Bearish API crushes cracks while crude holds due weak USD.

Bearish set of data from APIs, looking at a 3.6mio bbl build in gasoline and a 2.4mio bbl build in distillates, coupled with lower implied demand for gasoline. Little wonder gasoline cracks continue to take a bath today. Perhaps a major correction is now underway for Gasoline, as rising prices over the past few months start to eat into its own demand. Whether this translate into this pm's data or not remains to be seen but risk assets shall not be touched either way before the FOMC today. Middle distillate cracks are also under a little pressure, understandably given the API stats and also crude oil's late evening rally due to USD weakness. SFOT remains short these.

Flat price is a funny game. The only reason why WTI contract is still hovering here is because of the bid in eur/usd and cable, supposedly from middle eastern bidders. Equities had an edgy day yesterday, and shall have another one before the Fed gives their verdict today. This morning's ECB tender was a staggering 442bio alloted at 1%. They are flushing the mkt with long term liquidity, and SFOT is afraid this may be a weapon of choice for specs to re enter the reflation trade shortly. We shall see the FOMC's statement this evening and SFOT will position himself only post the meeting, keeping risks low.

Japanese trade data overnight continues to prove ugly, with exports down more than forecast @ -40.9% YoY. China's role to save the world isn't working much, innit?

FOMC meeting holding back risk taking....commodities not spared

Its hotting up. S&P closed well below 900. Volume is apparently not very high and one doubt much will happen before FOMC. Vols in all asset classes are bid up into FOMC meeting tomorrow. While commodity complex had a rough day yesterday, Oil and Gold stands out most. Given they have been clearly the leader in the global reflation play that started back in March, it make sense for them to lose signicantly on any unwind. However, the move down is hardly convincing just yet to load up on a bigger play, at least not before FOMC tomorrow. Crude oil has been a particular point of discussion. SFOT came across several technical pieces, coming from experts and novices alike, that crude(WTI) is due for a correction below $60 due to increased contango and technicals. While this may be true, a bigger correction would need stopping out of lengths. However, since most of the length were in the longer part of the curve, eg Z10 and Z11, and these has only lost only half the value of the front months over the past few days, there is probably hardly any case for a bigger selloff, yet.

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....

On the way down...

A big week ahead, and has already started with a bang. Whether commodities are leading equities or the other way round matters not, as if this is to be a beginning of a major correction, be long of nothing. Whether position is taken off pre FOMC or cashed out for half year end, the case that this may be the correction bears have been waiting for is perhaps stronger this time, especially when SFOT received this bloomberg message headline from a sell side analyst first thing this morning... "World Bank cuts global GDP forecasts to -2.9% from -1.7% for 2009 and to 2% from 2.3% for 2010. It calls for “bold” policy action as the outlook for the poorest countries is “bleak”."

Gasoline has led this move down, and now that July Rbob contract is well below the £2 mark, that appears to be strong resistance again. The way that gasoline cracks in July 2009 collapsed suggests a lot of spec lengths are taking off position, possible ahead of FOMC. While the correlation between gasoline cracks and FOMC decision is probably not very high, if indeed this pullback is due to risk unwind, then perhaps the other more obvious risky assets has got another leg down, and very soon.

The double top formation in continuos CL1 is taking place now, and if the expiry today in CLN9 turns out to be ugly, then perhaps a test of $65 will be in place very shortly. Being long gamma will pay off this week.

Potential double top or anothe leg up? Watch this space

Opportunity to short distillate cracks?

SFOT is a little tied up this am, and thus the post is lat and will be a short one. Gasoline cracks have eased off since DOE came out yesterday confirming the relative increase in inventories. Indeed, days forward cover of Gasoline is now starting to reverse a little. However, what bothers SFOT is that demand is also on the way up, which means prices at current retail level has not hurt US consumers just yet. Perhaps it is substitution of flying holiday with driving holiday in the US at work and we are indeed seeing evidence of this from the airline industry and Jet fuel's relative prices. SFOT's decision to be flat of any Gasoline length proved to be right, but going short is a nono just yet.


