Oil markets refused to commit to a direction yesterday as front-month December WTI drifted around the $55 level. With no end in sight for the global economic turmoil, traders continue to focus on the lack of demand heading into 2009. While Opec recently lowered it's forecast yet again for year-on-year demand growth, it is becoming quite evident that demand may actually drop from 2008 to 2009.
The lack of movement in trading yesterday resulted in a sharp drop in implied volatility across the future's curve, resulting in cheaper option premiums. Using American-style options, the Q109 $30 puts are now offered around $0.60; that's $600 of total risk per month to be short from the $30 level in January through March 2009. While $30 may still seem far off, it's important to understand that the underlying futures do not need to trade below $30 for the buyer of this option to profit. Any sharp push lower in the next couple months would result in a spike in the price of the puts- allowing the hedger to sell them out at a profit.
Singapore, 08:30
Tuesday, November 18, 2008
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