Petroleum
Hedging recommendations
Consumers: Despite the notable slowdown in the pace global economic growth, the oil market
remains tight as US and EU sanctions against Iran have sharply reduced Iranian crude oil exports.
Further, as tensions between Iran and the West escalate, the risk to crude oil prices is becoming
increasingly skewed to the upside. Although we expect Brent crude oil prices to remain largely
range-bound in 2013, we expect the backwardation in the Brent forward curve to persist,
increasing the attractiveness of consumer hedging by buying oil forward.
Refiners: US refining margins remain exceptionally strong as WTI prices remain weak relative to
other crude oils such as Brent and LLS. While forward margins imply a narrowing of the WTIBrent
spread, we continue to expect longer-dated spreads to narrow even further than what the
market has currently priced in. Consequently, we see current long-dated refinery margins as a
selling opportunity for refinery hedgers. Further, for 4Q12 and beyond, we believe that crude will
be the bottleneck in the system, rather than refining; this would squeeze margins from the crude
side through a renewed spike in backwardation, suggesting refiners also look for potential
timespread hedges. This dynamic could become particularly severe should the tension between
Iran and the West lead to a more severe shortage of crude oil.
Producers: While we expect supply-demand balances to remain cyclically tight, making producer
hedging less attractive, ongoing uncertainties over the European debt situation and the US fiscal
cliff still pose downside risks. Given that positive put skew is still present in the market, we would
recommend put spread structures for oil producers, where incremental downside protection can
be obtained against the impact on crude oil prices of a moderate slowdown in economic activity
by forgoing protection against a more severe downturn. This would be most beneficial to
producers that are able to lower production in the event of a severe decline in crude oil prices.
Trading recommendations
Long Jun-13 NYMEX WTI crude vs. short Jun-13 ICE Brent crude (initial value -
$12.33/bbl, current loss $3.57/bbl)
Long S&P GSCI™-style rolling Brent crude oil futures position including a loss of
10.77% from rolling a long September 2012 NYMEX WTI Crude Oil position on 21-Aug-
12 (initial value 1174.26, current loss -10.03%)