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.

Nutter of a week so far

It's only Tuesday and SFOT is already feeling like a Friday, fairly drained out with dramtic happenings everywhere. First up, the famous GS vs SEC headline, taking WTI down by 2.5% on Friday and continuing the slide into Monday. One wonder why equites were down less than oil on that Friday. Does GS fighting a case for the next 2 year actually mean we lose 1 million per day or demand in oil? Then came the news that really matter, that volcano in Iceland. By now it is very well written in bloomberg and FT on the impact on Jet fuel demand. However, the move really happened on monday morning when Jet fuel prices lost almost $4 per barrel at one stage before stabilizing. At this moment, it is still unclear how are the backlog of jet fuel can be cleared and SFOT is not going to bet on that. True that there can be cash and carry opportunities or that jet can be blended with the other middle distillate pool but there can only be so much to be done. While SFOT is not entirely bearish Jet on the whole, he cannot be bullish right now and will be sitting on the sideline waiting for the physical traders to clear up the excess.
The move in WTI spreads is still on the lips of many players,, gettting in, stopping out etc. Many readers here would have felt the pain or joy no doubt. However, whhat is not pointed out is that the moved in middle distillate spreads have been even more violent, underperforming the move of crude timespreads in this downmove. The correction has been overdue, and perhaps is an overshoot. When crude spreads rallied up earlier this year, middle distillate spreads (ICE gasoil in this case) were outperforming crude but was not given a mention at all. This correction in spreads are totally led by middle distillates and the above mentioned case in Jet fuel does not help the cause. Now, would this be an opportunity for punters to get into a long middle distillate vs crude timespread trade?

Dec10-Dec11 ICE gasoil vs Ice brent timespread performance in usd/bbl


Elsewhere, in outright prices, SFOT is still targetting low 80s in CLM0 before assessing a buy level. The happy numbers from banks, in particular GS's big results today only masks the fact that UK FSA, Germany and US might be targetting more than just one bank. This surely cannot be good for equities in the short run, and certainly not financial assets like WTI?

Rumble in WTI time spreads

The move in timespreads in crude has been the major talking point. What looked like a healthy correction initially quickly turned into a terrible stoploss situation for market participants. Trading spreads in the past week had a reminiscence of late 2008/early 2009. The rebound proved equally dramatic yesterday and the volatility of these spreads are creating a havoc situation for SFOT and his counterparts relying on the crude curve to hedge multiple exposures. However, SFOT is watching this with a curious thought. Is this the opening to get into the big backwardation trade a major US bank is suggesting?


CLM0/CLZ0 spread

Doe figures contradicts API numbers , suggesting stocks drawing in crude, gasoline while building in distillates. We are into the traditional driving season, it is heating oil that has outperformed gasoline until recently. Perhaps it was another theme of too fast too furious but with continued draws forecasted in gasoline stocks, coupled with refinery shutdowns across the board due to maintenance, days cover has improved dramatically in US gasoline. Perhaps it is an increasingly good idea to buy into August Gasoline crack (XBq0 vs CLq0). For those trendy traders, beautiful trend line isn't it?

US Gasoline days cover

US Rbob crack Aug10

Record volume in CL in the past few days has definitely been the case of new financial money piling into this 'asset class'. While the earning season has seen a great start by UBS, JPMorgan, UPS etc and very good US + China data signalling recovery is full steam ahead, SFOT cannot help but think this move in CL has gone too fast. Failing to break the high in CLM0 might see a double top correction towards 80, very quickly. A cheap short term downside play is certainly worth a shot.

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

The demise of middle distillate

It has been a while since a post and the only excuse SFOT can conjur up with is that he has been bugged down by systems issues on a daily basis. The wonders of technology. Has anyone ever hoped for things to stay simple once in a while? Looking at crude prices, we really haven't done much in the past few weeks, inspite of gold and pther commodities having a great time. In truth, the physical situation in the barrel is still very much unchanged. Inventories are still high, contango widening. With rising crude prices driven by managed money, the result is lower crack spreads, i.e the profit that refiners make by breaking down crude into various fuels. This has been an industry bane all year long and the result is for refiners to idle units to lower cost, or even to shut it altogether, witness Valero last week.

