Tag: trading copper

Energy Educational Homepage

Benchmarks play a crucial role in the pricing of crude oil around the world. Most crude oil streams price as a spread differential to a global benchmark. The differential of these crudes is determined according to the basis differential which include both quality and location basis. Light sweet crude grades have a tendency to trade at a premium over the heavy sour crude grades.

The rise in importance of the U.S. crude market comes at a challenging time for other crude oil markets globally. The catalyst for this transformation was the sharp rise in U.S. oil production and the lifting of the export ban on U.S. crude that occurred at the end of 2015. Moreover, a number of new terminals are in the process of being built along the U.S. Gulf Coast to handle the rising number of ships arriving to load crude oil destined for the international markets.

WTI in Asia region

The WTI Crude Oil benchmark continues to increase its presence in a growing role throughout the Asia region. Crude oil can be sold via spot or term sale. It has a tendency to be sold on a fixed price basis. The most well-known oil benchmarks are WTI, Brent and Dubai. The WTI benchmark price is based on a blended series of crude oil streams produced in the U.S. mid-continent. It is physically delivered into Cushing, Oklahoma from the U.S. Gulf Coast and mid-continent, via rail and inter-connected pipelines. Asian clients can use WTI Crude Oil futures to hedge their downstream production, as this benchmark futures contract provides robust liquidity and high price correlation to most crude oil streams.

Examples

Look at a few examples from the perspective of a refiner and producer. A short hedge is the sale of a futures contract and is characteristically used by producers, refiners, distributors and traders. Whereas a long hedge is the purchase of a futures contract, and is typically used by refiners, distributors, traders, retailers, and end users.

Long Hedge Example

In the first scenario we will look at an oil refiner with a long hedge. Assume an oil refiner wishes to protect its acquisition costs from rising prices On July 15, a refiner enters into a term agreement to buy 300,000 barrels of crude oil per month from an oil producer for delivery starting in December. The refiner is at risk to rising prices between July 15 and the December delivery but could hedge its acquisition costs by buying NYMEX WTI futures. In this case, the refiner would buy 300 December WTI contracts at the price of $50. In December, the refiner purchases the 300,000 barrels of crude at $55 per barrel, and then sells 300 December WTI contracts at a price of $55.

The result is a final per barrel cost;

$55 (physical) – $5 (futures) = $50/barrel

Short Hedge Example

Now look at a short hedge example. Assume an oil producer wishes to protect its oil revenues from falling prices. On July 15, a producer enters into a term agreement to sell 300,000 barrels of crude oil per month for delivery starting in December. The producer is at risk of falling prices between July 15 and December delivery. One way the producer could hedge his revenue is by selling the appropriate number of NYMEX WTI futures contracts. In this case, the producer would sell 300 December WTI contracts at the current price of $50. In November the price drops to $45. The producer will sell the physical oil for $45 per barrel. In addition, he will buy 300 December WTI futures contracts at $45. This will result in a $5 per contract profit.

The result is a final per barrel cost;
45 (physical) + $5 (futures) = $50/barrel$

If you have any questions send a message or contact me

Regards,
Peter Knight Advisor

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WTI: A Global Benchmark

West Texas Intermediate (WTI) is a U.S. blend of several streams of domestic light sweet crude oil. The delivery point is located in Cushing, Oklahoma which is home to 90 million barrels of storage capacity. It is a crucial hub where extensive infrastructure exists and serves as a vibrant trading hub for refiners and suppliers.

The Importance of Crude Markets

The rise in importance of the U.S. crude market comes at a challenging time for other crude oil markets globally.  The catalyst for this transformation was the sharp rise in U.S. oil production, and the lifting of the export ban on U.S. crude that occurred at the end of 2015.

Infrastructure changes in the United States have become so prevalent that they are likely to have a transformational impact on the region for years to come. Investment in the U.S. Gulf Coast has transformed WTI into a waterborne crude, with extensive export capacity. The Seaway Pipeline links Cushing, Oklahoma to the Houston, Texas export market, with 850,000 barrels per day capacity. The Transcanada Marketlink Pipeline provides additional capacity of 700,000 barrels per day from Cushing to Houston.  Further, the Magellan, BridgeTex and Longhorn Pipelines carry up to 475,000 barrels per day from Midland, Texas to Houston. The Houston market has become export-focused, with a terminal network with extensive storage capacity of 65 million barrels, and an additional 20 million barrels of storage capacity projected to come into service in 2017.

Moreover, a number of new terminals are in the process of being built along the U.S. Gulf Coast to handle the rising number of ships arriving to load crude oil destined for the international markets.

