Unanswered Questions Result in Rangebound Trading

Energy prices remain in limbo as the market awaits further news on possible damage done to Gulf of Mexico production facilities in the wake of Hurricane Gustav. The storm season has reached its peak, and once traders sense that another year has passed without major damage, prices may fall further. In the U.S., as well as several other European nations, oil stocks are sitting comfortably at the 10-year average, thus fueling speculation of an imminent production cut by Opec. What is more likely than a stern announcement is the cartel slowly lowering levels back to the original target rates. In fact, this may have already begun.

With so many questions regarding supply and demand unanswered, the market may continue to vacillate at 6 month lows until some answers are forthcoming. The recent range-bound trading has resulted in a sharp decrease in option premiums which consumer hedgers would be wise to take advantage of. Using Average Price Options (Asians), it is possible to own the WTI $110/125 call spread from September through December for Zero Cost by selling the $102 put in the same tenor. This trade allows the hedger $15,000 per lot per month of upside protection with no premium at risk above the $102 price level.