Hedging Focus Moves to Global Economy after Gustav Weakens

Crude oil prices dropped below $111 yesterday as Hurricane Gustav quickly moved from "storm of the century" to probable non-event. More than 96% of oil production and 82% of natural gas production had been shut in, resulting in what many hope to be minimal damage to infrastructure. Traders are now focused on the lack of demand going forward in the next couple months due to a global economic slowdown. Opec's meeting in Vienna next week is also on the radar as Iran, Venezuela and Ecuador voice their displeasure at the recent fall in prices. No output cuts are likely at this juncture, so price may continue downward towards the $100 level.

Producers or physical players needing protection against further moves lower can look to the September through December $110/95 put spread vs. the $120 call using WTI Average Price Options. The put spread can be owned for free in every month remaining in the 2008 calendar by selling the upside call, thus giving the hedger about $8 of leeway should the market move higher. The spread provides $15 of immediate protection per month upon any move lower.