The Role of WTI

As U.S. production has risen substantially, the role that WTI is likely to play in terms of being the marginal supplier of oil is going to increase significantly and the global markets are likely to adopt WTI pricing into their crude oil trading. Lifting the U.S. export ban has significantly impacted global oil flows and will lead to greater market efficiencies as companies look to gain arbitrage opportunities with the improved logistics of free trade.  As a result, WTI is able to compete directly in the global marketplace and has become the price discovery leader in the crude oil market.

If you have any questions send a message or contact me

Regards,
Peter Knight Advisor

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Energy Educational Homepage

Even though the US experienced one of the coldest winter heating seasons in (2013/14) many years, the spot Natural Gas or Nat Gas for short, futures price did not increase to anywhere near the levels it did during previous very cold winters nor did volatility go through the roof. The main reason for this significant change in price activity is the surge in US production of Nat Gas from several very large shale gas producing regions of the country. That said, Nat Gas price activity remains a function of supply and demand. Although futures prices have not returned to the double digit levels seen in the pre-revolution years, prices did hit the highest level this past winter since the winter of 2009.

The major change in the Nat Gas market over the last several years is primarily on the supply side of the equation. Demand has been growing slowly with the occasional demand surge due to weather as we saw in the winter of 2013/14. The Nat Gas futures contract traded on NYMEX is principally a US produced and consumed commodity. Some Nat Gas flows from Canada and some gas flows to Mexico but as of now the LNG market is still not a factor in either flow direction.

The demand side of the equation is impacted by the economy. As the US economy moves into a sustainable growth pattern, the use of Nat Gas will likely continue to increase in the industrial and commercial sector. With the abundance of Nat Gas due to the shale revolution and relatively low prices versus many other places in the world, there has been a manufacturing advantage for those sectors using Nat Gas in their manufacturing operation. Although this is a growth area for Nat Gas, it will not result in a surge in demand in the short to medium term, rather, it is a slow and steady growth area.

Utilities may burn more or less Nat Gas depending on prices between oil, coal and Nat Gas. Many utilities have the capability of switching between Nat Gas and coal based on the most economical fuel at the time. Since the second half of 2012 the majority of the time coal has been more economical than Nat Gas for power generation. To the extent that a utility has the capability to burn coal it was likely their preference for the last several years. This pattern is likely to continue in the medium term especially with Nat Gas inventories still well below normal after the cold winter of 2013/14 (and prices higher than the last few years). Over the long term the EPA has placed additional regulations on coal driven power plants which will result in less coal and additional Nat Gas consumed for power generation.

Thus the main incremental use for Nat Gas in the US is for meeting heating and cooling needs and will remain in this pattern for the foreseeable future. A larger percentage of Nat Gas is consumed during the winter heating season with a portion of the consumption during the summer cooling season to supplement utility demand of air conditioning.

Nat Gas futures prices are generally driven by the short term weather forecasts produced by NOAA (free) and many private forecasters (fee based service).

Following is the latest actual and forecasted demand for Nat Gas produced by the EIA shown on a quarterly basis. The table shows the seasonal demand for Nat Gas during the winter and simmer seasons and is highlighted in red.

Nat Gas Consumption US (EIA Data), BCF/Day
	2014				2015
	Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4
Residential	28.86	7.09	3.55	15.5	24.3	7.1	3.68	15.8
Commercial	16.55	5.75	4.33	10.2	13.8	5.8	4.35	10.4
Industrial	23	19.8	19.5	22	23.2	20.6	20.3	22.6
Electric Power	19.79	20.9	28.4	19.9	20.4	22.2	29.2	20.7
Lease and Plant Fuel	3.95	3.98	4	4.02	4.05	4.06	4.06	4.08
Pipeline & Distribution Use	2.68	1.75	1.75	2.01	2.49	1.78	1.76	2.03
Vehicle Use	0.09	0.09	0.09	0.09	0.09	0.09	0.09	0.09
Total Consumption	94.93	59.4	61.6	73.6	88.3	61.6	63.4	75.7

Source Data: U.S. Energy Information Administration Data

Moving over to the supply side of the equation, the shale revolution has had a significant impact on the overall performance of Nat Gas prices as well as the volatility of this contract. The following chart from the most recent EIA Short Term Energy Outlook report (issued monthly) shows the steady growth in supply over the last several years.

Nat Gas production has steadily grown over the last several years adding a needed cushion to cover unscheduled issues as well as seasonal demand surges along with diversifying the supply profile in the US. The US is now less dependent on Nat Gas from the Gulf of Mexico (still a very important supply source) as all of the new production gains have been on-shore and out of harm’s way of hurricanes that often times find their way in the Gulf of Mexico and disrupt supply lines from that region. The projected supply growth should act to dampen any severe seasonal weather occurrences going forward.

That said, there is still a large variation in the inventory profile for Nat Gas. The following chart shows the normal seasonal movement in Nat Gas and how low inventories occurred after the severe winter of 2013/14.

