Crude Volatility

Volatility in the market for crude oil has been severe. Last Thursday oil traded in a 15% range finishing up 12%. The roller coaster continued on Friday-trading in a 7% range before finishing slightly down.

The chart of historical volatility shows expansion in volatility that has taken place since last September-and the volatility of volatility.

Aside from the macro-factors that are have elevated volatility across all markets, what else is driving the abnormally large swings in crude oil?

Reason #1:
There has been contango in the oil markets. This occurs when futures prices are higher than current prices. Oil markets are no stranger to contango, but the recent spreads are extreme. Currently, the April 2009 crude oil contract is $38.10– while the April 2010 crude contract, crude for delivery a year from now, is trading at $50.26. That’s a $12.16 spread between the two contracts. This presents an opportunity for major oil companies like Shell, Exxon and BP to store their physical oil on tankers and then sell the April 2010 contract to lock in the price at $50.26. Even factoring in the cost of storage, they come out better selling forward than selling at current market prices. This maneuvering causes additional volatility throughout the oil curve, as physical oil companies position themselves in the futures markets to take advantage of this contango.

Reason #2:

Contract rolls at major hedge funds, CTAs and ETFs. The U.S. Oil Fund LP, the world’s largest oil fund, is said to account for 22% of the outstanding front month contracts each month. When the front month contract approaches expiration, this gigantic ETF must sell its position in the expiring contract month and buy it back for the new front month.
Also, long term-trend following CTAs and hedge funds have been short the front months. When contract expiry approaches the fund has to roll their short position into the next month’s contract. Most CTAs and hedge funds do not have the ability nor the interest to take physical delivery of oil. Therefore, they will buy back their short position for the expiring contract and sell the new front month to re-establish a short position.

Last week’s spike in the front month March contract was not caused by the well publicized OPEC cuts and inventory numbers, but instead by the gigantic tug of war going on around key days of the month where funds, ETFs and oil companies are adjusting for the roll.

Note: Futures and Option trading involves risk, and may not be suitable for everyone. Trading should only be done with true risk capital. Past performance either actual or hypothetical is not indicative of future performance.

Sign of things to come…?

Oil momentum subsides after demand increase
Oil dips below $45 on profit-taking after recent rally on signs of renewed US crude demand

* Jake Neubacher, Associated Press Writer
* Friday February 27, 2009, 6:56 am EST

* Yahoo! Buzz
* Print

Related:

* United States Oil

VIENNA (AP) — Investor enthusiasm waned Friday, pulling oil prices lower to near $44 a barrel after a day-earlier surge in crude on evidence that protracted weak U.S. oil demand could be recovering.
Related Quotes
Symbol Price Change
USO 27.23 0.00
Chart for U.S. OIL FUND ETF
{“s” : “uso”,”k” : “c10,l10,p20,t10″,”o” : “”,”j” : “”}

Thursday’s bullish price increase turned neutral as the worst recession since the Great Depression overshadowed news of unexpectedly low supply increases.

Benchmark crude for April delivery fell 64 cents to $44.58 a barrel by midday in Europe on the New York Mercantile Exchange. The contract jumped $2.72 on Thursday to settle at $45.22.

Oil prices have rebounded from below $35 last week on early evidence that the drop in U.S. crude demand may be stabilizing. Government data earlier this week showed that gasoline demand was up 1.7 percent from the same period last year.

“Most of the strengthening demand development can be attributed to lower pump prices, which has encouraged more driving,” said Vienna’s JBC Energy.

The U.S. Energy Department on Wednesday said crude inventories rose 700,000 barrels for the week ended Feb. 20, less than the 3.5 million barrel build-up analysts expected. While inventories rose, the trend appears to be slowing. Last week the government reported inventories fell slightly.

“All we’ve had is doom and gloom on the economic front. Now we’re seeing U.S. demand up a little bit, and that’s convinced people to get back into the market,” said Gerard Rigby, an energy analyst with Fuel First Consulting in Sydney. “There was a little bit of overreaction, hence the profit-taking we’re seeing today.”

Dismal economic news reflecting the worst recession in decades still weighs on oil prices. The government reported Thursday that new jobless claims rose again and the number of Americans continuing to receive unemployment benefits has topped 5.1 million.

The Labor Department said first-time requests for unemployment benefits jumped to 667,000 from the previous week’s figure of 631,000.

“There’s probably too much bad economic news out there to let prices break out,” Rigby said.

