Crude prices ended last week in negative territory with WTI looking set to test the $40 level in early Asian trading Monday morning. Meanwhile, Brent, the North Sea benchmark also traded lower on the week but the WTI/Brent spread has now widened to almost $4 with Brent premium. Similarly, the Brent/Dubai spread has moved into negative territory. These atypical contract moves are a result of follow-through on the part of the Opec producers; the cartel has reduced the supply of their heavy, sour crude oil to the market, while the light, sweet contracts (WTI in particular) are suffering from a supply glut.
The above situation may take several months to play itself out, but the pattern is clear: less oil is coming to the market and those contracts directly concerned are rallying. Hedgers are beginning to take advantage of this phenomenon by buying upside protection for the 2nd half of 2009. Often the protection is cheap enough that it can be made Zero-Cost by selling a put significantly lower than the current market. For instance, the 2H09 WTI $75/90 call spread strip is trading around $2,800 per 1000 barrels per month. For a Zero-Cost strategy, sell the $40 put in the same tenor. With the 2H09 calendar strip trading above $57.50, this consumer hedge provides an average of more than $17.50 of room on the downside.
Singapore, 05:00
Monday, January 12, 2009
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