Source Data: U.S. Energy Information Administration Historical Data

The recovery of inventories heading into the winter of 2014/15 should have a strong impact on price activity during the summer cooling season as well as during the upcoming winter heating season. Weekly inventory levels have demonstrated a quick and strong impact on price activity.

As an example, with inventories below normal in 2014 so far the market has been maintaining a modest and widening price risk premium compared to 2013. The premium has been averaged about $0.485/mmbtu above 2013 since the beginning of April into early June.

This premium is a risk premium of starting the winter heating season with a gap in inventories. The widening premium suggests that the market is starting to take a stand that the projected gap in inventories ahead of the upcoming winter is likely to be the dominant price driver in the near to medium term. The premium may gain momentum at this point in time as the industry seems less relaxed that the recent pattern of above normal injections over the last several weeks will continue throughout the season.

Nat Gas trading is very dependent on supply and demand fundamentals with the supply side of the equation resulting in the most significant change in the structure of the Nat Gas market since it was deregulated in 1990 (also when the NYMEX Nat Gas contract came in to existence).

If you have any questions send a message or contact me

Regards,
Peter Knight Advisor

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Relationships between Crude Oil, Heating Oil and Gasoline

Even though the US economy is still a gasoline driven economy, the HO crack spread has become more and more interesting from a trading perspective as the US is now a major exporter of distillate fuels – HO and diesel. Like the Brent/WTI spread, the HO crack spread is very liquid as well as volatile and trendy – all positives for the trading community at all levels. In addition this spread is also used by the refiners as a hedge during periods when refinery margins are expected to narrow.

It is also a spread that can be traded on the NYMEX division of CME as part of the regulated futures arena. Volumetric activity for the spread is continuing to grow, as is liquidity.

This is a very fundamentally driven spread (as are most spreads) with the same fundamentals driving the direction of the spread for many years. The main fundamental drivers of the spread are:

Winter month demand for heating oil in the US and in Europe.

Inventory levels of heating oil and diesel.

Throughout the year the growing demand for diesel fuel in many regions of the world that are now exports targets for US refiners.

The state of the gasoline market in the US.

Crude oil balances and geopolitics and the impact it has on refiner’s crude oil costs.

Other weather events like hurricanes.

Scheduled and unscheduled refinery interruptions.

First let’s quickly discuss what the HO crack spread is and is not. It is not an absolute measure of refinery margins in the US as the HO portion is a wholesale price in New York Harbor as traded on the NYMEX division of CME while the WTI crude oil is price is a spot prices based in Cushing, Oklahoma. It does not include any refinery costs or location adjustments. It is a gross representation of the direction of the distillate component of refinery margins against WTI crude oil – one of the many, many crude oils that the US refiners actually process in their refineries. Simply put, when the HO crack spread is trending higher it means refiners are making more money processing crude oil to make distillate fuel and when the spread is trending lower they are making less money.

With this in mind, the following chart shows the NYMEX HO crack spread plotted on a seasonal chart along with the latest five year average and the highs and lows that occurred when the calculations for the five year period performed.

Source: NYMEX ULSD Historical Data

This is what is categorized as an inter-market spread with reduced trading margins compared to trading the flat price for either of these commodities. This weekly chart clearly shows a modest level of volatility as well as the trending nature of this spread. It also shows the seasonality of the spread with the high points generally hit during the so called official winter heating season (October through March) with the lows generally occurring during the summer months or during the gasoline driving season.

Certainly during the heating season the direction of the spread is going to be primarily driven by the winter weather and thus heating demand for heating fuels in both the US and Europe. During the heating season oil will flow between these two regions depending on the weather and demand for heating oil in each of the respective areas.

In the US the majority of the heating oil consumed for space heating is in the Northeast with minimal quantities consumed in other regions of the US. Thus when evaluating the spread during the winter months, the weather along the northeast coast is important. Also keep in mind New York, which represents almost 1/3 of the Northeast heating oil market, now requires ultra-low sulfur fuel (15 PPM) as reported by the U.S. Energy Information.

The following chart compares the spot NYMEXHO Crack spread with the weekly HO inventories along the East Coast of the US – the primary HO market in the US.

Source: Chart provided by DTN

As shown on the chart, there is a relatively strong inverse correlation between HO inventory levels along the east coast with the performance of the HO crack spread. As HO inventories rise the crack narrows and when stocks decline the crack has a tendency to widen. As expected the strongest correlations tend to be during the so called official winter heating season.

In addition the temperatures forecasts for Europe are also very important. These forecasts do impact the short term direction of the spread and add to the volatility of the crack spread in the short to medium term.

Another area that has an impact on the HO crack spread is the supply and demand status of the gasoline market. Refiners have a lot of flexibility to maximize the production of gasoline at the expense of distillate fuel and vice versa. When gasoline demand is strong and/or supply is tight refiners will run in a maximum gasoline mode which will reduce the amount of distillate fuel produced. This could result in distillate fuel inventories declining and thus having a positive or upside impact on the HO crack spread.