As we move into winter in northern hemisphere, the industry is focused mostly on the weather. It is now well known to industry players that the winter so far has been mild and that the forecast in the next week is still appallingly warm. While this is great for us wanting a nice weekend out, it is proving costly for this industry as the supply is high and there is no demand to meet it. Spreads and cracks, in particular, has to weaken with crude prices moving up, driven by a host of new 'investment money' finding new home for their low interest earning money. Without any significant normalisation of the weather condition, we shall not see a recovery of these middle distillate which is oversupplied, and SFOT cannot see how crude prices can go much higher here. In fact, we are in a small bear move and heading lower still as i write. Is SFOT bearish? yes but not with a lot of conviction, is he tradin the range in the chart below? Yes, as most others are doing now and rightly so.



CL1


Gasoil crack in europe

Non Inspirational

Non inspirational. The lack of convictionn and breakout has led to few opportunities Oil directionaly. The range 75-80 seems to be holding very well recently. The usually disciplined sfot opted to go against his wiser option of not getting involved until a clearer trend and it has not paid off, as he suffered what he suspects many counterparts have in so many instances, buying the highs and selling the lows. An intraday chart like below doesn't help, especially if trading breakout is what you do.



2 things of note over the past few days. 1) Total open interest is approaching the highs, as pointed out by many research houses and individual traders. Large traders are long, which normally means proces can creep up slowly, very slowly, until there are no longer any buyers, and then a big drop will follow. Will we see a scenario like this soon that will take us back into the low 70s or even mid 60s? Perhaps. However, it will be led by DXY, or equities, as expressed by the VIX. Equities futures making new highs are certainly not going to help WTI lower in the near term. Intraday trading is yet another matter.

2) Within the barrel, API came out with a set of very bearish stats. A large build in crude, gasoline and perhaps more importantly, distillate stocks. This is not going to help refining margins going forward, and certainly not the contango in products that have weakened dramatically of late. Now that the hurricane is out of the way, and experts are pointing to damages being very limited, a beraish set of product stocks will send crack levels to another new low. This time round, there may not be any hurricanes to save these margins.

God save the queen

SFOT's interpretation of the DOE data is that it was a non event in most part, except for the middle distillate draw where heating oil stocks were taken down. That should some support for the specific product, especially if we do get some sort of cold snap in the next few weeks, both in Nymex heat and European Gasoil. Note that distillate forward days cover seems to have peaked, and refinery run cut has contributed to this more than an increase in demand. Within the middle distillate pool sits the higher sulfur diesel, and the inventories have actually increased by a large chunk. That is a function of much much lower demand globally. Having said that, we are seeing very low cracks in heating oil in the US. Temperature appears to be warmer than normal over the next few days, which should keep cracks depressed. However, with stocks forecasted to continue its decline as refiners continue to cut run due to low margins, it is worth to be long some nearby cracks if it continues its slide lower.

US Distillate days forward cover

Jan09 Heat crack on Nymex

Gold continues to be strong and although it does not imply strong WTI, the recent high correlation will mean downside in WTI is fairly limited. The BOE action this morning has taken out some stops in cable and EUR is being dragged up against the USD. In turn, oil is trading above 80.00 in Dec09. Does this relationship sound familiar to all? We will continue to see this type of correlation until year end, until more risks are put on, until passive investment money starts to come through (which SFOT think is happening yet very slowly). SFOT is sitting long as he belongs to the dovish camp post FOMC, but only very slightly so. He shall leave the FED watching to expert bloggers on Macroman and other pros while taking cue from other asset classes as to where WTI can head directionally. He sees resistance at 81.90 which is the high of this contract this year and endeavours to take some profit close to the level, if he is right.

Risk on!

Its been 1 week since i had something in this blog, and this is not down to laziness i assure, nor is this down to absolute boredom in the market. Getting used to new sytem, new workflow and a new schedule is taking a little longer than expected. However, views on the market does not change and SFOT, like many others, are intrigued at the crazy turnaround in risk. Just 2 days ago, VIX was rallying above 30 and market sentiments were in risks off mode. Looks like Gold and a certain bullish Mr Buffet sent a signal to the rest of the market. Perhaps the big punters know something that i don't, as rates curve in US also steepened during the afternoon asset rally. A warning on the Fed from FT is worth reading, if you already haven't read it.

