[drew]

I agree, it 'feels' different. I am wary as of late, at least with respect to energy, perhaps because the cat is out of the bag. Last year I did well because no one beleived oil would move the way it did. I stayed the course in part because of the many 'certainties' postulated on this site.

Drew

[MrBill]

RE SPR Good points. China has indicated they would like to build their own SPR using their domestic production, instead of paying for it on world markets. Technically, this does not make much sense, as China is a net importer of crude to refine, but at least that is what they said last year. I think importers are wary of building reserves at $60-65 if in fact we slip back into a $50-55 range. We are afterall talking about 60-70 days of usage so the amounts of dosh are not inconsequential.

On a side note, I see that Japan's petroleum reserves have falled below 60 days of storage capacity for the first time in 30-years. Significant. If there were a disruption next year, they would far less willing or even able to accommodate SPR withdrawls if there own cover ratio is down to bar cupboards. That may explain the volatility you mentioned? More on that later.

Bush's 2007 budget does not contain the cash to meet his obligation to top up the SPR to one billion barrels. Therefore, this is just another unfunded, future liability. Nice to have, but who is going to pay for it. With some GOM production only coming back on line this Spring/Summer, and estimates that up to 5% of oil & gas production capacity may be lost, we are obviously not in good shape for another repeat of last summer's price volatility. Demand at $60-65 a barrel has not modified like some expected it would anywhere north of $50 for an extended period of time. Look for nasty supply shocks to come at anytime. Hard to go home short on a Friday night, but yesterday, saw a very weak close. Under $60 in the Brent and WTI not much better. Will likely touch $60 on Monday or Tuesday.

RE volatility. The rally started on DEC 28th when most trader's books were closed for the year and many had gone home for holidays. That is an easy time to push the market around without too much resistance. Then based on the performance of commodities in 2005, funds came into 2006 with loads of fresh cash to invest. Along with Iran and Nigeria this was the main driver behind the year's early rally. Now the fundamentals are reasserting themselves. The reality is that there is enough crude to supply existing needs, and short of a supply disruption later in the year, geoploitical risks are not enough to maintain prices at these levels. An event, yes, merely a risk, no.

However, no matter how high funds push it, their ability to maintain high prices depends on fresh money. Once they stop buying, the commercials start selling to hedge their production needs. If there are no new buyers, the price goes down, until there are. If those same funds who were buyers start to cut their longs, afterall they are using leverage and it is early in the year, then this adds fresh selling to a soft market. We see it in the oil market this year, but also the metals, and especially in the commodities.

I do not believe that the funds will successfully push wheat, corn and soybeans around like gold or aluminum. The real fundamentals of supply and demand are too strong in the softs and the commercials players have their elevator and field agents out in the country gathering information, which the funds do not have access too. I think the commodity players are going to teach the funds a lesson this year. Especially as prices are already so high. It is not a natural carry trade or such an obvious buy up at these levels as when Fed funds were 1%, the dollar was weak and commodity prices were 75% weaker than they are today. Plus there are more funds in the market to neutralize one another. 2006 is just another year than 2004 or 2005.

Well, it is Saturday. No reason tio hang around. Thanks for your comments and have a great weekend. Cheers.

[SeattleGuy]

Does anyone here have experience with OPTIONS on futures contracts for crude oil? I am trying to figure out two things:

(1) What is the liquidity of CL options for months that are 6-9 months out? (E.g., If I buy a call option now on December CL, how easy will it be for me to sell that option in May?)

(2) Realistically, what can I expect for the relationship between the price of the near month futures contract and value of an option on a contract for a month 6-9 months in the future. (For example, if I purchase a call option now on a December CL contract, and the price of crude spikes in June, how much of that spike is expected to show up in the value of the December option?)

These questions are separate from the question of what crude oil prices are likely to do. I'm really just trying to understand the dynamics of CL options. I'd be grateful for any insight you have to offer.