OPEC will likely announce a production cut of about 1 million barrels a day at the group’s next meeting on March 15, adding to 4.2 million barrels a day of output reductions the 13-member cartel has pledged since September, Rigby said.

Leaders of the Organization of Petroleum Exporting Countries have said recently they would like oil to trade near $70 a barrel.

“If oil stays in the $40s, I think they’ll cut again, but if the market goes above $50, they may not do much,” Rigby said. “I think they’d like to see a minimum of $60.”

Oil prices fell 78 percent to $32.70 a barrel in December from a record $147.27 in July, and for the last couple months, crude has traded in a range between $35 and $45. Investors who use technical analysis to follow trading trends say oil may be poised the trade higher.

“The downtrend has been broken this week,” said Christoffer Molke-Leth, head of sales trading at Saxo Capital Markets in Singapore. “$41 to $48 could be the range next week.”

In other Nymex trading, gasoline futures fell 2 cents to $1.28 a gallon, while heating oil slid 1 cent to $1.29 a gallon. Natural gas for March delivery dropped 1 cent to $4.07 per 1,000 cubic feet.

Brent prices fell 48 cents to $46.03 on the ICE Futures exchange in London.

Associated Press writer Alex Kennedy in Singapore contributed to this report.

AND THIS ON SUGAR!
White Sugar Heads for 10th Weekly Gain in London on Less Supply
Email | Print | A A A

By M. Shankar

Feb. 27 (Bloomberg) — White sugar headed for a 10th consecutive weekly advance in London, the longest winning streak in three years, on concern supply is insufficient to meet demand.

India, the world’s second-biggest sugar maker after Brazil, may produce 16 million metric tons in the year ending Sept. 30, 2009, compared with 18 million tons forecast in January, S.L. Jain, director general of the Indian Sugar Mills Association, said in an interview today.

Smaller crops in India, Pakistan and China, along with reforms to the European Union sugar industry, will contribute to a 15.2 million-ton decline in production, broker Czarnikow Group Ltd. said in a report Feb. 25. Consumption is expected to rise 1.5 percent and the global sugar deficit is expected to total 10.4 million tons, the report said.

“We are seeing the magnitude of the deficit for 2008-2009 increasing and the possibility for the deficit to increase still further,” said Peter de Klerk, an analyst with Czarnikow in London. “Czarnikow sees a further potential downside to its forecast for India of 18.5 million tons raw value that translates into 17 million tons for white sugar,” he said.

White sugar for May delivery fell 10 cents to $399.50 a ton on London’s Liffe exchange as of 11 a.m. local time. A close at that price would translate into the longest winning weekly streak since February 2006. The sweetener advanced almost 1 percent last year, outperforming the 31 percent decline in the UBS Bloomberg CMCI Index of 26 raw materials.

Raw sugar for May delivery dropped 0.6 percent to 13.82 cents a pound on ICE Futures U.S. in New York.

Among other agricultural commodities, cocoa advanced 15 pounds, or 0.8 percent, to 1,800 pounds ($2,554) a ton. Stockpiles of the chocolate ingredient climbed 11 percent in two weeks, Liffe data show. Robusta coffee for May delivery gained $18, or 1.2 percent, to $1,554 a ton.

To contact the reporter on this story: M. Shankar in London at

DJ Australia 2009-10 Raw Sugar Output May Fall 6.4% To 4.4M Tons
1:26 AM, February 25, 2009

CANBERRA (Dow Jones)–Raw sugar production in Australia next fiscal year
could fall 6.4% to around 4.4 million metric tons from 4.7 million tons this
year ending June 30, lobby Canegrowers Chief Executive Ian Ballantyne told an
industry briefing Wednesday.

The sweetener will be produced from a sugar cane crop estimated to contract
to 31 million tons next year in Queensland and northern New South Wales from
more than 33 million tons this year, he said. Most of the crop is crushed
August through October.

The expected contraction in the crush reflects the impact of flood damage in
northern Queensland, he said.

With several months of continued rain likely ahead, it would be premature to
be definitive about the impact of the floods, so any estimates at this stage
are tentative, Ballantyne said through a spokeswoman.

“While the outlook has been damped by the flood and it would have a dramatic
influence over the production and profitability of individual growers, overall
what we will see (broadly) is a smaller, more compact, resilient industry with
a more positive outlook in the short term,” he added.

