Mixed Pressures/WTI Hedging

After a slow week, traders returned to energy markets on Friday, pushing many benchmarks back near the previous week’s highs. Nymex WTI rallied almost $2 to settle back above $50. Not surprisingly however, implied volatility continues to decrease across the product sector with more range bound trading expected for the foreseeable future. A softer U.S. dollar and decreased volatility in the financial markets along with what appears to be a delicate stabilization of the global economy have improved investor risk tolerance and put a temporary bottom under the price of commodities. On the flipside, the previously mentioned bloated global inventory situation alongside the IMF’s recent slash in its worldwide economic growth forecasts will continue to place supremely bearish pressure on the oil and products sectors. Furthermore, Opec Secretary General Abdalla El-Badri recently stated that he doesn’t expect any announcement of further production cuts at the group’s next meeting in May.

Consumer hedgers looking to take advantage of the significant drop in implied volatility as of late should look to own a WTI Second Half of 2009 price ceiling (call) at $65 for an average price of only about $4,000 per 1000 barrels/month. Much safer than simply buying swaps, this hedge offers max losses limited to only $4/barrel per month without the prospect of margin calls. However, the price ceiling can be owned for zero cost by accepting a price floor (short put) at $50. With the 2H09 underlying swap trading above $56.50, this collar strategy allows for an average of more than $6.50 of breathing room on the downside with unlimited protection above the $65 level.

Singapore, 09:00