Crude Markets Volatile after Opec Cut

Light-sweet crude oil prices drifted lower yet again yesterday, with February 2009 WTI currently offered just above $42. While Opec's supply cuts were answered by the market with a sharp move lower, it was the heavy sour crudes that may have reached at least a temporary bottom. It is the production of this type of crude that will be most affected by the cartel's recent severe production cuts. Lower quality Dubai crude actually rose slightly yesterday.

With the global economic slowdown expected to continue to weigh heavily on consumer demand for much of 2009, downside producer protection strategies remain the focus of many traders. Implied volatilities have also recently relaxed, allowing for relatively cheaper option premiums. Using Asian-style options, the 1H09 WTI $30 puts are currently trading around $1,100 per 1000 barrels per month. By selling the $70 call in the same tenor, the puts can be made Costless (the resulting position would be the 1H09 $30/$70 Costless Collar). With the 1H09 swap trading under $48, this hedge would not produce losses at expiration without front-month prices moving up more than $22.

Singapore, 08:30