ProShares UltraShort Oil and Gas (DUG)

[Recognizer]

Crude Contract Spreads

Courtesy of Optioninvestor.com
"Another problem is the unwinding of hedges by companies like airlines and truckers. When faced with constantly rising oil prices in the first six months of 2008 all of these people put on huge amounts of complicated hedges in order to protect themselves from higher prices. The only way to hedge is to be long the futures and options in some form. Because of the expense of creating longs representing the billion barrels of crude they burn each year they are forced to do this with leverage instead of straight crude futures. We all know how leverage works. It is great if the position is going in your favor but horrible when it turns against you. The losses pile up even faster than the gains. Companies hedging against $100 oil were jumping for joy as prices fell back to $60 and then $50. Thinking they were seeing prices dip back to realistic levels many actually increased their hedges while celebrating their good fortune. As prices fell under $50 and then $45 those long hedges began costing them hundreds of millions in losses. As the losses mount they are forced to liquidate and that means selling their longs with increasing panic as their own selling pushed prices even lower. We saw airlines reporting billions in losses when crude went over $75 and I suspect we are going to see them report monster losses from hedging exposure for the current quarter. Crude prices for the February contract are likely to come under some serious pressure next week as the market begins to factor in the same supply glut for February."

Jim Brown, OptionInvestor.com
http://www.optioninvestor.com