Spring Break
Crude Realities of a Hot Commodity
Lily-Hayes Kaufman (OI)*,Contributing Writer
Issue date: 11/10/08 Section: Viewpoints
Sarah Palin's $150,000 wardrobe caused a commotion, but oil's $150 makeover, rapid rise to fame and fortune, and sudden recent decline is equally sensational.
In 2003, oil was that awkward guy in the corner at $25, lonely and undervalued. By 2008, the barrel re-emerged refined and glorious.
Conflict in the Middle East, US Dollar weakness, the competition to own the largest SUV possible, a couple of hurricanes, an outrageous call for a "super spike" and petroleum in any form was literally the next hot commodity.
From heating oil to gasoline, olefins to aromatics, traders coaxed oil out of the corner and into portfolios. Commodities tended to have a negative correlation to equities market. Thus oil derivatives provided an attractive means by which to diversify a portfolio.
Corporate players too, employed derivative instruments to hedge exposure to underlying physical commodities. As oil rose and cut further into the bottom line, demand for commodity derivatives products intensified. Companies explored complex trading solutions and exotic products in thin or illiquid markets.
Then oil peaked.
Since peaking at $147, Oil has relinquished nearly $90 almost as sharply as it rose. Commodities players are scrambling again, this time off the dance floor.
Diversified Institutional Investors, in efforts to meet margin calls or keep non-commodity portfolios afloat, began liquidating oil positions months ago while oil was rich and liquid. But with the sharp daily declines in oil, this strategy isn't likely to prevail. Furthermore, liquidation of oil portfolios and an exodus of "smart money" builds the momentum of oil's downward spiral.
No longer able to lock in at attractive forward rates, Corporate industrials may have begun exploring strategic operational changes in response to rising costs of operation direct and indirect to oil. Industrials may be shutting down factories, closing production lines, and developing innovations to circumvent fuel/commodities inputs. These changes to future operations and products are moves that could have longer-term oil demand destruction implications which will further sustain falling prices.
In 2003, oil was that awkward guy in the corner at $25, lonely and undervalued. By 2008, the barrel re-emerged refined and glorious.
Conflict in the Middle East, US Dollar weakness, the competition to own the largest SUV possible, a couple of hurricanes, an outrageous call for a "super spike" and petroleum in any form was literally the next hot commodity.
From heating oil to gasoline, olefins to aromatics, traders coaxed oil out of the corner and into portfolios. Commodities tended to have a negative correlation to equities market. Thus oil derivatives provided an attractive means by which to diversify a portfolio.
Corporate players too, employed derivative instruments to hedge exposure to underlying physical commodities. As oil rose and cut further into the bottom line, demand for commodity derivatives products intensified. Companies explored complex trading solutions and exotic products in thin or illiquid markets.
Then oil peaked.
Since peaking at $147, Oil has relinquished nearly $90 almost as sharply as it rose. Commodities players are scrambling again, this time off the dance floor.
Diversified Institutional Investors, in efforts to meet margin calls or keep non-commodity portfolios afloat, began liquidating oil positions months ago while oil was rich and liquid. But with the sharp daily declines in oil, this strategy isn't likely to prevail. Furthermore, liquidation of oil portfolios and an exodus of "smart money" builds the momentum of oil's downward spiral.
No longer able to lock in at attractive forward rates, Corporate industrials may have begun exploring strategic operational changes in response to rising costs of operation direct and indirect to oil. Industrials may be shutting down factories, closing production lines, and developing innovations to circumvent fuel/commodities inputs. These changes to future operations and products are moves that could have longer-term oil demand destruction implications which will further sustain falling prices.
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