All eyes on IKE

The storm should put even more pressure on refined products and cracks. We have seen cracks widen and volatility move out beyond 60% in RB. Physical players with inventory could sell some calls and collect big premium here.

As a lower risk trade, long inventory heating oil players could buy the Oct Euro heating oil put spread 260-280 for 7 cents or sell a 307 call in combination, making the whole structure zero cost. At-the-money is 293 here.

Gasoline is another story. The Oct-Nov spread is 1650 now down from 2000 today. We have heard that physical gasoline has traded as much as $1.22 / gallon over NYMEX, which means there are some short squeezes in the market. That spread could go out again. Our suggestion would be to own some call spreads for Nov Euro (or Oct Asian), which would not be subject to too much volatility compression. If the refinery complex is down for a few weeks, the compounding effects of low inventory and refinery downtime could have a dramatic effect.

Opec Draws Line at $100 Crude

Opec's surprise decision to reduce production below 29m barrels per day dominated trading in both Asian and NY markets. The decision to immediately adjust production to the lower quota level has caused many traders to wonder if the +25% drop in prices can continue. While Opec has certainly drawn a line in the sand around the $100 level, it remains to be seen if the cartel can actually achieve the cuts outlined in the announcement. An unsuccessful cutback in the short-term risks further downward pressure as Opec may appear divided and ineffectual.

The rangebound trading produced by Opec's announcement provides an excellent pause for consumers to lock in both the lower volatility (cheaper premiums) of late as well as 6 month lows in prices. Using Asian options, the WTI Q4 $115/130 call spread is currently trading around an average price of only $1.80. That's only $1,800 of total risk per month with total upside protection amounting to $39,600.

Consumer Hedgers Take Advantage of Recent Lows

Oil prices moved closer to the $100 level yesterday as traders bet Hurricane Ike would skirt crude production facilities in the Gulf of Mexico. High levels of production, as much as 80%, remain shut-in resulting in approximate losses of 10 million barrels. Traders however, view this as short-term news and have chosen to focus on the market's overall bearish trend. Opec, meanwhile is expected to announce no cuts in the current quota of 29.67 million barrels per day. Instead, the cartel will most likely unceremoniously pare back production to that previously agreed upon level, as excess production of about 700,000 barrels per day has been flooding the market.

Consumer hedgers can take advantage of the current bearish sentiment to lock in 6 month lows for the remainder of 2008 and all of calendar year 2009. Using Asian options, the Sept 2008 through December 2009 $110/130 call spread can be purchased for Zero Cost by selling the $89.50 put in the same tenor. This trades provides $20,000 per month for the next 16 months of upside protection above the $110 line with downside risk beginning only below $89.50.

Traders Eye Hurricane Ike and Opec Quotas

Traders remained focused on Hurricane Ike's unpredictable passage through the Gulf of Mexico as well as remarks eminating from an Opec advisory group as to how the cartel will proceed on the quota issue at Tuesday's meeting. Expectations are for the group to publicly hold back from adjusting the outright quota while paring back production to the original quota level. Opec has been watching nervously as crude inventories continue to rise against a backdrop of slowing economic growth.

Production quota levels remaining in place combined with the potential for the remainder of the hurricane season to proceed without disaster have led us to take a closer look at producer strategies. Using Asian options, the September through December $100/85 put spread provides $15 of downside protection per month with only $2.50 of premium at risk. That's a combined $60,000 per contract of total downside protection with $10,000 of maximum risk.

Producer Hedges Remain Cheap on Rangebound Trading

Energy markets continued their decline Friday as October WTI crude traded below $106 for the second time in a week. Traders are now focused on the medium-term trend line of approximately $95, which would signal a drop of more than 35% from highs reached in early July.

Downside protection remains cheap as option volatility has decreased in the rangebound trading as of late. The September through December $105/90 put spread strip is currently trading around an average monthly price of $3.90 using Asian options. With protection of $11,100 per month on a move below $90, this producer hedge provides protection for the remainder of the 2008 calendar year.

Volatility holding - Don't wait for the unexpected

When we look at volatility levels, it is often difficult to decide when it is well offered versus how cheap it might get. We have seen volatility decrease lately (to the low 40s), but the fact is, it could go lower. In these situations, using spread strategies continues to rule for buy and hold trades. For example, the Q4 115-125 call spread (Asian) is offered at $2.65. This is a low cost hedge for the remainder of the year for consumers. On the other hand, short term strategies or long physical (wet barrel) or inventory hedge players are better off buying outright options (in this case puts) to protect against a strengthening USD that might put more pressure on crude down to $100 or below.

Short term, we see potential risk from Hurricane Ike. This may put pressure on crack spreads and could also give some support to NG, which has experienced a very bearish market, with volatility in. We are suggesting a long futures strategy in NG with a put stop-loss for consumers.

It is always better to hedge when the market is stable and fear has subsided.

NY, Fri 430 PM EST.

Unanswered Questions Result in Rangebound Trading

Energy prices remain in limbo as the market awaits further news on possible damage done to Gulf of Mexico production facilities in the wake of Hurricane Gustav. The storm season has reached its peak, and once traders sense that another year has passed without major damage, prices may fall further. In the U.S., as well as several other European nations, oil stocks are sitting comfortably at the 10-year average, thus fueling speculation of an imminent production cut by Opec. What is more likely than a stern announcement is the cartel slowly lowering levels back to the original target rates. In fact, this may have already begun.

With so many questions regarding supply and demand unanswered, the market may continue to vacillate at 6 month lows until some answers are forthcoming. The recent range-bound trading has resulted in a sharp decrease in option premiums which consumer hedgers would be wise to take advantage of. Using Average Price Options (Asians), it is possible to own the WTI $110/125 call spread from September through December for Zero Cost by selling the $102 put in the same tenor. This trade allows the hedger $15,000 per lot per month of upside protection with no premium at risk above the $102 price level.