Energy prices surged yesterday as a series of bullish announcements, although none too surprising, served to cast doubt on recent 4-year lows in the crude oil market. The International Energy Agency contributed to traders expectations of a large production cut from Opec, by stating world oil demand would drop in 2008 and then again in 2009. Adding to the bullish pressure was the news that Russia would collaborate with Opec at the cartel's upcoming meeting in Algeria. Many traders are expecting the producer nation to contribute a cut of approximately 500,000 barrels per day on top of the 1.5 - 2.5M cut many expect to see from Opec.
The resurgent underlying WTI price served to decrease implied volatility, resulting in relatively cheaper option premiums. Producer bargain hunters looking to protect against further price drops in the first half of 2009 are looking at the 1H09 $30/45 put spread strip, currently trading around $3,300 per 1000 barrels per month using Asian-style options. This put spread strip can be purchased for zero premium by selling the $68 call in the same tenor. With the 1H09 underlying calendar strip trading around $54, this zero cost strategy contains no risk below $68 (a buffer of $14).
Singapore, 07:00
Thursday, December 11, 2008
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