Volatility in oil markets returned yesterday after a short hiatus as crude prices drifted higher in early Asian trading, only to retreat sharply during NY hours. Traders had been banking on $70 (WTI) providing short-term support and as a result implied volatility began to retreat. However, doubts over Opec's ability to coordinate and follow through on what will surely be an announcement of cuts later this week, has caused traders to sell the market off and test the $70 level yet again. Opec's recently announced production cuts have yet to be greatly felt by the physical market and many analysts are concerned over the cartel's lackluster record in following through on its often bold announcements. Non-Opec producers Norway and Russia have declined to consider production cuts.
Hedgers can certainly expect the resurgent market volatility to affect their long-term outlook. Consumers looking to lock in prices at relative bargain levels need to be aware of downside risks should the physical market continue to push lower. Buying Singapore 180cst Fuel Oil Swaps around the $370 level should be paired with the purchase of highly liquid WTI puts. Using Average Price Options, the November 2008 $65 puts can be owned for only about $2.00 per contract. That's $2,000 of maximum exposure per 1000 bbls. If the Fuel Oil swap trends lower in the short-term, the consumer hedger can sell out the losing position which may be to a large extent compensated for by the profits on the long WTI puts. Hudson Capital Energy makes markets and acts as counterparty for both the Fuel Oil Swap and WTI puts without charging any fees. This is an optimal strategy to consider in these extremely volatile markets.
Singapore, 09:45
Tuesday, October 21, 2008
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