Drop in Energy Prices Results in Consumer Buying Opportunities

Equity and commodity markets fell sharply yesterday, quickly erasing Monday's gains, as traders focus on the near-term economic fallout of the current banking crisis. Opec, meanwhile, spoke out yet again on the impact on demand from the economic turmoil. It is a near certainty at this point that the cartel will cut production at its emergency meeting on November 18th. This usually bullish announcement had no impact on the market, as front-month November WTI crude has pushed below $73.50 in early Asian trading.

Despite the increase in implied volatility, consumer protection strategies have become increasingly cheaper as the market moves lower. It is now possible to lock-in crude prices below $100 for the entirety of the coming year by purchasing the Cal09 $90 calls for only $7.25. Also, the Cal09 $100 calls can be owned for Zero Cost by selling the $65 puts in the same tenor. This strategy puts no premium at risk at or above $65 and provides unlimited upside protection above $100.

Singapore, 09:30

Cheaper Premiums Allow Hedgers to Enter New Protection at Discounted Levels

Yesterday saw a sharp turnaround in energy markets as traders begin to focus on the possible after-effects of the current banking/liquidity crisis. The trickle-down effect to the main-stream economy is expected by many analysts to cause several quarters of recession in the United States which may spread eastward. Early Asian trade had markets sharply higher, and several producer hedgers entered the market to purchase cheap downside protection in the form of put spreads. These mid-day Asian-hours hedges paid off swiftly as the market sold off sharply during late-day trade in NY.

Implied volatility softened early yesterday, thus allowing consumer and producer hedgers to enter the market today to lock in significantly lower premiums. As the bearish pressure looks to be unrelenting in the short-term, calendar hedges such as the Q408 through 1H09 $60/75 put spread strip are being purchased to protect against a further drop in prices. This strip is currently trading around $4.00, thus providing $11,000 of downside protection per month after the $4,000 average cost is factored in. To gain the full $15,000 per month of protection, bearish hedgers can make the trade zero-cost by selling the $96 call in the same tenor. This hedge offers no premium at risk below the $96 level.

Singapore, 07:40

Commodities Retrace on Bullish Government Announcements

Commodity and equity markets rose sharply yesterday as the governments of leading industrialized nations pledged to support the struggling global financial system. Metals and energies in particular rose firmly, with November WTI crude oil pushing back above the $80 level to its current level above $83.00. Helping the recent bullish turn is the unequivocal statement by several of the more hawkish members of Opec (Iran, Venezuela and Algeria) to request for a cut in production at the cartel's emergency meeting next month in Vienna. Several Opec members have argued that the world is currently oversupplied by as much as 0.5m barrels per day.

Yesterday's sharp move higher served to increase implied volatility during Asian trading. While the move was quite convincing from the bullish perspective, doubts remain over the economic stability of large consumer nations. Focus is now on the extent to which the recent financial turmoil has damaged commodity demand for the near-term. Thus, the rally may be short-lived and downside producer hedges remain in the spotlight. Using Average Price Options, the November through December WTI $80/60 put spread strip is trading around $4.25. That's max exposure of $4,250 per month with a total payout of $31,500 should both months settle below $60. The trade can be made costless by selling the $90 call in the same tenor. This hedge would provide $40,000 of downside protection with no premium at risk below $90.

Singapore Fuel Oil hedgers looking to protect their downside can combine the above strategy with the sale of the 180 Fuel Oil Swaps in the WTI/Fuel Oil crack, currently trading around $19.00.

Singapore, 08:30

Financial markets recover - a sigh of relief

In a quasi-holiday (Columbus Day), crude oil markets followed the equities market higher, with volatility easing in tandem. Crude volatility eased much less than other financial markets and a follow-on Tuesday would indicate even lower levels.

For those using 3-way strategies (selling net options), there may still be time to capture good premium. Inventory hedge strategies for November include the 65-75 put spread versus the 96 call for zero cost. A move down due to bearish stats Wed would benefit from the decrease in prices and potential for further volatility easing.

We expect the US Treasury to firmly step in and buy US bank equities. This will prompt a follow-on rally in the DJIA after a huge 10% plus up day Monday.

Energy Markets Not Immune to Global Asset Selloff

Energy and commodity markets rounded out last week with a complete collapse in Asian trading on Friday. The dramatic price fall, which continued into NY trading, was punctuated by continued selling by investors across all asset classes throughout the entirety of the world economy. The International Energy Agency added to the bearish pressure by lowering expected oil consumption in 2008 to 86.5m barrels per day while also decreasing 2009's expected demand by almost 0.5m barrels. The weak demand seen throughout the summer driving season, which was largely a result of the dramatic price rise, is now expected to continue through the remainder of the year as the banking crisis pours into the world's local economies.

Despite the rapid drop in crude oil prices, producer strategies using put spreads continue to be popular, as they offer cheap protection which has proved itself valuable in recent weeks. Using Average Price Options, the WTI December 2008 $75/60 put spread is currently trading around $4.50. That's $4,500 of max potential premium at risk with a payout of $10,500 should crude oil prices continue lower. The price of the put spread can be cut in half by selling the December $105 call at $2.25. This strategy provides the downside hedger with a $12,750 payout should December WTI settle below $60, while putting only $2,250 of premium at risk at or below the $105 price level.

Singapore, 19:50

Consumers Buying Cheap Upside Protection

Energy markets along with equities plumbed new lows yesterday as the financial turmoil continued. Front-month November WTI is now trading below the $85 level, marking a drop of more than $62 since only mid July of this year. In a swift reaction, Opec has dropped its prevarications and announced an emergency meeting on November 18th in Vienna where many traders feel the cartel will announce further cuts to production. The initail 500,000 barrels per day cut of only several months ago has yet to be fully realized by Saudi Arabia, the defacto group leader and only member capable of quickly increasing or decreasing production. Oil demand in the US was reported as down 8.6% last week against the same week in 2007 by the US Department of Energy.

Implied volatility in WTI Crude Oil softened somewhat yesterday, decreasing substantially the premiums demanded for upside call options. Consumers looking to protect against a return to higher prices in the first half of 2009 can buy cheap protection in the form of the 1H09 (First Half 2009) $110 call for only about $4.75. By buying this Average Price Option, the consumer has unlimited upside protection above $110 with a maximum risk of only $4,750 per month. This upside strategy can be made costless by selling the $73.50 put in the same tenor. In this instance, the hedger would only need to post margin and would have Zero premium at risk at or about $73.50.

Singapore Fuel Oil hedgers looking to protect their upside can combine the above strategy with the purchase of the 180 Fuel Oil Swaps in the WTI/Fuel Oil crack, currently trading around $15.50.

Singapore, 08:00

Petroleum resistant to market selloff

Crude markets were largely unchanged all day until the stock market (Dow) fell dramatically near the close. Volatility in stocks is now higher than crude oil at 65%. Lower heating oil prices have created an excellent opportunity for diesel and jet hedgers to protect their consumption for the balance of the year and 2009. Natural gas remains resilient to the downdraft across markets.