[Daryl]

$this->bbcode_second_pass_quote('SeattleGuy', 'D')oes anyone here have experience with OPTIONS on futures contracts for crude oil? I am trying to figure out two things:

(1) What is the liquidity of CL options for months that are 6-9 months out? (E.g., If I buy a call option now on December CL, how easy will it be for me to sell that option in May?)

(2) Realistically, what can I expect for the relationship between the price of the near month futures contract and value of an option on a contract for a month 6-9 months in the future. (For example, if I purchase a call option now on a December CL contract, and the price of crude spikes in June, how much of that spike is expected to show up in the value of the December option?)

These questions are separate from the question of what crude oil prices are likely to do. I'm really just trying to understand the dynamics of CL options. I'd be grateful for any insight you have to offer.

[MrBill]

I am not an expert at pricing options or running an options book. I will try to clarify a few points. In order to trade options you have to know your greeks and how they affect the price of an option.

Delta - The expected change in the value of an option, per dollar change in the market price of the underlying asset. An at the money (ATM) option as a delta of 50%. That means from ATM if the price goes up 1% the delta will go up 0.50%. Out of the money (OTM) options have a dleta of less than 50%. In the money (ITM) options have a delta of more than 50%.

Deep ITM options will exhibit a change in the value of the option to a change in the underlying future contract of almost one:one, but time value also plays a part and if you are trying to sell an option, no one wants to buy something that in all likelyhood will expire worthless (i.e. there must be a mathmetical chance at least that the option offers some value to the holder.

Gamma - Measures the amount that delta will change for a given price change in the underlying security.

Vega - the amount an option price should change to a 1% change in implied volatility.

I quickly priced some various options in the May for your guide, so you can see the relationship between

a) the futures price $63.50
b) the strike price
c) delta
d) gamma
e) vega
f) volatility 26%

and g) the value of the call option.

------------------------------------------------------------------------------------
a) the futures price $63.50
b) the strike price $63.50 ATM
c) delta 0.5214*
d) gamma 0.0482
e) vega 0.1248
f) volatility 26%

and g) the value of the call option $3.24/1000 barrels

* do not be confused, the ATM delta for the call is +0.52% while the ATM delta for the put is -0.47%. Consider the 1% difference the bid/offer spread if you will.

------------------------------------------------------------------------------------
a) the futures price $63.50
b) the strike price $65.00 OTM
c) delta 0.4496
d) gamma 0.0479
e) vega 0.1240
f) volatility 26%

and g) the value of the call option $2.59/1000 barrels

------------------------------------------------------------------------------------
a) the futures price $63.50
b) the strike price $70.00 OTM
c) delta 0.2429
d) gamma 0.0380
e) vega 0.0994
f) volatility 26%

and g) the value of the call option $1.10/1000 barrels

------------------------------------------------------------------------------------

So you see that the farther out of the money the lower the delta and therefore the less the option price moves in relationship to the price of the underlying futures. This is simply because time value is at work. If the price moves up $5 and there is still 2-months time value left in the option, then there is a mathmetical probability that the price might also move down $5 before maturity of the option. However, an option OTM or ITM close to maturity is likely to stay OTM or ITM with some degree of certainty.

It is complicated stuff, so hopefully I have not made it more so? Sorry. Markets moving all over here and have to keep it short. Cheers.

[MrBill]

$60 proved no more than a round number to shoot for and provided very little support just as it did not provide much resistance on the way up last year either. However, there are probably some option holders that would like to see expiry below $60.

Where to from here? Well, the same technical commentaries that were calling for a break of $70.85 during the rally are now calling for $55, so you tell me?

We are seeing a bit of a bounce here in the heating oil and unleaded this morning, but this may just be shorts taking profit ahead of today's DOE inventory numbers, which most expect to see builds in the crude and the unleaded and only slight draws in the distillates. For my part, I think buying in the middle distillates has been for diesel fuel, not heating oil. Never the less, with negative crack margins, refineries will likely want to take down time for maintenance ahead of the summer driving season and of course any interuptions due to hurricanes later next summer/autumn. This profit taking may lead to a slight correction higher, but probably only enough to take us out of oversold territory in the crude.

