Markets Wake Up to Predicament Between Russia and West

Crude oil pushed back above $120 yesterday on mounting tensions between Russia and the West. Diplomatic protests are a given at this point, but Russia also has at its disposal the ability to seriously curtail oil exports. The market appears to finally be waking up to a problem that began more than two weeks ago. The silver lining of the recent bump in prices is that less bullish rhetoric is likely by Opec nations ahead of the September 9th meeting. With prices remaining above $110, it was unlikely a decision would have been made to curtail output, but with a new range possible above $120, the focus is now on whether the market will continue to push to even further heights.

Consumers who locked in hedges while crude prices hovered around the $115 range certainly took advantage of cheap option premiums. Deals still abound however, as does a high level of uncertainty in the market. For short-term protection, the October through December 2008 $125 / 135 call spread can be purchased for Zero Cost by selling the $108.50 puts in the same tenour. This trade gives the consumer $10 of upside protection for the remainder of 2008 while putting no cash at risk above the $108.50 level.