WTI Below $50 as a Result of Opec's Failure to Cut

Front-month WTI crude pushed below $50 yesterday, giving back much of the gains from late last week. The drop in prices was seen by many as a reaction to Opec's lack of further production cuts at the sideline meeting in Cairo over the weekend. Approximately $5 of premium had been built-in to the market as a precaution by traders against a surprise cut by the cartel; it was this premium that began bleeding out during Asian trading and accelerated as the western markets opened.

Implied volatility increased yesterday as uncertainty returned to the market. Traders are now focused on how low crude can push in the next three to six months. Strong buying has been seen in both the $30 and $40 put range through the first half of 2009. Using Asian-style options, the WTI 1H09 $30 put strip is currently offered at a very cheap $0.70. That's $700 of total premium at risk per month- crude need not trade below $30 for these options to return protection/profits- any sharp drop towards the $40 level in the next few months should result in an increase in value for these puts.

Singapore, 08:00