Opec Draws Line at $100 Crude

Opec's surprise decision to reduce production below 29m barrels per day dominated trading in both Asian and NY markets. The decision to immediately adjust production to the lower quota level has caused many traders to wonder if the +25% drop in prices can continue. While Opec has certainly drawn a line in the sand around the $100 level, it remains to be seen if the cartel can actually achieve the cuts outlined in the announcement. An unsuccessful cutback in the short-term risks further downward pressure as Opec may appear divided and ineffectual.

The rangebound trading produced by Opec's announcement provides an excellent pause for consumers to lock in both the lower volatility (cheaper premiums) of late as well as 6 month lows in prices. Using Asian options, the WTI Q4 $115/130 call spread is currently trading around an average price of only $1.80. That's only $1,800 of total risk per month with total upside protection amounting to $39,600.