Energy traders continued last week to focus on the global economic slowdown and its effect on consumer demand. Front-month WTI crude oil had declined by almost 10% on the week by the end of trading on Friday despite warnings from the International Energy Agency that long-term global trends in energy supply and consumption were unsustainable. The current (relatively) low crude prices have resulted in alternative energy supplies such as Canada's oil sands and finds off the coast of West Africa to be given lower priorities. State-run oil giants are also being forced to shoulder larger economic burdens, resulting in less re-investing in declining fields. The WTI future's curve serves as a striking reminder of where prices are expected to trade as the economic turmoil dies down. December 2008 is currently trading around $61.00 vs December 2010 trading close to $78.00.
Despite long-term calls for crude oil to push higher, the short-term picture remains fundamentally bearish. To capitalize on the downward momentum, traders and producer hedgers have been using Asian options to buy up cheap near-dated vertical spreads such as the December $50/60 put spread, trading around only $3,400 per 1000bbls. The put spread can be purchased for Zero Cost by selling the December $70 call. This trade puts no premium at risk at or below $70 in WTI crude oil and the December Asian options do not expire until the end of the 2008 calendar year.
Singapore, 23:00
Sunday, November 9, 2008
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