Energy and equity markets dropped sharply yesterday as traders' focus remains on current and looming recessions in the western world. The crude oil market appears to have little faith in Opec's ability to put a floor in prices, as December WTI dropped below $70 to trade in the $66 range. Expectations for production cuts from Opec range from a minimum of 1m barrels to as high as 2.5m barrels, possibly spaced out over a period of 3-4 months.
A Fuel Oil hedger buying 5 lots of the 180 Swap around $370 early yesterday would have booked losses of approximately $185,000 according to settlement. Our recommendation was to augment the hedge by purchasing the November WTI $65 puts for $2.00. These puts are currently trading around $3.50, resulting in a gain of about $50,000 if the hedge was entered into on a 1:1 ratio. Thus, instead of exiting the market today with losses of $185,000, the prudent hedger would have saved himself $50,000.
Singapore, 09:45
Wednesday, October 22, 2008
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