1 oil futures market hedging & price management june 1, 2014
Post on 28-Mar-2015
218 Views
Preview:
TRANSCRIPT
1
Oil Futures Market
Hedging & Price Management
April 10, 2023
2
OutlineOutline
Types of Financial Instruments
Jargons
Usages of Financial Instruments
Trading Failures
3
Types of Financial InstrumentsTypes of Financial Instruments
Forward Contract Futures Contract Derivatives
1. Options Calls Puts
2. Swaps
4
Forward ContractForward Contract
“A supply contract between a buyer and seller, whereby the buyer is obligated to take delivery and the seller is obligated to provide delivery of a fixed amount of a commodity at a predetermined price on a specified future date. Payment in full is due at the time of, or following, delivery.”
5
Future Contract Future Contract
“A supply contract between a buyer and seller, whereby the buyer is obligated to take delivery and the seller is obligated to provide delivery of a fixed amount of a commodity at a predetermined price at a specified location.”
6
Futures Contracts - CharacteristicsFutures Contracts - Characteristics
Regulated Small lots Monthly quote Price transparent Clearing house Margin money required Not always physical
7
OptionsOptions
“a right – but not an obligation- to buy or sell an underlying asset at a fixed price during a specified time period in exchange for a one-time premium payment.”
Call : the option to buy Put : the option to sell
8
Where are They Traded ?Where are They Traded ?
NYMEX (US) IPE (London)
Light sweet crude (WTI) Brent
Heating oil (No 2) Gasoil
Gasoline
Natural Gas SIMEX (Singapore)
Fuel Oil
9
JargonsJargons
Contango vs. Backwardation
Long vs. Short
Bull vs. Bear
10
ContangoContango
If at any point in time…
Market prices RISE through future months…
Then the market is in CONTANGO
11
BackwardationBackwardation
If at any point in time…..
Market prices FALL through future months…
Then the market is in BACKWARDATION
12
IPE Gasoil CurveIPE Gasoil Curve
100120140160180200220240260
1st
Mth
2nd M
th
3rd
Mth
4th
Mth
5th
Mth
6th
Mth
7th
Mth
8th
Mth
9th
Mth
10t
h Mth
11t
h Mth
12t
h Mth
$/to
nn
e
3-Aug-98
1-Aug-00
13
Pay Out Diagram – Long PositionPay Out Diagram – Long Position
Buy AXL @ 30$/bbl
-4-3-2-101234
27 28 29 30 31 32 33
Market Price
Profits as Market rises
Losses as Market falls
$/bbl
Profits $
Losses $
27 28 29
14
Pay Out Diagram – Short PositionPay Out Diagram – Short Position
Sell AXL @ 30$/bbl
-4-3-2-101234
27 28 29 30 31 32 33
Market Price
Profits $
Losses $
Profits as Market falls
Losses as Market rises
$/bbl31 32 33
15
Use of Financial InstrumentsUse of Financial Instruments
1. Speculation
2. Hedging
3. Price Management
16
SpeculationSpeculation
Outright position taking
Pure paper traders
Directional price movement
17
A Speculative MarketA Speculative Market
IPE Brent Crude futures Total Traded Volume January 1998 - October 2000
0
2000040000
6000080000
100000
120000140000
160000
1/2/
98
3/2/
98
5/2/
98
7/2/
98
9/2/
98
11/2
/98
1/2/
99
3/2/
99
5/2/
99
7/2/
99
9/2/
99
11/2
/99
1/2/
00
3/2/
00
lots
18
HedgingHedging
Definition:
Taking an opposite position on futures to that on physical to remain…
“PRICE NEUTRAL” Objective:
“TO REDUCE RISK”
19
Hedging - ExampleHedging - Example
It is October 29th. A trader loads a gasoil cargo ex-Yanbu. The FOB price is $270/ton. His freight cost is $15/ton. He also has agreed to sell it CIF to a buyer in
Rotterdam at Platts 0.2%S CIF on arrival. Vessel is due Rotterdam November 9th. Today, Platts 0.2%S CIF price is $293/ton IPE December Futures price for gasoil is $291/ton. The trader intend to make $8/ton in profits.
20
Hedging – Example (continue)Hedging – Example (continue)
Hedging plan (Part I)When the physical is priced in, he should
sell futures (October 29th)
Action: 1. Buy physical @ $270/ton
2. Sell Futures @ $291/ton
21
Hedging – Example (continue)Hedging – Example (continue)
Hedging plan (Part II)When the physical is priced out, he should buy futures (November 9th)
On November 9th, Platts CIF Cargoes price is $280/ton IPE December Futures price is $278/ton
Action: 1. Sell physical @ $280
2. Buy Futures @ $278
22
Hedging – Example (continue)Hedging – Example (continue)
Physical $/ton Futures $/ton
FOB
Purchase
-270 Sell on
Oct. 29th
+291
Fright -15 Buy on
Nov. 9th
-278
CIF Sale 280
Net -5 Net 13
Accounting
OVERALL NET = +$8/TON
23
Price ManagementPrice Management
Definition:
Using futures and forward markets as a vehicle to…
“CATCH THE MARKET” Objective:
“LOCKING IN A PRICE”
24
Price Management - ExamplePrice Management - Example
It is November 1st
A Japanese refinery is due to load Dubai crude on December 15th
As usual, price will be determined 5 days around B/L
Buyer fear that crude prices are increasing next month and would like to lock current price
Action: 1. Buy Dubai futures now
2. Sell Dubai futures at time physical is priced
25
Why Do You See Trading Failures?Why Do You See Trading Failures?
Failure to understand risk & exposure Poor organizational structure Excessive speculation No position tracking Absence of controls Extreme market volatility
26
Crude Oil PricesCrude Oil Prices
38
0
5
10
15
20
25
30
35
40$/BBL Dubai Brent WTI
27
Crude Oil Price VolatilityCrude Oil Price Volatility
4-Mar3-Mar
18-Feb
23-Mar
10-Mar
9-Mar
24-Feb
17-Mar
11.0
11.5
12.0
12.5
13.0
13.5
14.0
14.5
15.0
15.5
16.0
16-Feb-99 23-Feb-99 2-Mar-99 9-Mar-99 16-Mar-99 23-Mar-99
WTI ($/BBL)
OPEC Meeting (Vienna)
28
SummarySummary
Many financial instruments Three motives to use financial instruments. There is a distinct difference between
hedging and speculation Hedge to reduce risk Trading Failures
top related