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.

Bullish on bottom of the barrel?

Option expiry on Nymex WTI today. The open interest numbers reported on Nymex $5 either side of 70 is quite low at this stage, and thus could be a fairly uninspiring expiry, although OTC interests may yet give today a bit of volatility. Weak across the complex is the theme this am, much like yesterday morning in London, only for prices to shoot above $72 once US came in. However, SFOT is aware of some key technical levels being tested in some asset classes. Eg, SPX on its 200day moving average. These are the things that can spark a violent move, infecting the other assets that are in the current reflation play in the process.

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!

Is Gasoline getting to strong for its own good?

There is not too much changes in the energy complex today, in particular flat price. With USD getting a bid, and the obvious break in eurusd in a classic head and shoulder development, Crude came under some pressure but holding out this $70 handle is still a sign of strength on it own and the current macro theme remains the same. Although there has been a little correction in the rates world, with 2year rates coming off about 30bps from its high last week, rates have still gone up a long way. With bullish news yesterday that UK CBI has warned BOE may raise rates soon, and the very strong ZEW reading today out of Germany, one may have to admit the greenshoot/reflation play may still have a bit of legs, and speculators in Crude especially have not got any real reason to dump just yet.

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

Refining margins are crushed, led by middle distillates and recent Fuel oil weakness.

Market actions suggest we are at a little cross roads this morning. USTs rallied into the close, and continues its rally over night and asian hours. This is keeping a cap on the performance of risk asset including Gold, Oil and giving USD a little boost. Given the HF community's current theme is the reflation trade, there must a quite a few shorts in USTs currently, and perhaps a little squeeze is due in the longer end? In a scenario like this, perhaps it is wise to take off lengths in risk assets for now, and SFOT is happy to return to neutral in his outright exposure at this moment and he shall do just that.

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

China effect and Oil.

SFOT is aware that the release of China's trade numbers overnight has been one of the most highly anticipated number so far this month. Therfore, the less than expected trade balance, topped by much lower exports and imports may be of interest to some macro punters in the commodity space. Exports suggests world trade may not be as rosy as the greenshoot /reflation story suggests, however it is the import story that is more interesting. With a full month of rising prices in May, it is interesting to see this number falling much more than expected. The breakdown for oil related imports is quite clear. Stock piling for crude was very well publicised, but what has not been so well documented is the fall in imports of refined products. Seasoned traders will remember that it was last year in April and May that China imported the highest amount of Diesel, and this sent middle distillates to new highs shortly before the olympics. As previously mentioned, China's import of crude perhaps is a way of diversifying their reserves, but in true demand terms, refined products again shows that depending on China to kick start global recovery is going to take a longer time than what markets are pricing in now.

The DOE data yesterday confirms that of API, crude inventories continues its drawdown in the US, helped by reduced imports and production. This morning also sees a little bullish news from IEA, that demand has been raised by 120kb/d for this year. First evidence of the potential for bottoming of demand is here. This will give the longs of the back end of the crude curve comfort. In fact, SFOT sees that the back end of the curve will reach $100 way before year end if this demand really bottoms and crude stocks keep drawing at a sustainable rate. Apparently a major player loaded up with a bunch of near the money calls 1 year out yesterday, which is a fairly interesting flow in recent times. I shall stress again, while SFOT is long and happy so, he is taking off some outright exposure here and increasing long gamma in the front.

Stay long crude for now, and gamma positive.

A number of factors contribute to the overnight strength in Crude and product prices. 1) The strong API data on crude oil. 2) Weaker USD. As for pt 1), a draw of almost 6mio bbl is likely to put fear in players who are short the front line WTI spreads, in particular weak shorts who are just riding on the index rolls ongoing currently. Indeed, the N9/Q9 spread has already jumped 30c from its weakest on Monday. This number again confirms that crude oil inventories are drawing down, which is consistent with reports of floating storages clearing in the crude oil space, as well as middle eastern crude tightening. Perhaps market commentators and sell side bulls will use this to call for 80, 90, or even $100 crude by year end. However, the truth is that products are still extremely weak, and unless refined products inventories starts to clear in the manner of crude is currently, it is difficult to see a strong recovery in front prices.

