while refinery activities are also down by about 250k. SFOT is treating this data with caution, and looks to DOE for more clues. However, one thing for certain is, that although option expires tomorrow and $60 has indeed proven a big obstacle, if DOE data shows a similar draw across the board, irrespective of demand numbers, we will not stay below $60 in front line WTI for long .
The fact that market seems to be ignoring current demand numbers for now is reinforced by the revision of EIA demand numbers yesterday. 2009 consumption is now forecast to fall by 1.8mio barrels/day, 0.4mio more than the forecast last month. This only seemed to put flat price on the back foot for 2 seconds before bouncing back up. Opec has also just reduced its forecast on demand by 150kbbl/day, which will see the number for 2009 falling by 1.57 mio bbl/day. While SFOT views that we have probably seen the lows in oil prices, he can only feel what most macro traders are feeling here in terms of equity strength. When will the next wave down come? What will it take for the market to fall? Back to greenshoots or overshoot in this current day theme.

Greenshoot in oil markets or overshoot?

Just when we thought things might not look as pretty as it is, we get a crazy run in crude oil prices first thing london morning. The way crack spreads and time spreads are behaving suggests that it is not consumers that are buying but specs. At the time of writing, we have flat price in WTI approaching $60 fast. This seems to be driven by a comment from IEA chief that the demand forecast is unlikely to be cut again from its already low level in the upcoming report(is this the green shoot in the oil market). However, another comment seems to be ignored totally, i.e oil inventories are 'a bit exaggerated, reuters quote. SFOT finds it hard to justify buying anything here other chart based breakout entry. He would guess that the layers of call at $60(currently around 20k on exchange and whos knows how many more OTC) might play a part in this game to expiry. As noted yesterday, the level of inventories are still extremely high and there still appears to be a shortage in storage space. Higher flat price and stronger spreads might induce these inventories to finally come out of storage, but to who would they be sold to? Speculators and 'index' investors who have no interest in taking delivery? SFOT does not think the spread strength will last and will look at selling a spread on strength but in the prompt. He maintains a short in CLZ0 in flat price exposure opened up beginning of the week as he does not like the nutty swing in front line for now.

Sweet/sour revisited and European Gasoil expiry

Revisiting sweet sour spreads differentials developments. So the press has not mentioned OPEC for a while and they have seemingly been cutting production in sour crude and raising their OSP(official selling price) to reflect the cut in supply. This is one factor that has kept the sweet sour differential in check. Brent-Dubai spreads, as per chart below, tends to be a very good gauge of sweet sour crude differential. This spread also tends to show a good correlation with market direction. However, due to above mentioned reason and others (sour crude refineries coming back, strong fuel oil in asia etc), this spread has remain at its tightest for a while. This just shows that the excess crude in the market is sweet crude, and that even when Gasoline cracks are making sweet margins look good, we are unable to clear up sweet crude inventories. Indirectly, SFOT suspect that at some point(sooner than later), this equity/oil correlation has to give way to the large amount of sweet crude that is built up and has to be absorbed. Hence, momentum maybe to stay long oil, a top may be near and he still favours short position in CLZ10, targetting mid 60s at least.


Brent-Dubai spread and CO1

On another matter, European gasoil contract is expiring tomorrow. What is interesting is that that the spread QSk9/QSM9 has been strengthening steadily into the expiry tomorrow. Hearing from physical sources, Gasoline exports from Europe to Gulf Persian, US and Africa has created some storgage space which is in a premium these days. This has driven prompt end buying for the likes of Gasoil in europe as the contango further out still makes it a good arbitrage to store. Given a physical delivery, perhaps length of this contract will look to take bigger delivery of gasoil this time round. The easing up of some storage facilities have also seen Jet moving from worldwide location to Europe in the hope of finding a home and further illustrates that in the physcial world, the only active trading taking place are trades to do with the contango and storage.

Gasoline leading the charge

Perhaps this bull market in Oil we have seen is attributed to the SPX behaving a little looney recently. The real strength lies in the Gasoline market. Readers will know SFOT had pointed out the strength in demand/supply in the US market. However, a look in the European Gasoline market tells a simlar story. One should note, and experienced oil industry players will know that Europe is a net exporter of Gasoline and importer of Diesel. Gasoline stocks in europe has followed a similar pattern in the US, i.e declining fast. Exports from Europe to US usually helps to ease US shortage in the driving season, however, SFOT hears that other region like Africa are also taking Gasoline from Europe now. This could potentially leave gasoline vulnerable for more upside surge. SFOT will be watching this space very tightly, but with flat price higher in general, this is slowing Gasoline's outperformance vs crude. The climbing backwardation in US Rbob is certainly another confirmation of the bull trend in this part of the barrel yet.

