Finding values in calmness

A rather short post today as SFOT tries to refocus his thoughts on the several forces impacting oil complex this year. So, crude prices has been relatively dull of late. This favours option sellers collecting theta and small intraday trading, hardly sufficient to fill up a day of work. Would SFOT join the crowd in collecting theta? Probably not at such low volatility levels as risk reward isn't that great.

Brent Vol Mar12.

Afterall, there are better value plays to look at. For eg, the Wti-Brent spread. The tightening in the last few month have been driven mostly by talks of enbridge pipeline reveral which finally will take crude out of cushing, providing a way out. However, given this has recently been put back until at least June this year, we are not due a reveral of fortune for wti just yet. Significantly, we are now going to witness a build in cushing stocks for a while. This shall depress prompt WTI vs Brent spread but perhaps create an opportunity to get long of this spread on a deferred basis. Dec12 perhaps?

Dec 12 Wti-Brent spread

Bull Asia

So another day where Asia opens off to the races. Base metals, energy, equities all reacting to what is an equivalent of a 50bp cut by China in their reverse repo operation which has been rumoured for a while. Also to a smaller extent the mere 58% drop in Goldman earnings, which is less than what most had expected. However, note that liquidity is again very thin and SFOT has quickly learned that moves happens not in Asia but in the western timezone where he used to ply his trade. Nevertheless, these few days have relatively mpressive in terms of intraday volatility, particularly in the energy space but we are not breaking out of the 110/115 range anytime soon. Implied volatility is coming off and continues to go lower in this environment. While it is probably not cheap yet, SFOT is now beginning to think about getting long some of these longer dated vega putting them in the drawer in case of a real Iranian conflict. This is no less thanks to a few of his colleagues and the internet having put up more interesting history of the Iranian related middle east conflicts where you can find here and here.
Here in the energy space, the big news is about the closure of yet another refinery, this time in the US. After 3 years and an astonishing 1.3bn loss, Hess and PDVSA finally decided to shut this loss making venture. This is consistent with IEA's release late last night of a fall in oil demand since 2009 and also SFOT's own humble post yesterday. This leads us nowhere as Iranian premium still prevent this market from reacting much. Watch for spreads to continue establishing a firm contango for the mean time.

Ugly Europe

Whilst we are all buried in trying to find out the results of the next bono or btp auctions, perhaps it is timely to point out how the demand side of europe is doing at this point in time. As GDP, retail sales, IFO etc are good indicators, i suspect it would be helpful to a few macro punters to look at a more timely indicator of demand/supply as indicated by the structure of oil for example. Even though oil prices are sticky at the moment, in particular with the Iranian reutoric in recent days, it is interesting to note that we are experiencing a severe drop in demand in Europe. The numbers are not available as yet but the term structure give us a hint. European (ICE) Gas oil, futures curve has gone into contango for the second month in a row. This typically signals a fall in demand relative to supply and is taking place in spite of potential supply cut resulting from the closure of some petroplus refineries.

ICE Gasoil front spread

Similarly in the crude oil market, Brent's structure is weakening repidly, with the last contract expiring in contango. As Brent is primarily still a European based contract, this is a telling sign that refineries are taking less crude into their system and that end user demand in finished products like Heating oil is falling hard in europe. This isn't helped by a fairly mild winter so far and is a lagged effect of the very high price of oil in EUR terms. The likes of Greece and Italy must be feeling the pain even more now. Perhaps i am jumping too far ahead but January economic numbers in Europe could be bad. European sanctions on Iran might be good for the long run politically but Brent is only above $110 now for one reason. In any scenario of Iran easing off, oil price could finally come off and give Europe a small helping hand. I'd like to point out though that this weakness is a pure European phenomenon as Asian/US related oil product structures are still highly backwardated and demand is strong.

Brent crude front spreads

Brent crude in EUR

Greetings from the east

Happy new year to all. Having endured much turbulence in the oil space in 2011, SFOT has emerged relatively ok and is now residing in another part of the world where trading the oil market means going to bed at 3am. He has much to adjust to but one thing that needs no adjustment is the random volatility of crude prices. Just when prices look to be dominated by potential Iranian crisis, daily range narrowed and converged before both upside and downside stops got taken out all in a matter of 4 hours. That should leave a few wounded but also presents opportunities to get involved.

Mar12 Brent

While the likes of Goldman and other research houses have cited various upside target, SFOT is inclined to think this move will be yet to materialize. The main reason being that Iran will have to negotiate a buyer(china) at depressed prices initially while the other factors for a push towards a real spike in oil prices are not in place just yet. Smart money though, is on buying very low delta longer dated calls. You just never know what can pan out in the coming year with potential trouble in Nigeria, producing double the output of Libya, while european woes are still very much in the foreground with oil demand in europe falling fairly quickly.
The recent problem with refiner Petroplus is just another drag on demand in europe, amongst a weak EUR and a very mild winter, but met with some good news when they managed to secure temporary credit for some of their refineries. This recent episode has really given refining margins a boost which, in my view, is short lived. While we have a good amount of refinery maintenance going on in the next 3 months or so, there are enough capacity out there to warrant a cap in margins. However, downside would be limited unless demand falls even faster in the coming months.

Dubai Crude cracking margin Singapore

Forties crude cracking margins Europe

While rumours of a RRR cut by China pre chinese new year is circling round the market and will certainly give the market a small boost, one doubt there is very much appetite for risk at this time of low liquidity. Well good luck for the day and i shall endeavour to have more useful stuff back here soon.