Traders Speculate if Price Drop is Overdone

Energy markets plummeted and the U.S. Dollar rallied in trading on Friday as hedge funds continue to exit short dollar/long crude positions. With tensions between Iran and the West worsening, an actual war going on between Russia and Georgia, militant strikes in Nigeria increasing again, and a U.S. Gulf hurricane season that can still bare its teeth, the drop in prices is starting to look overdone. Just as with the move on the upside to $147, this downward push appears to have exceeded its mark and a correction may be upcoming.

Hedgers looking to lock in prices at the lowest levels we've seen in months have been pricing the October through January $120 price cap against the $113 price floor. This trade enables the owner to have oil prices capped at $120 for the remainder of the 2008 calendar year while putting a price floor in at $113. The trade requires Zero Premium, and as such there is no option decay associated with the hedge.