In addition during periods of tightness in the crude oil markets caused by rising demand and/or supply issues due to natural events like hurricanes or geopolitical events like seen for many years in the Middle East and in North Africa the price of crude oil (the other half of the spread) could surge higher and have a negative impact on the HO crack spread even during periods when the relationships discussed above comparing inventories and the spread support a widening of the spread.

Finally, scheduled and unscheduled refinery events can impact the spread in either direction. When refineries are shut down for whatever reason it has an impact on production of distillate fuel (as well as all refined products) and often times result in a widening of the HO crack spread. On the other hand, when refinery runs are at high levels, more refined product is produced which could ultimately result in a narrowing of the crack spreads.

The following chart of the refinery run rates along the US East Coast (main heating oil market) versus the HO Crack spread demonstrate this relationship.

Source: Chart provided by DTN

The chart shows an inverse relationship between refinery run rates and the crack spread. Although this is not a perfect correlation it holds most of the time. When the refinery runs rates are increasing it generally has a negative impact on the HO crack spread and vice versa.

The above are the main price drivers of the spread.

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Discovering Trading Opportunities with Two Benchmarks

The single most widely traded spread in the global oil complex is the WTI/Brent spread and the change in the relationships between these two global marker crude oils has implications to both crude oil and refined products on a global basis. It is also the most important spread in setting all of the various pricing interrelationships among the many different crude oil grades as well as for refined products inside and outside the US. Brent (North Sea crude oil) and WTI (US indigenous crude oil) are the industry’s two main benchmark crude oils which the majority all of the crude oils around the world are priced against.

This spread is not only traded heavily by the speculative community, it is also traded by the oil industry asset trading sector or those that actually are responsible for all of the physical crude oil acquisitions around the world. It is also a spread that can be traded on NYMEX as part of the regulated futures arena, as well as the cleared over the counter system on CME Direct. Volumetric activity for the spread is continuing to grow, as is liquidity with relatively narrow bid/offer ranges.

Although the spread does respond well to various technical analysis techniques, this is a very fundamentally driven spread with the same fundamentals driving the direction of the spread for many years. The main fundamental drivers of the spread are:

US crude oil production levels

Crude oil supply and demand balance in the US – i.e. crude oil inventory position in Cushing, PADD 2(mid-west) and PADD 3 (Gulf region)

North Sea crude oil operations

Geopolitical issues in the International crude oil market

There are other minor fundamental drivers but the aforementioned list of drivers is the focus of this paper. Understanding the aforementioned spread directional drivers may provide decent signals when trading this spread.

There has been a major transition that has taken place in the US and Canadian crude oil markets that has had a major impact on the direction of the spread since about 2008. The US crude oil revolution has resulted in a significant increase in US domestic crude oil production as a result of the successful technologies applied to the main shale oil regions of the US – i.e. Bakken, Permian, Eagle Ford, Niobrara, Haynesville and Marcellus. The drilling and production success in these regions coupled with a significant increase in the availability of Canadian crude oil for the US has significantly changed the dynamics of the US oil industry.

The US logistics system was designed and built as a south to north pipeline system. This system was designed around the large crude oil reserves and production level in the Gulf region (in particular Texas) of the US as well as the large volume of imported crude oil that entered to the US to supplement US indigenous production for the main refinery centers in the Gulf and PADD 2 region (mid-west). The west coast has mostly consumed California and Alaskan crude oil and supplemented by imports while the east coast refining system has been dependent on offshore imports.

With a significant increase in US domestic crude oil production and a surge in Canadian imports the south to north logistics system created a huge bottleneck in the Cushing area (also the delivery location for the NYMEX WTI contract). Cushing stocks built strongly as the intake capacity to Cushing far exceed the takeaway pipeline capacity. This resulted in a huge overhang of crude oil and thus had a very depressing impact on the price of WTI, especially relative to Brent.

Over the last two years the mid-stream industry has done a fantastic job in increasing the crude oil takeaway capacity out of Cushing by building new pipelines and reversing several south-to-north pipelines that were no longer needed. In addition rails deliveries of crude oil from Canada and North Dakota have also played a large role in adjusting the logistics system to accommodate the oil shale revolution taking place.

Cushing stocks are now back down to the level they were at prior to the onset of the surge in crude oil supplies from the US and Canada. In fact Cushing is now a transition area feeding both the PADD 2 and PADD 3 regions. Crude oil coming into Cushing supplies a combination of PADD 2 refineries that are connected to Cushing via pipeline as well as sending crude oil down to the Gulf Coast refineries. There should not be a large build up in crude oil in the Cushing region unless the market moves into a strong contango and economics justify building crude oil facilities. Inventory levels in Cushing will find a normal operating level needed by the PADD 2 refiners.