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.

Sour crude harming margins, while European Gasoil expiry looks very weak.

Flat price seems to be afraid of the $70 mark in front line Brent and WTI these few sessions. From past experiences, the market tends to fly when it finally break through the up or downside. It is now clear speculators are positioned for the upside medium to longer term as the reflation/rate hike/recovery trade continues. Perhaps a self fulfilling resistance when everyone is trading their gamma around $70. Over the past week, spreads in crude oil and middle distillate has suffered a lot, i.e the rise in price has been led by the longer end of the curve. SFOT sees funds/specs driving this rather than real demand buying at this stage, and perhaps the sustainability of this rally will depend highly on the global macro trading theme. Consumers are not rushing into hedging programme as they are now well aware of the developments of the physical market in crude and distillates, and are probably happy to sit on their hands more than the past years. This is probably less so for producers and SFOT sees potentially more producer flows now that Z11 is above $80.

Sour crude is strong, especially the ones coming out of the gulf. Brent-Dubai, usually the benchmark for sweet/sour spread, is now at its tightest again. The cause being continued reduction in OPEC's crude (though there have been reports that exports have gone up last month), the result being margins getting crushed in sour crude. If this were to continue, surely demand for sour crude has to come off anyhow as refiners cut loss by cutting runs, sweet or sour.

Brent-dubai diff vs Oman refining margin

European Gasoil M9 contract expires this thursday. This contract has suffered, in very stark contrast to the past few contracts which has rallied into expiry, vs surrounding contracts. SFOT has got it wrong this time admittedly, as it seems physical guys are absolutely running out of storage space for gasoil, and are not keen to take delivery of more gasoil. Top that with asian gasoil being even weaker, we may yet see the weakest expiry for European gasoil yet, unless a few big hands waiting for the last minute. We shall see....

Time for gamma long in crude?

Crude is weak this am, led by the middle of the barrel products, especially Gasoil. In relative value terms, SFOT is positioned rightly being short cracks in middle distillates. Sources in the physical space suggests to him there is much in storage, and the widening contango helps, but storgage space is drying up and there is no end user demand. Another instance of weakening demand is happening in Asia, where airlines' demand for aviation fuel has dropped to a level that took prices to lowest in a year. Smilar to Gasoil, any strength is probably an opportunity to sell into, as the sheer amount of inventories available just cannot make any strength sustainable. However, SFOT thinks these relative values within the barrel is being overshadowed by 2 market movers over the past few days.

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.

Direction in crude oil should continue to be dominated by a gloabl macro theme now, and at the moment it looks weak. However, all could change, as the momentum seems to be on the upside. More buying of 100calls in 1-2yr out period, especially from speculators as CFTC reveals both open interest and net length on the up. Perhaps now is a good time to own some gamma, and SFOT shall do just that for a short term punt.

Short term overshoot in WTI on card, while airlines' woes continue

So, a certain analyst changed his oil price forecast for the year, stopping out of his short and calling for higher year end prices, WTI rallies, mid term calls rallies 3 vol points. Sounds like groundhog day to anyone trading WTI in 2008? Well well. SFOT has seen this many times, and if anything is to go by, today's weakness due to producer hedging will only be short lived, as speculators will indeed buy into the story, especially now that inflation them is gathering steam. No, SFOT has not turned bullish on WTI enough to bet the house on it. Rather he sees flow driven speculation into the oil market, one of very weak fundamental still at this point in time. A very good example is in distillates, where time spreads was under pressure again and cracks lost almost $1 into the close yesterday and this morning. Reports of more supertankers being hired to store distillate is circling the market, and inventories on water are just swelling. Still happy to sit on short distillate cracks and time spreads. As for the Jet fuel space and equity guys looking at airlines, more bad news on that front. Finnair said turnover has dropped 15% since start of the year and Kenya air has full year loss of $72mio due to fuel hedging. The challenge facing these guys are tough, and with prices almost doubling from lows of the year, the case is not being helped. Jet differential has come of a little from its recent high and SFOT will remain short of this.

