Here's why oil hedging is a gamble and not insurance. Today oil hit 35.65 WTI and 37.97 Brent. In order for a hedge position to be positive you would have had to call oil at 35 back in June or December of last year.
Had you been allowed to make that bet as a corporate commodities manager, you would have been way out on a limb. Your job would have probably been dependent on that position.
As a corporate commodities portfolio manager, you are now looking at 35 dollar oil knowing you have to make a call on upside but what is your call number? Oil has decayed all year, pundants have said 50 would hold then 45, then... now 35.
What is your only real safe play? A moderate laddered hedge higher to protect the energy bill. Which will most certainly lose money even if oil bottoms and stays stagnant. If you don't hedge for a higher price you will lose your job if oil rises and you are unprotected.
The moderate the impact play is always a loser but an argument can be made for protection. Great intentions that are guaranteed to lose some money but hopefully not a lot of money. Open market oil leaves you exposed but if the competition is also exposed, you have matched their cost.
If you bet on the continual fall in oil, how low? And when will it reverse?
Sound like gambling yet?
Come on........... Seven!
CRAPS!