Back in the Hunt

Greetings to all. It has been a while and SFOT has finally settled down enough to think of restarting this blog. It will probably not be on a daily basis, however, i will do my best to provide as much basis for discussions as possible. Quite a lot has changed since the last post back in November. SFOT has begun his first full year with his new firm, has broken a rib while snowboarding in Japan, has recovered and gone back to the slopes last week with amazing powder, has seen his team bow out of champions league having been taught how football should be played by the best player in the world. May Arsenal win the remaining games and pray the other 2 drop points.
Well, on the oil side, things aren't similar as well. Many investors are getting more clued in about how to trade energy, through a variety of ETFs for eg. They have also gotten smarter and understand the industry a lot better, with help from many blogs, bloomberg data etc and many banks publishing very detailed research on inventories, demand and seaonal patterns. This market is getting very interesting and very transparent compared to just 2 years ago.
SFOT would like to take note of 2 current issues. 1) The narrowing of crude timespreads. The move has been a major talking point for many, and for eg, just looking at CLZ0/CLZ2 spread, it has moved about $3 this past quarter alone. A lot has been published on the clearing of floating storage, and many research houses have forecasted a clearing of access floating stocks in crude and products between q3 and q4 this year. However, in the last 2 days, we have seen crude spreads giving back about 1/4 of the move. Is this a pullback temporary or is this a prelude of more contango to come? With refineries globally going through maintenance, crude runs are significantly reduced. As such, there will be an expected pullback in timespreads, perhaps for another few days, or even weeks. However, SFOT will be in favour to bet on a narrowing spread again when the refineries are finished with their turnaround. A few things could come in the way of a big outperformance of this though. 1) OPEC compliance might start to deteriorate if prices continues it's upward march towards 90. 2) Stop losses by major players might exagggerate the correction. SFOT will bide his time before stepping in.



2) Crack spreads in middle distillate have performed extremely well this past week, having been an under performer for the most part of this year and all of last year. What is driving this sudden outperformance of middle distillates? SFOT thinks there are 2 reasons. The first is that the excess inventories have been in middle distillates through all of 2009. As such, the correction of the global inventories are going to come from this part of the barrel, and it has been as such. Even though the inventory levels are still high, spreads in middle distillates are firming as a result and we have cracks overshooting on the upside. Another reason is that there is a big correction on crude and more importantly, heavy fuel oil structure. This gives a synthetic support to middle distillates as refiners need to make a profit from somewhere.




In SFOT's view and ideal world, there will be a correction in crude structure and a fall in middle distillate crack spreads, relative to a recovery in heavy fuel oil cracks while light ends like Gasoline and Naphtha will be supported. This will maintain the refining margin needed for refiners to keep running. However, once we get over the next few months of volatility in the energy space, we should continue to tighten up in crude timespreads while cracks will recover to higher levels. Crude prices should also correct in the meantime, perhaps to low 80s and set a new range 80/88 ( as SFOT do not see how we can get above 90 just yet).
Good luck