Market News

Oil Consumers Pounce on Futures Slump to Lock in Cheaper Barrels - BLOOMBERG

DECEMBER 09, 2023

BY Devika Krishna Kumar and Alex LongleyBloomberg News


(Bloomberg) -- Oil consumers jumped on a chance to lock in protection against higher energy costs as this week’s price slide made hedging cheaper.

A flurry of call spreads traded in Brent crude, with one one of the most actively purchased ones involving buying $85 and selling $110 calls for June and December next year and 2025. These contracts and others, covering at least 11 million barrels, limit the impact to the buyers of a rebound in prices and have the hallmarks of consumer activity, according to people involved in the market.

Benchmark Brent crude futures plunged this week to the lowest level since June as sentiment quickly soured on signs of oversupply despite deeper production curbs from OPEC+. While the move lower on its own makes it more attractive for consumers to lock in the price of the oil they buy, implied volatility — a key gauge of how expensive options contracts are — also fell. That makes it doubly appealing to enter into hedging deals. 

 Airlines are some of the biggest consumers to hedge their oil consumption, and they have been actively boosting their activity this year. But there are a whole host of other actors in the market, ranging from Walt Disney Co., which locks in the fuel costs for its theme parks, to the Panama Canal and the New York Metropolitan Transportation Authority.

Key timespreads further along the futures curve have also flattened over the course of the week, with nearer-term contracts trading at smaller premiums to later ones. While such a move is generally a bearish signal, it can also be a result of hedgers such as airlines buying later-month futures. 

For US crude futures, the drop in implied volatility this week also prompted some producers to lock in protection against a further decline in prices. Several three-way collar structures traded this week — made up of buying a put spread and selling a higher call — a popular method for some shale producers to hedge.   

  • This story was produced with the assistance of Bloomberg Automation

--With assistance from David Marino.


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