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