According to figures supplied by Queensland Sugar Ltd., which markets most of
the crop under voluntary collective arrangements, in a year with a production
of 4.5 million tons, Australian demand will account for 20%, New Zealand 5.5%,
North America 4.5% and east Asia 70%.

The government’s chief commodities forecaster, the Australian Bureau of
Agricultural and Resource Economics, is scheduled to update its sugar
production and export forecasts next Tuesday.

-By Ray Brindal, Dow Jones Newswires; 612-6208-0902; ray.brindal@dowjones.com

China’s Sugar Output to Fall 13% This Year on Weather, Yields
Email | Print | A A A

By William Bi

Feb. 19 (Bloomberg) — Sugar output in China, the world’s third-largest producer, may fall 13 percent this year, said the head of an industry group, as cold weather and lower fertilizer use cuts yields.

Production will decline by 2 million metric tons to 12.84 million tons from a record 14.84 million tons last year, Jia Zhiren, chairman of the China Sugar Association, forecast today at a conference in Nanning.

Prices in China have gained 24 percent this year on expectations of lower output and as the government began purchasing sugar in an effort to mop up a surplus caused by over-planting.

“Output will fall significantly,” Jia said. “In a year when output drops, it often drops more” than expectations, he said. The output decline compares with the 13.04 million ton median estimate of five analysts surveyed by Bloomberg News earlier this week.

Freezing temperatures and reduced fertilizer use may cut output in Guangxi province, China’s top producer of the sweetener, by 19 percent this year, a regional industry executive said today.

Output may plunge to 7.6 million tons in the region’s crushing season, compared with 9.4 million tons last year, Nong Guang, chairman of the Guangxi Sugar Association, told the conference in Nanning today.

“If it’s really 7.6 million tons, that’s a serious reduction,” Jocelyn Yang, analyst at Dahua Futures Co., said in an interview. Still, “the market may not buy that” Guangxi’s output would drop that much, Yang said.

Rising Stocks

A fall in output comes after gains in recent years, which have outpaced demand growth, leading to a build-up in stockpiles of more than 3 million tons, said Chen Jingqun, an analyst at Guangxi Sugar Net.

“Before growth was just taken for granted, but now there’s a slowdown in economic growth,” said the sugar association’s Jia.

As of Feb. 10, sugar sales in Guangxi have fallen 12 percent from last year to 1.8 million tons, said Nong.

The worsening recession has reduced the amount of sugar used by the food-processing industry for exports and domestic consumption, said Zhao Lihua, a director at the National Development and Reform Commission. China won’t import much sweetener this year because of higher global prices, Zhao said.

China will allow domestic prices of sugar to gain further to boost incomes for farmers and the cane industry, said Jiao Nianmin, vice president of Nanhua Sugar Group Co., in an interview today.

‘Reasonable Incomes’

“The government wants reasonable incomes for farmers and crushers, so it won’t let prices fall,” said Jiao. “But it doesn’t want the gains to be too drastic.”

It is “unreasonable” for prices to fall below 3,500 yuan ($512) a ton, said Yang Daoxi, vice governor of Guangxi province.

White sugar for September delivery on the Zhengzhou Commodity Exchange fell 0.8 percent to 3,544 yuan a ton today. Cash prices in Guangxi are about 3,200 yuan to 3,300 yuan, the break-even point for the average crusher, Yang said.

“The government will sell reserves if deemed necessary,” said Jiao, who is also vice chairman of the China Sugar Association. A rise to 4,000 yuan a ton may trigger a reserve sale, said Dahua Futures’ Yang.

China meets the bulk of its needs domestically and imports around 400,000 tons of raw sugar every year from Cuba under a decades-old trade agreement.

To contact the reporter on this story: William Bi in Nanning at wbi@bloomberg.net

DJ MARKET TALK: Liffe Sugar Mixed, Underpinned By Supply Concern
6:16 AM, February 13, 2009

1116 GMT [Dow Jones]–Liffe white sugar futures trade mixed, supported by
supply concerns. “The 2009-2010 timeframe will be a supply/demand deficit year
and if any additional supply problems due to weather creep up in India, China
or Brazil, it could really set sugar on fire,” says Shawn Hackett of Hackett
Financial Advisors. March -$1.40, or 0.4%, at $386.00/ton. New York’s
most-active raw sugar futures +6 points, or 0.5%, at 13.91 cents a pound. (SMC)DJ MARKET TALK: Liffe Coffee Up, Bullish Supply Outlook
6:21 AM, February 13, 2009

