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.