Last week the Mexican government announced it had spent $800 million dollars buying crude puts in the $63 to $65 range. When triple digit crude prices appear to be on the doorstep, why did they place this hedge? The simple answer is that they are protecting their fiscal budget.
This is the proper and good use of hedging. Not to make additional profit, but to ensure an already budgeted profit.
Energy traders with a conservative risk tolerance should take heed of this action and look for opportunities to be sellers of put options, as there will be plenty of market participants similar to the Mexican government looking to buy options.
Although we may continue to see more pull back in energy futures as December winds down, especially with refiners looking to sell inventories to avoid ad valor em taxes and traders locking in year end profits. The outlook for 2011 is for energy to be well supported on any pullbacks allowing put option sellers to enjoy a profitable premium income stream.
Saturday, December 18, 2010
Sunday, December 12, 2010
The IEA and 78.6% Fibonacci
For the past several weeks the news has all been energy positive with big houses and OPEC raising energy demand forecasts for 2011. The International Energy Association (IEA), however, casts a different light on their forecast. Traders will do well to take heed.
The IEA released a tempered outlook for energy demand in 2011. They are foreseeing slower growth in China leading to a lower demand. Crude prices are being pegged to a range of $75 to $85. A sharp contrast to OPEC's $85 to $95 range. And even larger contrast to Goldman Sach's 2011 average price of $105.
The hope of a US economic recovery along with the Fed pumping the US economy with liquidity through a $600 billion bond purchasing strategy, has given traders the green light to add to long positions, driving crude past $90.
This has allowed traders to retrace the ever important 78.6% retracement level. A technical pull back is likely off this closely watched Fibonacci number. However, ultimately traders will need to heed any interest rate hikes coming out of China that will slow their economy and ultimately energy demand.
The IEA released a tempered outlook for energy demand in 2011. They are foreseeing slower growth in China leading to a lower demand. Crude prices are being pegged to a range of $75 to $85. A sharp contrast to OPEC's $85 to $95 range. And even larger contrast to Goldman Sach's 2011 average price of $105.
The hope of a US economic recovery along with the Fed pumping the US economy with liquidity through a $600 billion bond purchasing strategy, has given traders the green light to add to long positions, driving crude past $90.
This has allowed traders to retrace the ever important 78.6% retracement level. A technical pull back is likely off this closely watched Fibonacci number. However, ultimately traders will need to heed any interest rate hikes coming out of China that will slow their economy and ultimately energy demand.
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