Today's forecasts are

Crude +1.0 +1.9 mio to 322 mio vs. 281 mio bbls 3-yr ave
Distillates -1.0 +0.2 mio to 135 mio vs. 110 mio bbls 3-yr ave
Unleaded +0.7 +1.7 mio to 225 mio vs. 213 mio bbls 3-yr ave
Runs -0.5% unch'd to 85.3% vs. 91.7% last year

and tomorrow's nat gas draw is forecasted

-80 -90 bcf to unch'd vs. -109 bcf last year and -150 -160 bcf 5-yr ave

Not alot of support coming out of those numbers, but those numbers are already factored into today's price, so look for any surprises, such as a regression to the mean from the unusually large builds we have been seeing or a drop off in imports. Dunno, maybe one last hurrah to the downside and then use any excuse to buy? Probably not, that is just my contrarian streak coming out.

[Silverharp]

I would not take on any new (long) positions until the FED has its way with the commodity markets, I believe the fed can only stop raising rates when both oil and gold are seen to be falling. It appears the stock market maybe due to fall over in March & April and since the energy stocks are keeping up the averages they might lead the way down, if this pans out then April may maybe a good time to go long oil, as the market seems to be obsessed with inventory levels it will be interesting to see where oil goes by April. As there is a new long term cycle in the Atlantic the odds are for more hurricanes and colder winters in the US although the US appeared to doge a bullet this winter. It really depends what the funds to this year either they will collectively keep oil high all year or the fed will pull out all the stops to force them to sell. Pick a good entry point or stay away

[joewp]

I've noticed something strange the last day or two, perhaps Mr. Bill or someone can explain this. The spread between the March and April contracts has increased substantially. This seems to be the opposite of what I've noticed before, that the spread tightens as expiration approaches. This time, the spread has shot up from around a dollar to over a $1.50 just in the last two days!

Is March oil demand done and April is being bought for gasoline making?

[MrBill]

$this->bbcode_second_pass_quote('joewp', 'I')'ve noticed something strange the last day or two, perhaps Mr. Bill or someone can explain this. The spread between the March and April contracts has increased substantially. This seems to be the opposite of what I've noticed before, that the spread tightens as expiration approaches. This time, the spread has shot up from around a dollar to over a $1.50 just in the last two days!

Is March oil demand done and April is being bought for gasoline making?

[MrBill]

No surprises from the nat gas storage report. A draw of -102 bcf which was well within everyone's expectations and a weather report that puts above and below average weather in the next few weeks at even odds.

Unleaded is up 5 cents (210 pts. on a BOE) vs. 2 cents (84 boe) in the heating oil and 75 cents in the April WTI. Brent is trading at -125 against April WTI, which is quite narrow when you're used to seeing it between -150-200? IPE Gasoil is not keeping up to the rally in the NYMEX products.

Spent the day buying dips quite successfully. Also at -125 been a buyer of WTI against Brent. However, I am very nervous. Quick to take profit everytime the rally stalls. Mindfull that any strength can be easily met with aggressive technical selling from the trend followers. So cautiously seeing a bottom on the hourly charts here and some crack spread tightening lead by the unleaded. April is finally outperforming March. Maybe this is just a dead cat bounce after yesterday's late routing in NY time?

Dunno, too early to call a correction other than to remove ourselves from oversold territory, and Iran was back in the news today as France, not America, actually publicy accused Iran of having a clandestine nuclear weapon's program and calling for sanctions. China was the moderating influence on events however, calling for Russia and Iran to find a diplomatic solution. Until February 20th we will not know very much more.

Venezuela, always the hawk, thinks OPEC is over producing by at least 1 mbpd and should cut production (officially) at their next soiree in March. For once, I probably agree with VZL. With planned maintenance and healthy product inventories, now is a good time for refiners to prepare for summer and for OPEC to cut back or risk flooding crude markets at the wrong time. If we see anywhere near $50 OPEC may decide to cut back more than we need to see us through the year, so better to manage everyone's expectations accordingly. $55-60 would be a nice range ahead of their next meeting sans an Iran event.

