Reduced volatility brings energy hedging

June 25, 2015 09:21 AM

Another day, another deadline breached as the Greek scenario plays out. The creditors for Greece have submitted a counter proposal to the Greeks through the European Union and The International Monetary Fund (IMF) that is asking for further compromise from the troubled economy. It appears that nothing will be done this week as the hard default deadline looms next Tuesday.  With Greece being such a small economy, the issue is really more symbolic than fundamental to the success of the EU.  

As negotiations continue, the market remains at attention with every small development. What makes this Greek scenario different than the litany of previous crisis’s is the fact that the Greeks are now run be a more leftist government that has made some very significant promises of less austerity to its people in winning their trust and the seat at the head of the state just last year. The new regime may be more ready to 'dig the heels in' than previous government’s which could become problematic for the negotiations as well a possibly change the outcome. Stay tuned. 

Inventories in crude yesterday continued to show the larger than expected draws in with the refined products showing very modest larger builds. The inventory picture illustrated by this data paints a very different picture than it did just two months ago. Recently, the balance shifted from more crude on hand and less refined products 180 degrees to now five weeks in a row of less crude and more refined material. It would seem that the cutbacks in rigs online in the United States during the past six months are starting to have a more pronounced effect. 

The crude oil options market is starting to pick up form a hedge perspective as the past week has seen some major downside protections put into place. With the recent sideways price action driving option premiums lower due to lack of volatility, the time is right for those in need of hedges against lower pricing to put those positions on at a relatively effective price. These pauses in the price action will eventually become a breakout one way or the other. Producers should be hedging (and currently seem to be) for the downside breakout while consumers should be looking to hedge against further corrections higher. 

Natural gas is showing signs of life ahead of the inventory data today at 9:30 central time. With dialed down expectation of only 72 BCF, any lower reading should spark a nice rally just a day before July options expiration. This could be a very cost effective low risk way to establish a long position with cheap call premium that could be converted to a future if the forthcoming data were to support a substantially higher move. 

About the Author

Tory Enerson is a senior market strategist with the Zaner Group in Chicago, an Independent Introducing Broker. He has been in the futures industry for over 20 years. Beginning his career at the CBOT in 1990, Enerson worked his way up through the industry when he became a member of the CBOT in 1998 and traded for over a decade before beginning to work with clients as a market strategist.