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.

Volatility pop

The early signs of hurricane risk were magnified when new information regarding Russian military movements hit the wires. Options volatility rapidly increased well over Wednesdays levels. Crude oil quickly was up more than $5.0/bbl and refined products over 14 cpg. As mentioned by previous posts, there is plenty of upside risk to consider. Product options expire Tuesday. Please IM, email or call for strategies prior to the weekend. Also note that Monday is a bank holiday in the UK and traders most likely will not go out short.

Tropical Storm Fay

NHC more bullish this AM - Crude up over $118 early NY time after London open had kicked off a small rally. Fay has a chance of making its way to the Gulf but reports are inconclusive currently. Traders are looking mostly to cover and remain neutral to long coming into this weekend. The bank long weekend in the UK may give more incentive for traders to go out long. In this case, short players can pick up long call spreads. Long players may be able to collect good premium for the 128 calls and perhaps add puts as a collar. The September Asian zero cost collar is now 110 put versus 128 call.

NY, 0850