What does all these do for oil? For one, we have our weekly industry inventories data out this afternoon london time, ahead of the FOMC. API release late yesterday showed us a large draw in crude and a products build. More importantly, the draw is NOT in PADD5, which is rather bullish crude than anything. However, notice that the market has been more focused on products stocks recently than crude, which means cracks spreads will be a lead indicator for flat price, at least for a short while before FOMC. Moreover, the Brent contango remains very depressed, and by now, i am sure most market participants will know that Brent represents a better gauge for global crude inventories rather than WTI. In other words, the stock situation is still dire, though may not be as bad as 6 months ago, and SFOT suspects that beyond extraordinarily large numbers, crude stock will not be the main driver post DOEs. Refining margins have been under severe pressure of late, and SFOT will presume that refinery runs should go lower this week, particularly after cracks in distillates suffered terribly over the past few days. SFOT continues to be bearish distillates, and industry sources reveals that that part of the barrel is seeing no recovery in sight. One hint we can get is the freight rates of clean tankers from the baltic exchange, which continues to show real depressed rates in the products. These thoughts will be out of the window when it comes to this evening though, as everyone watches the Fed. For the short run, SFOT will watch Gold and the VIX as a gauge where the next move in Oil will be. Good luck

Brent refining margin
Brent dec09/dec10 spread

Baltic clean tanker index

Risk off everywhere but not in Oil

A risk off day here at mid-day london. Various bloggers have pointed out the downside risk so far this am, for eg, Gartman pointing out the triple top in EURJPY, Macroman on the eurusd put skew. EUR under pressure from low capital base banks getting hit big time, not to mention the 'stellar' performance of equities so far today in Europe. How does this translate into Oil? Given the financial aspect of this contract now, prices should be significantly lower. However, a surprise draw of 3.5mio bbl as reported by API yesterday is detering any major selloff, until the DOE report this afternoon. Consensus is for a build, which will be in line with the recent reports of refineries cutting runs. However, with the APIs reporting the draw in PADD 3, perhaps imports have also taken a nosedive and a big build may not materialize. Whatever the case, we need to look into the numbers with more caution, and SFOT would look at refinery utlization a litle more carefully, as refining margins seems to have strengthened with middle distillate cracks and Gasoline cracks leading the charge.

WTI refining margin

One thing of note, is this morning's news of a sabotage event on Iraq's export pipeline to Turkey. Any similar news last year would have sent timespread in Brent a lot stronger. However, it is not the case this time round, with timespreads in the prompt actually weakening since the news. Perhaps it is still a matter of too much floating storage globally. WTI prompt spreads, on the other hand, has strengthened a lot since early doors yesterday. This was before API numbers, and certainly before today's numbers in crude. Perhaps there is something the vast market knows nothing about but certain trade groups do. Whatever it is, SFOT has a sneaky feeling that we might be in for a Oil positive number. He is not short.

WTI prompt spread

Back!

It's a pleasure to be back in after a fantastic summer break. The trouble is, after too much fun, getting back into the market is tough. It is even tougher when market seems to be surprising many fellow bloggers consistently. For eg, the GBP, q3 earnings from the banks to Amazon.com. Therefore, as one might have expected, SFOT is treading this treacherous water very slowly and carefully. Any views he might have formed and has transformed into a trade of some sort in the past month is only being tried out rather than being a committed involvement. He shall attempt to write about his humble views in the coming days and weeks and again invites readers to share theirs, although it might be a slower process than he initially thought as he gets settled into his new role.
One of the the most amazing developement he has seen over the summer(other than the painful equity and GBP trade), has been the return of liquidity in the commodities market, in particular the oil sector. Readers will know SFOT indeed deals in this market by trade, and other markets by pure interest. However, he is in awe at how liquid the market in crude oil futures has become. Bid-ask spreads has come in to levels not seen since very early 2008 or 2007. This is clearly inviting speculators and it has indeed done so, with front month open interests back to the speculative height in 2008. This may not mean anything to most people in terms of p/l, however this would mean to potential specs in commodities, notably the CTA type funds to lever up again to participate in this market. Which leads to his first thoughts, should volatility in the low 30s be bought? Hopefully all had a great year, and better things to come ahead.

Summer break

SFOT has returned from a short break, but this will be his last post before taking a prolonged period of break until september, when he will reenter the market with a different employer. Good luck to all until then. Here's a chart which should speak by itself. The ride this summer would be a rough one.

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!