In regard to the main drivers, US crude oil production and imports from Canada are projected to continue and grow well into the future. This trend will support the main changes that have taken place in the logistics system and most importantly in the crude oil acquisition pattern for the US refining system which brings me to the main directional driver… Cushing crude oil stocks.

The following chart shows the relatively strong correlation between inventory levels in Cushing and the WTI/Brent spread. This is a weekly chart to coincide with the weekly release of EIA Cushing inventory data.

Source: Charts provided by DTN

In spite of the major transition that has taken place in the slate of crude oil for the US refining system as well as the in the logistics system the correlation between the direction of Cushing inventories and the spread remain solidly in place.

Over the last several years as the logistics have changed the relationship between PADD 3 (Gulf region) crude oil stocks are also starting to be a reasonably correlated directional driver of the WTI/Brent spread as shown in the following chart.

Source: Charts provided by DTN

With Cushing crude oil stocks now back to the pre-surplus normal operating range level and with Cushing acting more as a transition areas between PADD 2 and PADD 3 the relationship of PADD 3 inventories are also now driving the spread.

On the other end of the spread (Brent side) the two main general areas that have an impact on the spread is production levels of crude oil from the North Sea. From time to time severe weather impacts the flow of crude oil out of the North Sea. During periods of time when flow is impeded it has a tendency of strengthening the Brent side of the spread irrespective of what is going on in the US. In addition when there are geopolitical interruptions in the flow of crude oil from various locations (i.e. Libya, Nigeria, Middle East, etc.) it has a stronger impact (generally upside) on the Brent side of the spread and has a tendency to offset any bearish spread signals coming from the US side of the spread.

There are three sources of inventory data that are released at different times of the week. Genscape reports Cushing crude oil stocks at 9 AM on Monday. This is a subscription service. The subscribers of this report certainly set their positions in the WTI/Brent spread if a signal presents itself. The API issues its Cushing inventory data late on Tuesday afternoons – also for a subscription fee. However, this data tends to be broadcast via several news services and on Twitter. Finally the most comprehensive and free inventory data is released mid-morning on Wednesday by the EIA. All of these data sources are in close agreement for Cushing crude oil inventories. Finally the inventory data points are always as of the previous Friday.

The above are the main price drivers of the spread.

This spread has a high level of liquidity to allow for relatively easy entry and exit as well as a high level of volatility. Furthermore as you can see from the charts presented in the paper the spread tends to trend for extended periods of time allowing for many entry and exit points during the course of a trend.

Energy Educational Homepage

Energy products are varied and have many end uses. Crude oil, for example, can be used to make gasoline or as a raw material in the manufacturing of plastics. Natural gas can be used for heating applications as well as a feedstock for plastics, chemicals and other applications.

Since energy products can be refined products like gasoline, which is directly consumed, or raw inputs like crude oil, which can be made in to other products, the fundamental trader will need to consider the factors that influence supply and demand for the raw material, as well as supply and demand for any secondary products. Traders who trade crude oil will look at all the sources of demand both foreign and domestic not just the demand for gasoline.

Supply and Demand

Energy products, specifically, are very sensitive to changes in supply and demand. Small changes in either can have a noticeable effect on the price of the energy futures contract. Traders will pay attention to data releases concerning the supply and demand of the energy products they are interested in. For example, a crude oil trader will watch the weekly inventory reports to remain updated on the current build or drawdown details of crude oil and build a case of where they believe the price of crude oil will move next.

Another example is if crude oil inventories increase the price of crude 2% one week and decrease it by the same amount the next week, traders will make sure they are aware of the potential for large moves in the price of the futures contract and trade accordingly to limit their risk.

The main drivers of the price of energy products are user demand, inventory build and drawdown cycles (the supply cycle), and seasonality.

Demand is increased by economic growth along with consumer and industrial demand. If the economy is growing, then energy demands will be higher from both consumers and industry.

Some of the factors that create increased demand when economies are growing are: increased demand from automobiles and trucks, increased power consumption requiring increased energy demands, more heat requirements for homes and buildings and more requirements for energy products that are used as inputs in manufacturing.

Supply, or inventory build, also has many factors that make energy unique when compared to other commodities.

Build and Drawdown

Energy futures go through what is referred to as a build and drawdown cycle. Most energy products are extracted from the ground then transported to storage facilities, where they are stored to be delivered to the ultimate users. This is the build phase.

The drawdown phase is when the product is shipped from the storage facility to the end user. If production is lower than what is needed to satisfy current demand then there will be a drawdown in inventories, and if production is higher than the quantity which is being demanded then inventories will increase.

Traders will be familiar with this data in relation to the crude oil report which comes out every week and tells traders whether there has been a build or drawdown in crude oil reserves.

