$20 a barrel?

[mawilson 2,133]

This is interesting - explains what's been going on behind the scenes.

Mexico revealed on Thursday it had built a massive position in oil “put” options,

a financial instrument that gives holders the right to sell at a predetermined price and

date, in an effort to lock in its oil revenues for next year.

Agustín Carstens, the country’s finance minister, said Mexico bought 330m barrels

worth of put options for 2009, securing a minimum price of $70 for the country’s

crude oil export mix, which roughly translates to $85 for the West Texas Intermediate

benchmark. “It is an immense program,” Mr Carstens said.

The use of put options – instead of futures or swaps – is likely to prompt brokers to review

trading patterns at the New York Mercantile Exchange, the largest oil futures and options

market, since the summer as some dealers suspect that heavy buying of put options

exacerbated the decline in oil prices during some periods.

That is because the options’ originators, such as Wall Street banks, need to sell futures –

pushing down prices – to hedge themselves against their option positions.

“We started at the end of July and we did it very gradually, very quietly, precisely trying

to avoid the possibility of those positions moving the price against us,” Mr Carstens said.

“It was always done in a controlled way and bearing in mind the market’s capacity to

absorb the transactions,” he added.

Options traders at Nymex were suspicious since the summer of a strong pick-up in put

options dealing, particularly for December 2009, and some attributed the activity at that

point to a sovereign producer hedging its revenues.

Bankers familiar with the effort said Mexico’s positions were spread in each month

between January and December 2009 at different strike prices up to $100 a barrel.

Each month had a position of about 27.5m barrels of oil worth of put options.

Confirming a Financial Times’ report on the hedging, Mr Carstens said the cost of the

initiative was about $1.5bn. He added that with international oil prices now at about $55

a barrel, the present value of the hedging initiative was about $9.5bn.

Mr Carstens said the main factor behind the hedging effort was Mexico’s conviction that

oil prices had risen to such high levels in the summer that “the only way forward was down”.

The volume hedged of 330m barrels, or about 900,000 b/d, is equal to all Mexico’s

net crude oil exports.

The country is an importer of petrol and other refined products. In the past, Mexico has hedged

about 20-30 per cent of its oil exports.

Bankers familiar with the program said Barclays Capital and Goldman Sachs brokered the deal.

FT

[mawilson 2,133]

Some speculators reaped a return of more than 2,000 percent in less than 6 months.

Here's how:

When oil jumped to an all-time high of almost $150 a barrel, speculators bought put

options for just a few cents in July, giving them the right to sell oil at well below the

then current prices.

Example:

When oil prices were close to $150, they were able to buy the right to sell oil at $100

before the end of the year for as little as $1.80 a barrel.

With oil prices close to $55 a barrel, they will pocket $43 a barrel, net of the cost of

the option.

$1.80 -> $43 in less than 6 months.

Ain't speculation great.

[rocks 494]

Pirates on Monday took control of a huge Saudi Arabian crude oil tanker in the Arabian Sea, the US Navy said in a statement, the latest pirate attack near the waters of war-torn Somalia.

The tanker, named Sirius Star and owned by Saudi Aramco’s shipping subsidiary Vela International, is capable of carrying about 2m barrels of crude oil, making it one of the largest ships in the world. The tanker was fully loaded, the company said.

http://www.ft.com/cms/s/0/e10892ba-b4a8-11...?nclick_check=1

anyone think that this might change things a little? or is it just small change?