Energy and metal prices failed to rebound in Friday trading as the current market volatility shows no signs of abating. Equities also failed to recover lost ground with the Dow sinking back below the 9000 level. Traders are watching Opec nervously as the oil group has called an emergency meeting for November ahead of its regularly scheduled December gathering. Late last week the cartel moved up the hastily assembled meeting to next Friday. As recently as early October with WTI crude oil trading closer to $90, some of the more hawkish members of the group issued statements claiming the world was oversupplied by between 0.4 - 0.5m barrels per day. As the market momentatily broke below $70, those extra barrels of supply were revised upwards by the group to 1m.
As traders view an Opec production cut as a fairly solid bet, it is pertinent for consumer hedgers to enter the market to take advantage of the more than 50% drop in many energy markets since only mid-July. Singapore bunker traders can protect against an Opec-inspired jump in prices while also limiting downside exposure by purchasing the Singapore 180CST Fuel Oil Swap in December at about $360. In order to avoid unlimited downside losses, the prudent hedger would purchase WTI puts (WTI options are the most liquid energy options in the commodity trading world, and help avoid the twin traps of counterparty credit risk and limited counterparties that Fuel Oil options currently entertain. These twin risks result in large bid/offer spreads making it extremely difficult to profitably exit bilateral Fuel Oil option deals). Using Average Price Options, the WTI December $65 puts are currently trading around $3.75 per contract. That's maximum risk of only $3,750 per 1000bbls of crude oil which provides unlimited downside protection should both Fuel Oil and Crude Oil continue lower. The above combination strategy represents unlimited upside protection gained from Fuel Oil swaps, with cheap unlimited downside protection from Crude Oil puts.
Singapore, 18:30
Sunday, October 19, 2008
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