Transactions in the commodity market from August 2015 till year end clearly suggest that the situation won't be different in the coming months of 2016. Further five months of crude oil prices showing weakness and instability as November December and January itself turned out to be a disastrous month for oil bulls.

The prospects of a second half-year price rebound have evaporated and there is a clear indication that the market fundamentals is not supportive for the crude oil price to show some stability. WTI crude oil itself tasted the previous bottom of $27 in February 2016 creating a record of 12 years low. The real out in the crude oil started during last November when in spite of glut of the commodity in the US it wasn't ready to apply any production cut.

At the same time Opec also officially announced that they won't apply any production cut. Crude oil entered in the bear market which crashed by 18 per cent during July alone. Any commodity which crashes more than 20 per cent from its current peak it is defined bear market. The lifting of the oil trade sanctions imposed on Iran by the western countries can also see huge supply in the market in addition to this Opec member's countries would be ready to increase production in a big way which can trigger further sell off in the oil price.

Normally crude oil or gas producers aren't willing to sell their commodity at cheaper rates. But now they don't have any option and this would compel them to sell at any prices which would trigger crude oil prices to slip down further. Some say that you are bound to trigger sell button when you don't have any choice. The US benchmark WTI crude oil futures have crashed more than 60 per cent from the peak of $107.73 witnessed in December 2014 and quoted $30 at December 2015-January 2016. Naturally sell-off is imminent. Several producers are impatient to hedge their production.

Hedging in futures options and swaps markets allows producers to ensure a certain price for future output. For example if there is a possibility of crude oil prices going below $20 level and a company buys put options at current $30 price it gets profit from the price difference at the time of option cutting. During first month of 2016 the prices of long delivery options futures for 2016 & 2017 were quoted at record bottom level which means that hedging activity by producers puts downward pressure on prices. With 2016 first quarter dawning in less than a month the consensus is that producers are under-hedged.

December 2016 delivery futures were quoted season low at $38. Given this producers don't think that now it is proper time to make addition in their hedge sale. However to avail bank credit and to show profit capacity weaker companies would be forced to make hedge sale at lower prices in futures option or swap deals.

Hedging deals take place usually throughout the year but deals decrease during July and August. During current year there aren't any major hedging deals as prices have gone down further operators also waiting for strong direction of prices. Hedging volume is likely to increase in oil and gas derivatives futures. Thus producers would be able to pledge their reserve against the bank loan.

The writer is manager - commodities market at Emirates NBD Securities. Views expressed by him are his own and do not reflect the newspaper's policy