Jun/Sep Rbob spread
ARA gasoline inventories

Groundhog day

So another day, another rally in asian equities, followed by european equities, then oil, then gold. While SFOT is not any expert in the equity market, he has some industry contacts ranging from short term momentum punters to old fashion value based investors. He has seen these value based investors raking it in, happy to argue that stocks are cheap on valuation and buying anywhere 3-4 weeks ago make sense. These happens to be the guys who has no interest in short term flows and they are sitting pretty in the YTD p/l. Pat on their shoulders for now, as these are the guys who have inflicted the initial pain on those who have only recently thrown in the towel. Beware, the latter, as stopping in always leaves a very nasty results.

For a while now, SFOT has heard bulls talking about base has formed in WTI and we will not see 30 handle again. While that is possibly true, is 30 handle analagous to 600 handle on SPX and 700 handle on Gold? Is oil now simply a function of financial markets and the good old fundamentally driven price actions we have seen over the past few months are all but gone? The financial markets, mr and mrs smith buying notes issued by xyz banks on oil/commodities, jacksons on the street using etfs are running the show again as in the case of 2008? At this moment, it seems the case. SFOT cannot bring himself to buy the market here. What he will look at is to be short of the back end, either vs prompter stuff or outright, reason being Z10 at $70 must make producers drool again.

One fundamental trade that make sense is to continue to run a short position in distillate cracks. After DOE data yesterday, distillate data continues to show itself as the weakest link. Within Europe, Gasoline is now more attractive to produce than Diesel from a refiner point of view, for the first time since 2007 and going into the peak of driving season and hurricanes, SFOT will continue to hold this position.

More Irrationality, less risk appetite?

The star of the day has to be Singapore's STI index. A whoppy 22% in 5 days. If there is any bigger representation of irrationality anyone, pls let me know. SFOT is also puzzled by the strength of this island state's currency. Surely a massively export dependent country cannot live long with a currency that strong? Well well, another day, another confirmation that fundamental investment in this climate can only give you pain, more in brain cells than p/l wise for some.

Back to oil, the behaviour in the past few days in oil replicates on-goings in equities, fx and gold. Hence in terms of direction, SFOT sees no point in taking a fundamental view point. Rather, he would go with the flow and trade the miserable range. Vol looks cheap compared to the past few months, however the realized short term vol has fallen off a cliff, making implied look a touch expensive to be long of.

Refining margins has been holding up well of late, mostly supported by gasoline and heavy fuel oil. Baring any major surprise in DOE numbers later today, SFOT doubts there will be any significant movements attributed to the set of numbers. This move up recently has been accompanied by a sudden strength in crude timespreads, particularly in the 2010/11 area. There could be a little bit of producer activities lately depressing the curve. Any larger flow will surely stop the market from going higher as volume seems to be on the light in recent sessions.

Accompanying this post is a little contribution from a reader/colleague taken from the bbc website. What is he thinking of??

Back from the sun

2 weeks away from the market and nothing has changed. Equities are still bid, forcefully. No bad news seems to be able to take it lower. Perhaps its interesting that a old timer colleague of mine pointed out that it is when the mutual fund managers are finally fully invested that we will see a new low. Sources from Asia are telling me these managers have been buying, not wanting to be the last one on board. Presumably the same as in Europe and certainly on the other side of the atlantic. Well, SFOT is staying clear of the equity space right now as he knows not much of whether financial stocks strength are going to pull the rest up for much longer.



An interesting fact is that he witnessed for the first time the number of ships acting as oil storage for both clean and dirty products around the island he has visited. That spreads in crude and distillates continues to be weak suggests that the need for oil, recovery in economy is not even close to taking place. Flat price do not reflect any real demand at the moment, but SFOT cannot see front line prices go much higher with increasing inventories globally, floating or non floating basis.
SFOT shalls stick with relative value trade that make sense and readers will know he has liked being long Gasoline vs Heat on paper. That past 2 DOE numbers have certainly helped the case and Gasoline is now printing new highs vs Distillates. Perhaps it is wise to take some profit.


Will Arsenal do it tonight, against the odds and take themselves into another champs league final? I have hopes, but they remain only hopes as Man Utd look like odds on favourite. Gunners will have to play the game of their lives. Come on Arsenal!