If energy supplies are higher or demand is lower, then price should decrease. If supplies are lower or demand is higher, then price should increase. Energy products follow the basic rules for supply and demand just like any commodity.

Seasonality

Seasonality also plays a part in the supply and demand for energy products. There are times during the year when, due to weather, demand might be higher or lower than normal. This might be due to increased demand for heating during winter months or increased demand during the summer months where vehicle use is typically higher.

Seasonality effects on energy futures are generally predictable as they occur during the same time each year, but what is not predictable is the actual demand during the season.

For example, natural gas goes through a seasonal build to ensure there is enough supply to meet the typically higher demand for heating during the winter generated by lower temperatures. Like most things in the market, price moves based on a combination of actual data and the assumptions that the market makes for price in the future.

Natural gas suppliers will make projections for demand over the coming winter. They will purchase the quantity of gas they believe will be required. If the winter is warmer or colder than anticipated, then actual demand will be different than forecasted demand. It is this difference that will affect the price of the futures contract. If demand is higher than anticipated by the market then price will go up, if it is lower than price will go down.

Conclusion

Traders who trade energy futures are aware that there are unique factors that will influence the price of the futures contract they are trading and use fundamental analysis to help them analyze the market and make their trading decisions.

If you have questions send us a message or schedule an online review.

Regards,
Peter Knight Advisor

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Interest Rate Position Trade Homepage

1) 3 Month Euribor–Today’s Technical Opinion  Symbol (I)

1.1)   1999-2018 chart & historical data 3 Month Rate

1.2)   20 Year Futures chart, monthly data
1.3)   5 Year chart, weekly data
1.4)   1 Year chart, daily data
1.5)   Quotes, All Deliveries
1.6)   Options Quotes
1.7)   Exchange = ICE
1.8)   Contract Specifications  each 0.01 = 25.00 EUR
1.9)   Technicals
1.10) Support & Resistance
1.11) Ranges & Price performance

2) 3 Month Sterling–Today’s Technical Opinion  Symbol (L)

2.1)   1986-2018 chart & historical data UK 3 Month Rate

2.2)   20 Year Futures chart, monthly data
2.3)   5 Year chart, weekly data
2.4)   1 Year chart, daily data
2.5)   Quotes, All Deliveries
2.6)   Options Quotes
2.7)   Exchange = ICE
2.8)   Contract Specifications  each 0.01 = 50.00 GBP
2.9)   Technicals
2.10) Support & Resistance
2.11) Ranges & Price performance

3) Euro Schatz–Today’s Technical Opinion  Symbol (FGBS)

3.1)   20 Year Futures chart, monthly data
3.2)   5 Year chart, weekly data
3.3)   1 Year chart, daily data
3.4)   Quotes, All Deliveries
3.5)   Options Quotes
3.6)   Exchange = Eurex
3.7)   Duration 1 3/4 to 2 1/4 Years
3.8)   Contract Specifications  each 0.01 = 10.00 EUR
3.9)   Technicals
3.10) Support & Resistance
3.11) Ranges & Price Performance

4) Euro Bobl–Today’s Technical Opinion  Symbol (FGBS)

4.1)   20 Year Futures chart, monthly data
4.2)   5 Year chart, weekly data
4.3)   1 Year chart, daily data
4.4)   Quotes, All Deliveries
4.5)   Options Quotes
4.6)   Exchange = Eurex
4.7)   Duration 4 1/2 to 5 1/2 Years
4.8)   Contract Specifications  each 0.01 = 10.00 EUR
4.9)  Technicals
4.10 Support & Resistance
4.11) Ranges & Price Performance

5) Euro Bund–Today’s Technical Opinion  Symbol (FGBL)

5.1)   20 Year Futures chart, monthly data
5.2)   5 Year chart, weekly data
5.3)   1 Year chart, daily data
5.4)   Quotes, All Deliveries
5.5)   Options Quotes
5.6)   Exchange = Eurex
5.7)   Duration 8 1/2 to 10 1/2 Years
5.8)   Contract Specifications  each 0.01 = 10.00 EUR
5.9)   Technicals
5.10) Support & Resistance
5.11) Ranges & Price Performance

6) Euro OAT–Today’s Technical Opinion  Symbol (FOAT)

6.1)   Life of Contract Futures chart, monthly data
6.2)   5 Year chart, weekly data
6.3)   1 Year chart, daily data
6.4)   Quotes, All Deliveries
6.5)   Exchange = Eurex
6.6)   Duration 8 1/2 to 11 Years
6.7)   Contract Specifications  each 0.01 = 10.00 EUR
6.8)   Technicals
6.9)   Support & Resistance
6.10) Ranges & Price Performance

7) Euro Buxl–Today’s Technical Opinion  Symbol (FGBS)

7.1)   Life of Contract Futures chart, monthly data
7.2)   5 Year chart, weekly data
7.3)   1 Year chart, daily data
7.4)   Quotes, All Deliveries
7.5)   Exchange = Eurex
7.6)   Duration 24 to 35 Years
7.7)   Contract Specifications  each 0.01 = 50.00 (GBP)
7.8)   Technicals
7.9)   Support & Resistance
7.10) Ranges & Price Performance

8) Australian Government Bills and Bonds (ASX)

If you have questions send us a message or schedule an online review .

