Energy and commodity markets rounded out last week with a complete collapse in Asian trading on Friday. The dramatic price fall, which continued into NY trading, was punctuated by continued selling by investors across all asset classes throughout the entirety of the world economy. The International Energy Agency added to the bearish pressure by lowering expected oil consumption in 2008 to 86.5m barrels per day while also decreasing 2009's expected demand by almost 0.5m barrels. The weak demand seen throughout the summer driving season, which was largely a result of the dramatic price rise, is now expected to continue through the remainder of the year as the banking crisis pours into the world's local economies.
Despite the rapid drop in crude oil prices, producer strategies using put spreads continue to be popular, as they offer cheap protection which has proved itself valuable in recent weeks. Using Average Price Options, the WTI December 2008 $75/60 put spread is currently trading around $4.50. That's $4,500 of max potential premium at risk with a payout of $10,500 should crude oil prices continue lower. The price of the put spread can be cut in half by selling the December $105 call at $2.25. This strategy provides the downside hedger with a $12,750 payout should December WTI settle below $60, while putting only $2,250 of premium at risk at or below the $105 price level.
Singapore, 19:50
Sunday, October 12, 2008
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