1121 GMT [Dow Jones] Liffe robusta coffee futures trade higher benefitting
from a bullish supply outlook. An expected deficit of somewhere between 7 to 12
million bags in the 2009/2010 crop year is supporting the market, says Shawn
Hackett of Hackett Financial Advisors. “Producing countries will only have
around 17 million bags in reserve,” says Hackett. “This sets up for a new
record low in ending stocks in producing countries at around 5 million bags.”
Adds due to Brazil, Vietnam and Peru all being in their ‘off’ year of the
biennial crop cycle, global production could “fall anywhere from 10 to 15
million bags from this year’s 135 million bags number to between 120 and 125
million bags.” March robusta +$20, or 1.3%, at $1,595/ton. New York’s
most-active arabica futures +85 points, or 0.8%, at $1.1300 a pound. (SMC)
Call us in London: 44 20 7842 9415
E-mail: londonsofts@dowjones.com

(END) Dow Jones Newswires

Chart of the Week

For those that are become increasingly uncomfortable plowing money into the US dollar for lack of a safer parking place, is it time for gold to make its run? Will gold take over as the ultimate safe haven trade until there is more visibility for investors on the probable outcomes in the global economy.

Remember, when it all it the fan in August of 2007, gold began its surge from $640 to $1032 over the course of seven months. A similar extension now would take gold up to $1100 by April.

BEIJING (Dow Jones)–China’s wheat crop could be under serious threat if
major wheat producing regions don’t get sufficient rainfall in the next two
weeks, a senior government official said Tuesday.

“The crop will face a severe situation if there is no effective rainfall in
the next 15 days,” making the government’s drought-relief work “extremely
hard”, said E Jingping, secretary general of the State Flood Control and
Drought Relief Headquarters.

Speaking at a press conference, Jingping said the country’s meteorological
department has said it expects only limited rainfall in the rest of February.

The ongoing drought, along with more demand following the Lunar New Year
holidays, has already pushed up prices in some of China’s wheat producing
regions.

Wheat prices in Dengfeng in Henan province were around CNY1,860/ton in the
week to Monday, up CNY30/ton in the previous week.

Prices in Yuncheng in Shanxi province have risen to around CNY1,880/ton, up
CNY40-CNY50.

However, the drought is unlikely to cause a big rise in wheat prices this
year as ample stocks from earlier harvests, mostly kept in state reserves, will
help ease any supply tightness, said Hai Yang, an analyst at Zhengzhou Esunny
Information & Technology Co.

Jingping also said prices won’t be affected much by the drought as the
government is sparing no effort to compensate for the lack of rainfall.

“Summer grain output (this year) won’t be greatly (affected) as long as the
government’s drought-relief measures are effective and the weather doesn’t
deteriorate,” he said.

Much of the crop could be irrigated by April, minimizing damage, he said,
adding summer grain output accounts for less than 30% of the country’s total
annual grain output.

Most wheat affected by the drought will be irrigated within 10 days, with
daily irrigation expected to cover 600,000 hectares, he said.

The area affected by drought in China’s major wheat producing regions has
shrunk by 15% as of Monday, thanks to some rains and accelerated irrigation,
according to the office.

But about 8.70 million hectares in eight provinces are still affected, down
from Saturday’s peak of 10.23 million hectares, the office said in a statement
published on its website.

Wheat areas under severe drought conditions have fallen by 1.02 million
hectares to 2.60 million hectares, it said.

-Zheng Xiaolu contributed to this story, Dow Jones Newswires; 8610 6588-5848;
tracy.zheng@dowjones.com

(END) Dow Jones Newswires

02-10-09 0253ET

Copyright (c) 2009 Dow Jones & Company, Inc.

02:53 021009

Corn Rally Stalls Before USDA Crop Estimate Report; Soybeans Up
Email | Print | A A A

By Jae Hur

Feb. 10 (Bloomberg) — Corn declined as investors slowed their purchases before publication of new crop estimates by the U.S. government today. Soybeans climbed for a fifth day, while wheat was little changed.

Corn gained 5.4 percent in the previous three days and soybeans advanced 5.9 percent in the previous four sessions on speculation the U.S. Department of Agriculture will lower its world output estimate after dry weather damaged crops in Argentina and Brazil.

