oil futures market
DESCRIPTION
Oil Futures Market. Hedging & Price Management September 27, 2014. Outline. Types of Financial Instruments Jargons Usages of Financial Instruments Trading Failures. Types of Financial Instruments. Forward Contract Futures Contract Derivatives Options Calls Puts Swaps. - PowerPoint PPT PresentationTRANSCRIPT
![Page 1: Oil Futures Market](https://reader033.vdocuments.site/reader033/viewer/2022061614/56814304550346895daf57d8/html5/thumbnails/1.jpg)
1
Oil Futures Market
Hedging & Price Management
April 21, 2023
![Page 2: Oil Futures Market](https://reader033.vdocuments.site/reader033/viewer/2022061614/56814304550346895daf57d8/html5/thumbnails/2.jpg)
2
OutlineOutline
Types of Financial Instruments
Jargons
Usages of Financial Instruments
Trading Failures
![Page 3: Oil Futures Market](https://reader033.vdocuments.site/reader033/viewer/2022061614/56814304550346895daf57d8/html5/thumbnails/3.jpg)
3
Types of Financial InstrumentsTypes of Financial Instruments
Forward Contract Futures Contract Derivatives
1. Options Calls Puts
2. Swaps
![Page 4: Oil Futures Market](https://reader033.vdocuments.site/reader033/viewer/2022061614/56814304550346895daf57d8/html5/thumbnails/4.jpg)
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.”
![Page 5: Oil Futures Market](https://reader033.vdocuments.site/reader033/viewer/2022061614/56814304550346895daf57d8/html5/thumbnails/5.jpg)
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.”
![Page 6: Oil Futures Market](https://reader033.vdocuments.site/reader033/viewer/2022061614/56814304550346895daf57d8/html5/thumbnails/6.jpg)
6
Futures Contracts - CharacteristicsFutures Contracts - Characteristics
Regulated Small lots Monthly quote Price transparent Clearing house Margin money required Not always physical
![Page 7: Oil Futures Market](https://reader033.vdocuments.site/reader033/viewer/2022061614/56814304550346895daf57d8/html5/thumbnails/7.jpg)
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
![Page 8: Oil Futures Market](https://reader033.vdocuments.site/reader033/viewer/2022061614/56814304550346895daf57d8/html5/thumbnails/8.jpg)
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
![Page 9: Oil Futures Market](https://reader033.vdocuments.site/reader033/viewer/2022061614/56814304550346895daf57d8/html5/thumbnails/9.jpg)
9
JargonsJargons
Contango vs. Backwardation
Long vs. Short
Bull vs. Bear
![Page 10: Oil Futures Market](https://reader033.vdocuments.site/reader033/viewer/2022061614/56814304550346895daf57d8/html5/thumbnails/10.jpg)
10
ContangoContango
If at any point in time…
Market prices RISE through future months…
Then the market is in CONTANGO
![Page 11: Oil Futures Market](https://reader033.vdocuments.site/reader033/viewer/2022061614/56814304550346895daf57d8/html5/thumbnails/11.jpg)
11
BackwardationBackwardation
If at any point in time…..
Market prices FALL through future months…
Then the market is in BACKWARDATION
![Page 12: Oil Futures Market](https://reader033.vdocuments.site/reader033/viewer/2022061614/56814304550346895daf57d8/html5/thumbnails/12.jpg)
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
$/to
nn
e
3-Aug-98
1-Aug-00
![Page 13: Oil Futures Market](https://reader033.vdocuments.site/reader033/viewer/2022061614/56814304550346895daf57d8/html5/thumbnails/13.jpg)
13
Pay Out Diagram – Long PositionPay Out Diagram – Long Position
Buy AXL @ 30$/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
![Page 14: Oil Futures Market](https://reader033.vdocuments.site/reader033/viewer/2022061614/56814304550346895daf57d8/html5/thumbnails/14.jpg)
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
![Page 15: Oil Futures Market](https://reader033.vdocuments.site/reader033/viewer/2022061614/56814304550346895daf57d8/html5/thumbnails/15.jpg)
15
Use of Financial InstrumentsUse of Financial Instruments
1. Speculation
2. Hedging
3. Price Management
![Page 16: Oil Futures Market](https://reader033.vdocuments.site/reader033/viewer/2022061614/56814304550346895daf57d8/html5/thumbnails/16.jpg)
16
SpeculationSpeculation
Outright position taking
Pure paper traders
Directional price movement
![Page 17: Oil Futures Market](https://reader033.vdocuments.site/reader033/viewer/2022061614/56814304550346895daf57d8/html5/thumbnails/17.jpg)
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
![Page 18: Oil Futures Market](https://reader033.vdocuments.site/reader033/viewer/2022061614/56814304550346895daf57d8/html5/thumbnails/18.jpg)
18
HedgingHedging
Definition:
Taking an opposite position on futures to that on physical to remain…
“PRICE NEUTRAL” Objective:
“TO REDUCE RISK”
![Page 19: Oil Futures Market](https://reader033.vdocuments.site/reader033/viewer/2022061614/56814304550346895daf57d8/html5/thumbnails/19.jpg)
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.
![Page 20: Oil Futures Market](https://reader033.vdocuments.site/reader033/viewer/2022061614/56814304550346895daf57d8/html5/thumbnails/20.jpg)
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
![Page 21: Oil Futures Market](https://reader033.vdocuments.site/reader033/viewer/2022061614/56814304550346895daf57d8/html5/thumbnails/21.jpg)
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
![Page 22: Oil Futures Market](https://reader033.vdocuments.site/reader033/viewer/2022061614/56814304550346895daf57d8/html5/thumbnails/22.jpg)
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 = +$8/TON
![Page 23: Oil Futures Market](https://reader033.vdocuments.site/reader033/viewer/2022061614/56814304550346895daf57d8/html5/thumbnails/23.jpg)
23
Price ManagementPrice Management
Definition:
Using futures and forward markets as a vehicle to…
“CATCH THE MARKET” Objective:
“LOCKING IN A PRICE”
![Page 24: Oil Futures Market](https://reader033.vdocuments.site/reader033/viewer/2022061614/56814304550346895daf57d8/html5/thumbnails/24.jpg)
24
Price Management - ExamplePrice Management - Example
It is November 1st
A Japanese refinery is due to load Dubai crude on December 15th
As usual, price will be determined 5 days around B/L
Buyer fear that crude prices are increasing next month and would like to lock current price
Action: 1. Buy Dubai futures now
2. Sell Dubai futures at time physical is priced
![Page 25: Oil Futures Market](https://reader033.vdocuments.site/reader033/viewer/2022061614/56814304550346895daf57d8/html5/thumbnails/25.jpg)
25
Why Do You See Trading Failures?Why Do You See Trading Failures?
Failure to understand risk & exposure Poor organizational structure Excessive speculation No position tracking Absence of controls Extreme market volatility
![Page 26: Oil Futures Market](https://reader033.vdocuments.site/reader033/viewer/2022061614/56814304550346895daf57d8/html5/thumbnails/26.jpg)
26
Crude Oil PricesCrude Oil Prices
38
0
5
10
15
20
25
30
35
40$/BBL Dubai Brent WTI
![Page 27: Oil Futures Market](https://reader033.vdocuments.site/reader033/viewer/2022061614/56814304550346895daf57d8/html5/thumbnails/27.jpg)
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)
![Page 28: Oil Futures Market](https://reader033.vdocuments.site/reader033/viewer/2022061614/56814304550346895daf57d8/html5/thumbnails/28.jpg)
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