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Downward pressure on crude benchmarks
7th July 2010 15:48 GMT

Lack of confidence in continued global economic recovery persists in exerting downward pressure on the major crude benchmarks. Recent data releases continue to skew to the negative, inducing many investors to dump long positions. However, technical factors as well as the lurking hurricane season (this early in the season and we've already had a major named storm) continue to set a price floor under any market dumps.

Implied volatility has been slow to respond to the recent move lower. Typically, as crude oil sells off, implied vol increases. Based on recent price movements, traders would expect front-month WTI & Brent vols to be trading around 40%, instead we're languishing in the low 30s. This could be the result of the price floor many dealers see in the market- without any further negative news surprises, there's no real expectation of a sustainable move below $70.  

This theory is reinforced by recent interest in WTI August $70 puts (the right to be short from $70); these options have been firmly bid for more than a week with scarcely any interest in the $65 puts (the logic being that a dip below $70 is highly plausible while driving through $65 is exceedingly unlikely).

Bunker consumers looking to take advantage of recent price moves to the downside can buy upside protection in the form of the October through December $450/500 call spread for Zero Cost by accepting a leveraged price floor around the $350 level. This hedge provides $50/month of upside protection with no premium at risk at or above $350.


Jonathan Kornafel,
7th July 2010 15:48 GMT

Comments on this Blog
Kate Frank
9th July 2010
Jonathan, this is a well research piece of analysis around the status of the leading oil benchmarks. Brent is arguably the most representative benchmark for the global crude oil trade whilst WTI remains essentially a US benchmark reflecting localised US economics. The ICE Brent crude oil futures contract has attracted significant depth of liqudity over the past few years. In addition to Brent futures, ICE lists a number of options contracts - American style, European style and Asian style options for Brent, WTI and Gsasoil.
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