Traders ended last Friday with growing concerns as to the prospective path of Hurricane Gustav in the Gulf of Mexico. More than 25% of US crude oil production originates in this region, and while Gustav will hit landfall sometime in the next 12 to 24 hours, it may be weeks before the full extent of any enery production infrastructure damage is known. The Gulf region is also a large producer of Natural Gas, and while the storm has resulted in rallies in both crude and gas, it is the natural gas price that has fallen farther over that last couple months, resulting in the current 15 year high for the crude to natural gas price ratio.
Consumer hedgers looking for some cheap protection for the remainder of the hurricane season can still look to the liquid WTI Average Price Options (APO's). The September through December $120/135 call spread can be purchased for Zero Premium by selling the $109 put in the same tenour. This zero cost call spread provides $15 of protection above $120 for every remaining month in 2009. There is no premium at risk at or above the $109 level.
Sunday, August 31, 2008
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