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.

Upside for Gasoline crack determined by flat price

The latest set of data from DOE continues to show weakening supply/demand dynamics for the barrel, with the exception of Gasoline. Distillate forward days cover continues to hover at multiyear highs, with demand not looking likely to recover anytime soon, while gasoline days forward cover looks relatively healthy for this time of the year. We seem to be at a cross road here as far as Gasoline is concerned. In my humble view, being long gasoline cracks is now a bear trade in the near term. if crude prices continue to squeeze higher, say towards $75 driven by specs, Gasoline demand would begin to suffer and cracks will see limited upside as retail gas price has almost doubled. As we enter into the peak of the US driving season, SFOT is keeping his gasoline risk small and to the long side.

US Gasoline fwd days cover

US distillate fwd days cover

Obama's trip to the Middle East is seen by some oil fundamentalist as a key event for the oil market. With regards to that front, SFOT has no particular opinion and would not make any short term call on direction based on this recent visit. Instead, he focuses his attention to the rising vol as market took a dive into the close yesterday. Perhaps its profit taking, perhaps its new shorts being entered into. However, as SFOT has come to terms recently, 200day moving averages in all markets seems to be a key support now, and for CLZ9 contract, it has the same pattern and SFOT will also watch this level very carefully.

API date signals poor middle distillate economics to continue

A short post this morning

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.

Gasoil a sell? Where and when are the cash coming in?

The theme in london am this morning is one of profit taking, small but going on. GBP, Oil, Gold. Oil vol has gone down to low 40s in the prompt, which incidentally was the level it was at when SFOT moved across from rates where 3m10yr straddle was trading at 13%. The switch in vol was a shocker for SFOT then, however, this time round, it seems this is a little low. As flat price continues to go higher with the global recovery/inflation/money flow theme, vol coming off suggests a comfortable market where market participants will continue to buy into the story. The amount of cash sitting on the sideline should not be as much as in april but they are by no means close to fully invested. This worries SFOT as to how high S&P, oil, gold will go before it comes off again. If equities continue its climb higher, consumer confidence will surely be back and Mr and Mrs Smith who has been shut of the property market will start looking again. This morning's housing data in UK already shows this and SFOT is aware that singapore, another country with hyper inflated property prices at its peak, has seen some recent positive activities as well. Equity induced recovery on the way?
CL1 Vol
Uk Mortage Approval

Back to oil RV, middle distillate are strong this morning, and SFOT can only attribute this to consumers stopping in and some profit taking. The pool looks so ugly that even if some business in Asia is taking cracks higher, SFOT has no problem selling into this strength, and this is exactly what he will do.

Front Euro gasoil crack

New month, same theme? Poor margins and strong spreads, which one will give in?

Its June already, the sun is shining down in london this early summer, and all seems well in the markets. Everything you look or touch is going up, and almost anything is going up against the USD. As WTI inches so close to $70, SFOT has to confess he had stopped out of his CLZ0 short position last week but has no desire to jump into a long position in flat price just because financial players are having a great run. He shall also not be stubborn in his view as market remains irrational longer than his solvency. Instead he shall concentrate on relative values in oil fundamentals and happy that he had a small short in Jet and used the strength in distillate cracks last week to enter into a small short in crack spreads as well. He understands that as refineries come back online in Asia, more distillates will be coming onto the market and the contango in European gasoils paint a very ugly picture for this part of the barrel.

Oman and brent crude margins.

With this strength in crude oil, refining margins are getting crushed. Gasoline cracks have given back $3 from its recent highs, and middle distillate cracks are at the low of the year. Run cuts will take place again promptly and this could in turn slow the draw in crude, given Opec's latest decision not to cut more production. On OPEC, they must be happily keeping quiet on the extra receipts from their oil barrels the past month and perhaps the latest move in the fx world could be down to diversification? SFOT has heard theories of these sort over the past week and could not exclude this possibility. Whatever it is, it is perhaps a good time to sell some timespreads in crude.