Regards,
Peter Knight Advisor

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Spread trading is a widely-used trading strategy in futures markets and offers some key advantages over outright futures trading (i.e., going long or short a single futures contract), including capital efficiencies with lower margin outlay and potentially superior risk-adjusted returns. This is particularly true for precious metals markets, where the underlying commodities demonstrate strong correlations with each other due to close economic links, but also distinct fundamental drivers that can create profitable spreading opportunities using the associated futures contracts.

Creating a Futures Spread

A spread trade using futures is created by buying a futures contract and simultaneously selling another futures contract against it. The spread acts as a hedging transaction, altering your exposure from an outright price fluctuation to the price differential between the individual legs of the spread trade. The profitability of a futures spread trade depends on the price direction, or differences in price movement, for the legs of the strategy.

Spread trades may be executed across many markets, but traders often look at similar contracts, or related markets, for spread trading opportunities. A closer relationship between the spread markets means the individual legs are more likely to move in tandem, enabling relatively stable price changes governed primarily by the pace of price moves between the legs (i.e., the relative performance of the legs), thereby reducing the level of risk for the trader. These strategies are referred to as relative value strategies.

Types of Spreads

Spreads may be broadly classified as intra-market spreads and inter-market spreads.

Intra-market spreads, also known as calendar spreads, are where a trader opens a long or short position in one contract month and then opens an opposite position in another contract month for the same futures market. Given the popularity of these spread trades, as well as their contribution to futures rollover activity, dedicated calendar spread markets are available on the CME Direct platform, which allows spread execution with no legging risk.

Inter-market spreads involve two separate, but related, futures markets with legs of the same maturity time frames. Inter-market spread strategies may have legging risk, but can be mitigated by using dedicated inter-market spread contracts or by selecting liquid underlying contracts for each leg in conjunction with using the auto-spreading functionality offered by some software vendor trading screens.

Benefits of Spread Trading

The main advantages of spread trading are reduced volatility and lower margin requirements, as the legs are generally in related markets at the same exchange.

Compared to outright futures, which can exhibit significant price swings, spreads can demonstrate extended trending price moves, making it easier for you to visualize patterns and take a directional view or implement a technical trading strategy.

Spread Trading with Precious Metals

The precious metals complex includes gold, silver, platinum and palladium contracts and offers trading opportunities to a global market through a wide variety of instruments. These markets not only provide highly correlated commodities, but also with unique price drivers that can create many attractive spread trading opportunities.

While you can choose from the range of instruments available for trade execution once you have identified your preferred strategies, the Precious Metals futures markets at CME Group offers highly liquid and deep markets that enable the fast, efficient execution of spread strategies, with the additional benefits of considerable margin savings (as all trades are centrally cleared through CME Clearing) and much alleviated legging risk.

More importantly, these futures contracts are predominantly electronically traded (over 90%) on CME Globex, which allows easy access for participants across the world and high-quality trade executions virtually 24 hours a day.

Gold-Platinum Spread Trade

Platinum is both a precious and industrial metal, widely used in catalytic converters in the automotive industry but also in jewelry and as an investment asset.

The price relationship and the price spread between gold and platinum may be useful as an indicator of shifts in the macro environment. Historically, platinum has been more expensive than gold since the white metal is about 15 times rarer than gold and has many industrial uses compared to the yellow metal. However, gold can become pricier during times of economic distress and political uncertainty when the yellow metal sees increased demand as a safe-haven asset. Conversely, during a positive economic cycle with increasing automobile sales, platinum’s premium over gold prices can rise even further as the metal will see increased industrial use. Since 2015 Gold has been trading at a premium to Platinum and the spread has been widening.

Platinum-Gold Price Spread (in U.S. dollars per troy ounce) Chart based on NYMEX Platinum and COMEX Gold Futures Prices

CME Group offers one of the most liquid Platinum futures, making it a convenient instrument to manage risk and instantly capture trading opportunities, such as the platinum-gold price spread strategy.

Platinum-Gold Spread Profit and Loss Example

On March 2, a trader expects platinum demand to increase in the short term due to higher car sales and the platinum-gold spread to narrow. The trader buys two April Platinum futures contracts at $988.40/oz and simultaneously sells one April Gold futures contract at $1,231.90/oz (the Platinum contract is half the size, 50 oz, of the 100-oz Gold contract).

