Energy markets yesterday experienced a continuation of the recent high volatility as front-month WTI crude oil broke through the psychological $50 level only to end the day lower ($6 range). Wednesday's upcoming Opec meeting has put a temporary floor under prices as traders await news on the producer group's latest cuts. The question of whether or not to announce further cuts has already been answered; what remains is just how much will be announced and then followed-through on in subsequent months. Adding pressure to Opec is the increasing floating storage among physical traders and oil companies. The strategy of buying cheap surplus oil and selling back-dated futures along the contango curve has allowed some to lock in returns for 2009.
Implied volatility continues to hold strong, resulting in sharp P/L's for those hedging with swaps and relatively inflated premiums for those using options. The most basic and safest strategies for locking in protection at year-end often involve vertical spread strips. An example of short-term producer protection would be the WTI 1H09 $30/40 put spread strip using Asian-style options, currently offered at $2,000 per 1000 barrels per month. The strip can be made zero-cost by selling the $65 call in the same tenor.
Singapore, 09:00
Monday, December 15, 2008
Subscribe to:
Posts (Atom)
Posts
