With Oil Prices Tumbling Producers Rush To Lock In Prices

Soaring oil demand and constrained supply have been the main drivers behind the rise in oil prices which only last month reached record highs of $147.27 p/bl. However, with oil retrieving almost 20% from its June highs, and the persisting signs of a slowing global economy — it’s quite possible a trend-reversal is taking place in crude oil.

Many investors, based on oil last month’s performance seem to be rethinking crude’s ability to retest its June highs and have decided to cash in some of their profits from the market’s unprecedented advance. While the reverse in my view, will consist only on temporary basis, it still qualifies as a reversal.

Another force besides investors that could be at work in the background contributing in oil’s decline – are also crude oil and natural gas producers. According to FT – oil and gas producers are scrambling to ‘lock in’ prices by buying insurance against further drops in oil prices. Crude oil finished the session on Tuesday, at $118.75 p/bl — its lowest settlement price since early May.

Crude 2008 Chart

Oil and natural gas producers are clearly hedging their bets. Last month for example, various analysts said there was talk that Mexico, one of the world’s largest oil producers — was also hedging its bets by signing contracts to deliver oil several years into the future at market price. In addition, FT notes that in the options market in the last several days for every buyer of insurance against a rise in prices in ’09 there were almost 10 buyers of protection against a fall.

On Tuesday there were more than 46,000 outstanding contracts for Nymex December ’08 put options at $100 a barrel, up about 135 per cent on late June.

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About Ron Haruni 1067 Articles
Ron Haruni is the Co-Founder & Editor in Chief of Wall Street Pit.

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