The resulting notional amounts for the legs are $98,840 and $123,190, respectively. The trader has thus entered the spread trade at -$243.50 and is long the spread.

The tables below show the trader’s realized profit and loss (P&L) as negative spread, narrowed as both Gold and Platinum increased, but at different rates.

Platinum-Gold (negative) spread narrows when position is closed by selling two Platinum April contracts and buying one Gold April contract simultaneously on March 30.

	Platinum April	Notional Amt	Gold April	Notional Amt	Spread
Trade Enter Prices	Buy $988.40	$98,840	Sell $1,231.90	$123,190	($243.50)
Trade Exit Prices	Sell $1,056.40	$105,640	Buy $1244.20	$124,420	($187.80)
Strategy Leg P&L		$6,800		-$1,230
Total P&L			$5,570

Margin Offsets

One of the benefits of spread trading with futures is the reduced cost of margin, otherwise known as margin offset. Margin discounts can occur when CME Clearing scans the trader’s portfolio of futures positions looking for offsets.

In our example, we had a long Platinum position and a short Gold position. This spread position would have been identified as an offset and therefore would require less margin than the two outright positions.

Platinum-Palladium Spread Trade

Palladium, like platinum, is also a precious metal widely used in the automobile industry as an auto catalyst. The difference being palladium is predominantly used in petrol-engine vehicles, whilst platinum is used in diesel-engine vehicles. In the recent past, platinum has traded at a premium to palladium, but as the chart below illustrates, the premium has narrowed. The spread may cross, but the last time this happened was approximately 20 years ago. Traders can express a view on the platinum-palladium spread through trading individual outright futures contracts in a spread strategy like the ones demonstrated above.

If you have questions send us a message or schedule an online review .

Regards,
Peter Knight Advisor

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Ferrous metals, metals that contain iron, are distinct from both precious and base metals. They include raw materials like iron ore and steel scrap as well as semi-finished products such as hot rolled coil.

Iron Ore

Iron Ore is found in the earth’s crust and mined from open pits. China is the world’s largest producer, consumer and importer of iron ore, producing 1.3 billion metric tonnes, equivalent to 44% of the world’s output. Australia is the second-largest producer of iron ore and has the world’s largest deposits. Chinese iron ore deposits are of lower iron content than those typically found in Australia and Brazil.

Iron ore is the key ingredient in the steel making process using the blast furnace. The earliest blast furnaces date back to first century in China. In a blast furnace, which is lined with refractory brick, iron ore, coke and limestone are heated to produce liquid iron. Once a blast furnace is started, it will continuously run for years, with only short stops for planned maintenance. The temperature in a blast furnace can reach up to 4200 °F (2300 °C).

Steel is also produced via an Electric Arc Furnace (EAF) using steel scrap. About one-third of the world’s crude steel is made in an EAF. In an EAF, the scrap metal is charged using graphite electrodes to heat the metal. The temperature reaches 6300ºF (3500ºC). In the U.S., steel is typically produced using EAFs rather than blast furnaces.

Steel production using EAFs compared with primary steel production using a blast furnace has some benefits including the ability to use 100% recycled scrap feedstock, thereby being less energy-intensive and the flexibility to start and stop production being more responsive to changes in demand.

Iron Ore Market Fundamentals

Iron ore supply has been increasing over the last 10 years in response to China’s industrialization during the commodity super cycle. To meet China’s demand for iron ore, which is the key ingredient in steel making which is required for construction and white goods, world supply from iron ore mines increased.

This had an impact on the way iron ore was priced. In the decades between the 1960s and the millennium, iron ore prices were stable with plentiful supply. But China’s demand for iron ore caused prices to rise, and miners and steel makers who had traditionally agreed on annual prices following long negotiations, moved to quarterly prices in 2010 and then eventually spot pricing.

Iron ore is transported via ocean freight on capsize vessels. Some of these very large ore carriers have a deadweight capacity of 400,000 metric tonnes.

Steel

Steel scrap is collected from recyclable materials left over from product manufacturing and consumption. Scrap collection and supply is responsive to changes in price.

Steel Production

China is the world’s largest steel-producing country representing over half of all crude steel. In 2015 it produced 50.3% of the world’s 1,599.5 million metric tonnes. Japan (105.15 million metric tonnes), India (89.58 million metric tonnes), the United States (78.92 million metric tonnes) and Russia (71.11 million metric tonnes) make up the top five steel producing countries.

Steel Demand

Different types of steel are produced according to the properties required for their application, such as density, strength, thermal conductivity and elasticity. They are broadly categorized into carbon steels, alloy steels, stainless steels and tool steels. Steel is used in construction of bridges, roads, railways and buildings. It is also used in the white goods sector, which includes large electrical goods such as refrigerators and washing machines, named such because they are typically white in color.

If you have questions send us a message or schedule an online review .

Regards,
Peter Knight Advisor

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