Energy markets along with equities plumbed new lows yesterday as the financial turmoil continued. Front-month November WTI is now trading below the $85 level, marking a drop of more than $62 since only mid July of this year. In a swift reaction, Opec has dropped its prevarications and announced an emergency meeting on November 18th in Vienna where many traders feel the cartel will announce further cuts to production. The initail 500,000 barrels per day cut of only several months ago has yet to be fully realized by Saudi Arabia, the defacto group leader and only member capable of quickly increasing or decreasing production. Oil demand in the US was reported as down 8.6% last week against the same week in 2007 by the US Department of Energy.
Implied volatility in WTI Crude Oil softened somewhat yesterday, decreasing substantially the premiums demanded for upside call options. Consumers looking to protect against a return to higher prices in the first half of 2009 can buy cheap protection in the form of the 1H09 (First Half 2009) $110 call for only about $4.75. By buying this Average Price Option, the consumer has unlimited upside protection above $110 with a maximum risk of only $4,750 per month. This upside strategy can be made costless by selling the $73.50 put in the same tenor. In this instance, the hedger would only need to post margin and would have Zero premium at risk at or about $73.50.
Singapore Fuel Oil hedgers looking to protect their upside can combine the above strategy with the purchase of the 180 Fuel Oil Swaps in the WTI/Fuel Oil crack, currently trading around $15.50.
Singapore, 08:00
Thursday, October 9, 2008
Petroleum resistant to market selloff
Crude markets were largely unchanged all day until the stock market (Dow) fell dramatically near the close. Volatility in stocks is now higher than crude oil at 65%. Lower heating oil prices have created an excellent opportunity for diesel and jet hedgers to protect their consumption for the balance of the year and 2009. Natural gas remains resilient to the downdraft across markets.
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