Just in case, I have bought some $65 June calls. They were cheap and they let me sleep at night. Hopefully by June I will have dug myself out of my unleaded long gone wrong? ; - )

[cube]

Just a suggestion:

Should we let this thread die and create a new one?

Trader's Corner 2006

[joewp]

$this->bbcode_second_pass_quote('MrBill', '
')there are no hard or fast rules when it comes to contract expiry. the spread will tend to tighten if physical supplies are in demand and some commercials intend to take delivery of the futures on expiry. however,at the moment there is a glut of crude and products and no storage, so the nearby is at a deep discount. however, in the march/april unleaded for example, we have seen the spread tighten from -1650 to -1050 as of yesterday. I assume this is because -1650 was close to full carry and therefore was demand to buy march and deliver agasint april or at least use it as a free option in case crack spreads widened?

[MrBill]

$this->bbcode_second_pass_quote('cube', 'J')ust a suggestion:

Should we let this thread die and create a new one?

Trader's Corner 2006

[miniTAX]

$this->bbcode_second_pass_quote('cube', 'J')ust a suggestion:
Should we let this thread die and create a new one?

[MrBill]

$this->bbcode_second_pass_quote('miniTAX', '')$this->bbcode_second_pass_quote('cube', 'J')ust a suggestion:
Should we let this thread die and create a new one?

[miniTAX]

Thank you so much for your knowledgeable reply.
I asked about M3 because here, in France, there is a quasi-hoax circulating and gathering momentum saying that the conjunction of the Iranian Oil Bourse (IOB) and the suppression of M3 from March on will lead to a cataclysmic crash like in 1929. In many forums (I must add not financial but general discussion), I have destroyed this rumors but I'd like to have more points from a finance insider like you. Do you ever have heard of this "cataclysmic conjuction" around you (except from PO ) ? And do you think that with all theses rumors, it would have a chance of self-realizing in the financial community ?

Finance apart, I would think that Chairmain Greenspan would be nut to make the M3 publications stopped around the same date of the IOB opening, if it ever had any economical implication.
And just like you, as a trader, M3 is for me as useful as teeth for eating soups

[miniTAX]

Dear Mr Bill,
Here is the article I was talking about :
http://www.tiesweb.org/dialogues/incorr ... eri56.php3

May I let you read it so you can give me your feelings about it ?
Many thanks in advance.

[Daryl]

$this->bbcode_second_pass_quote('miniTAX', 'D')ear Mr Bill,
Here is the article I was talking about :
http://www.tiesweb.org/dialogues/incorr ... eri56.php3

May I let you read it so you can give me your feelings about it ?
Many thanks in advance.

[seahorse2]

The significance of the reports like the one linked by Minitax and the comments by Ron Paul that the dollar is not any date of a collapse, but that people are losing faith in the credit of the United States. Ultimately, value is determined by people's faith in something. Whether we talk about gold, dollars, or real estate, the ultimate "value" or worth of these objects is that which people collectively place in them. The "full faith and credit" of the United States dollar means nothing if the world loses faith in the credit of the United State's.

What these articles and comments by Ron Paul show are that people are losing "faith" in the dollar and the United States "credit." That growing loss of faith in the United States credit is more significant than the prediction that in March there's an "80% chance" of a collapse. However, I will say that if enough people believe that there will be a collapse in March, or any predicted date, it could become a self-fulfilling prophecy - that's why there are periodically runs on banks.

Until the United States does something to address the legitimate concerns about its fiscal imbalances, people will continue to lose faith in its ability to sustain itself, and eventually, all these dire predictions about the US economy and dollar will come to pass. How quickly? Who knows.

[miniTAX]

Thank you Daryl & seahorse2 for your kind attention and your comments.
Maybe I will let Mr Bill (if he had some spare time) has his say about the link before giving my impressions.
SYL.