WTI December crude pushed closer to $60 yesterday as traders choose to ignore Opec's production cuts and focus instead on the continuing drop-off in demand. As winter quickly approaches, many refineries continue to scale-back production. The drop in crude prices as well as the sharp and sustained increase in implied volatility is mirrored closely by global equity markets, particularly the S&P500 which has shown a high correlation as of late with the price of crude oil. In the U.S., the ViX (volatility index) has seen a similar sharp and sustained increase in volatility.
Despite the seemingly bottomless pit energy markets appear to have fallen into, consumer hedgers have been entering the market lately to lock in lows not seen in almost a full year. In the Singapore Fuel Oil 180CST market, December 2008 is currently trading around $310. This represents lows not seen since early 2007. However, with the continued volatilty the market has witnessed, just buying swaps means taking on an enormous amount of downside risk on a daily basis. Combining the FO swaps buy with the purchase of the WTI Average Price November $55 puts for only about $1.50 would put a floor in the hedgers losses while still allowing for unlimited profits on the upside.
FYI: Last week's recommendation to buy the November $65 puts as downside protection against any Fuel Oil swaps purchase would have saved the hedger more than $125,000 on a 1:1 basis.
Singapore, 08:30
Monday, October 27, 2008
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