Hedging Focus Moves to Global Economy after Gustav Weakens

Crude oil prices dropped below $111 yesterday as Hurricane Gustav quickly moved from "storm of the century" to probable non-event. More than 96% of oil production and 82% of natural gas production had been shut in, resulting in what many hope to be minimal damage to infrastructure. Traders are now focused on the lack of demand going forward in the next couple months due to a global economic slowdown. Opec's meeting in Vienna next week is also on the radar as Iran, Venezuela and Ecuador voice their displeasure at the recent fall in prices. No output cuts are likely at this juncture, so price may continue downward towards the $100 level.

Producers or physical players needing protection against further moves lower can look to the September through December $110/95 put spread vs. the $120 call using WTI Average Price Options. The put spread can be owned for free in every month remaining in the 2008 calendar by selling the upside call, thus giving the hedger about $8 of leeway should the market move higher. The spread provides $15 of immediate protection per month upon any move lower.

Questions Remain over Gustav's Heading

Traders ended last Friday with growing concerns as to the prospective path of Hurricane Gustav in the Gulf of Mexico. More than 25% of US crude oil production originates in this region, and while Gustav will hit landfall sometime in the next 12 to 24 hours, it may be weeks before the full extent of any enery production infrastructure damage is known. The Gulf region is also a large producer of Natural Gas, and while the storm has resulted in rallies in both crude and gas, it is the natural gas price that has fallen farther over that last couple months, resulting in the current 15 year high for the crude to natural gas price ratio.

Consumer hedgers looking for some cheap protection for the remainder of the hurricane season can still look to the liquid WTI Average Price Options (APO's). The September through December $120/135 call spread can be purchased for Zero Premium by selling the $109 put in the same tenour. This zero cost call spread provides $15 of protection above $120 for every remaining month in 2009. There is no premium at risk at or above the $109 level.

Crude Prices Remain +$115 after IEA Announcement

Crude oil bounced off recent highs yesterday as the International Energy Agency attempted to allay supply disruption fears. The IEA announcement that strategic oil reserves could potentially be released upon disruption to oil and gas production as a result of Hurricane Gustav had a calming effect on the market. Meanwhile, prices remain +$115 as deep-water rigs continue evacuation procedures. Production is expected to be shut in for a minimum of 5 days.

With yesterday's drop-off in prices, consumer hedgers are seeing a short-term reprieve before the long weekend, with many unanswered questions regarding Hurricane Gustav. The Q4 $120/135 call spread strip can be purchased for Zero Cost by selling the $107 put in the same tenour. This trade allows the consumer hedger $15 of protection per month for Q4 with no premium at risk above $107.

Premiums Strengthen on Hurricane Predictions

Energy prices rose yesterday as Hurricane Gustav moved closer to the oil and gas producing region of the Gulf of Mexico. While landfall is not expected until Monday, the approaching weekend has pushed many market participants to either go long or at least square-up any short speculative positions. This has resulted in the steady march back up towards $120 and a strengthening in crude oil option premiums. Not only upside call buying has been prevelant, but the market has seen traders scoop up cheap downside protection in the bet that Gustav will be a nonevent, resulting in a large downward move next week.

Cheap short-term downside protection is still available in the Q4 $110/100 put spread strip. For only $2,500 of total exposure per month, this trade provides protection of $7,500 per month on the event of a sharp move lower- just such a move which traders are looking for if Gustav fails to move in the direction of oil production facilities.

Storm Warnings Result in Volatile Trading

Volatile trading in energies is expected to continue for the next 5-10 days as the market attempts to predict landfall for Hurricane Gustav in the Gulf of Mexico. Landfall is slated for Monday, leaving little prospect of follow-through on any movement for the remainder of this week- conflicting news and weather models will push and pull the market as fresh information is digested by traders. From the fundamentals side it looks as if the market is searching for that equilibrium level where demand growth is restrained but not destroyed.

Heading into this uncertain weekend with dark storm clouds on the horizon, there are yet many cheap short-term consumer hedge strategies available. The WTI $120/130 call spread can be purchased for Zero Cost in every month from October through December 2008, by selling the $104 put in the same tenour. If Hurricane Gustav disrupts supply this weekend, the hedge provides $10 per month of upside protection with no premium at risk above $104.

Bearish Supply News finds Crude Oil Rangebound

Crude oil prices bounced off recent lows yesterday but remained range-bound as the U.S. approaches the long Labor Day holiday weekend. Bearish supply news has been paramount as of late, with Opec apparently pumping between 0.5m and 1m barrels per day above it's original August target. This has led to speculation of a production cut at the cartel's upcoming September 9th meeting, however de facto leader Saudi Arabia has yet to voice concerns over current market prices. Traders are watching whether the market can break below the current support level of $110-112, a level which has held under several bearish pushes lower over the past several weeks.

As the market is currently sitting in the middle of the $110-120 range, consumer hedgers should look to lock in protection ahead of the long holiday weekend in the U.S. With a potential hurricane on the horizon, short-term upside protection can be found in the Q4 Zero Cost $115/125 call spread. This spread provides $10 of immediate upside protection by selling the $107 put in the same tenour and there is no premium at risk in this trade above that level.

Reprieve for Consumer Hedgers

Crude oil prices retreated yesterday in a mirror image of Friday's dramatic rally. While further distruptions to Azeri crude supplies remains the number one topic on trading floors, a recent report from consultancy Petrologistics highlighted that Opec's current production is almost 1m barrels per day higher than it's actual target. While this data is bearish in the short-term, it provides increased fodder for those Opec nations looking to have production levels decreased at the organization's upcoming meeting on September 9th.

Consumer hedgers were given a reprieve on Friday as October crude oil settled below $115 just one day after breaking $122. Once again, the opportunity to lock in a price ceiling of $120 for zero premium for 2009 has presented itself. By selling every $112 put in the same tenour, it is possible to have a price floor and price ceiling between $112 and $120 for the entire 2009 calendar year.