“It’s a kind of position adjustment ahead of the USDA report,” Hiroyuki Kikukawa, general manager of research at IDO Securities Co. in Tokyo, said today.

Corn for March delivery fell as much as 1.1 percent to $3.7325 a bushel on the Chicago Board of Trade and traded at $3.76 as of 2:13 p.m. Singapore time. Futures are down 53 percent from a record $7.9925 on June 27.

Soybeans for March delivery were 0.4 percent higher at $10.06 a bushel after earlier trading as low as $9.985. Futures are down 39 percent from a record $16.3675 on July 3.

Smaller soybean and corn crops may be forecast for Argentina and Brazil, the biggest exporters after the U.S., according to a Bloomberg News survey last week. Smaller crops in South America may boost demand for U.S. supplies.

“I don’t expect a big surprise in today’s USDA report,” Kikukawa said.

While the report is likely to be “supportive” for soybeans, corn may trade between $3.50 and $4.00 a bushel pending a survey due next month on U.S. farmers’ planting intentions for the coming year, he said.

Shipping Costs

Still, recent jumps in shipping costs may slow interest among Asian importers, including South Korea and Japan, said Tomokazu Amano, research team chief at Mitsubishi Corp. Futures & Securities Ltd. in Tokyo.

The Baltic Dry Index, a measure of shipping costs for commodities, rose for a 15th consecutive session on demand to ship iron ore to China and increased port congestion. The index jumped 11 percent yesterday to 1,815 points, according to the Baltic Exchange. The gauge has more than doubled this year and is on its longest winning streak since 2007.

Wheat for March delivery was unchanged at $5.65 a bushel after gaining 1.4 percent yesterday. Prices have tumbled 58 percent from a record in late February 2008.

China today reduced its estimate of the winter wheat crop affected by the nation’s worst drought in 50 years.

About 130 million mu (8.7 million hectares) of wheat in the eight major producing provinces are affected, the Office of State Flood Control and Drought Relief Headquarters said today. The office had estimated 143 million mu on Feb. 6.

To contact the reporter on this story: Jae Hur in Singapore at jhur1@bloomberg.net

Sugar Rises in N.Y. as U.S. Economy Shrinks Less Than Forecast
Email | Print | A A A

By Yi Tian

Jan. 30 (Bloomberg) — Sugar prices rose, ending a three- day slide and capping the first monthly gain since September after the government said the U.S. economy shrank less than forecast and amid speculation that India’s imports will jump.

The U.S. gross domestic product contracted at an annual pace of 3.8 percent in the fourth quarter, the Commerce Department reported. That’s less than the 5.5 percent median estimate of 79 economists surveyed by Bloomberg News. The Reuters/Jefferies CRB Index of 19 raw materials jumped as much as 1.4 percent. Industry and government officials in India said import barriers fell.

“The GDP number wasn’t as bad as expected and that bumped commodities a little bit,” said Patrick Donnelly, a broker at Peak Trading Group in Chicago.

Raw-sugar futures for March delivery rose 0.08 cent, or 0.6 percent, to 12.67 cents a pound on ICE Futures U.S. in New York. The price fell 0.2 percent this week, after five straight gains.

The most-active contract advanced 7.3 percent this month partly on speculation that prices would rise if India, the world’s second-largest sugar producer, becomes a net importer this year for the first time since 2005.

“India may well need to import as much as 3 million metric tons of sugar this calendar year to satisfy local demand,” Fortis Bank and VM Group said today in a report.

Because of light volume, sugar’s gains today weren’t “a good sign of strength,” said Nicholas S. Hayman, a senior trader at LaSalle Futures Group in Chicago. “No one trusts this rally. Funds are yet to aggressively buy into this market.”

Biggest Gain in Week

Sugar rose as much as 2.8 percent earlier today, the biggest advance in a week, before paring gains. It lost 2.6 percent in the three sessions through yesterday on concern that Indian processors won’t increase imports as much as anticipated.

Prices may continue the downturn and fall to 12.5 cents by the middle of next week because “there’s simply no demand,” Hayman said.

India permitted duty free imports of the sweetener for sale domestically as output slumps, according to Vinay Kumar, managing director of the National Federation of Cooperative Sugar Factories Ltd. The trade ministry may announce the new rules in a day or two, Kumar said today in a telephone interview in Mumbai.

To contact the reporter on this story: Yi Tian in New York at ytian8@bloomberg.net.
Last Updated: January 30, 2009 16:37 EST