11/14/2019 Overview of Oil Trading
11/14/2019 Overview of Oil Trading
-Sonal Gupta
11/14/2019 Overview of Oil trading
Agenda
Introduction
Risk Management
4 Risk Management
7
Overview of Oil trading
11/14/2019
The Oil and Gas Chain
Refining Process
World primary energy consumption grew by 2.5% in 2011, less than half the growth rate experienced in
2010 but close to the historical average. Oil remains the world's leading fuel, accounting for 33.1% of
global energy consumption, but this figure is the lowest share on record. Coal's market share of 30.3%
was the highest since 1969.
11/14/2019 Overview of Oil trading
Source : BPSR
Proved oil reserves
11/14/2019
OPEC controls 73% (1196 mb) of the Global Oil Reserve
Overview of Oil trading
Source : BPSR
What next???????
What then????
World oil production increased by 1.1 million b/d in 2011,with OPEC (42%)accounting for nearly all
11/14/2019
of Overview of Oil
the increase despite a 1.2 million b/d reduction in trading
Libyan production.
Source : BPSR
Global Oil Consumption by Area
US; China and Japan
are top three oil
consumers
World oil consumption increased by roughly 600,000 b/d. All of the net growth came from emerging economies
in Asia, South & Central America, and the Middle East, offsetting declines in Europe and North America.
11/14/2019 Overview of Oil trading
Source : BPSR
Top Global Oil Exporters…
Region Crude Exports(mt)
Middle East 879.4
Former Soviet Union 319.3
West Africa 224.1
S. & Cent. America 139.0
Canada 111.7
North Africa 72.3
Mexico 67.5
East & Southern Africa 16.6
Australasia 14.2
Europe 12.9
4 Risk Management
In economic sense, price is what a buyer pays for the utility of the goods that he buys.
In that sense, the price of Crude Oil is the market price in the physical market.
Prices of Crude are generally quoted ‘free on board’ (FOB) at their loading port.
• Paper market
Derivative market which is a logical extension of Physical market.
Derivatives are instruments such as futures, swaps, Options which derive their value
from an underlying commodity.
• OPEC Policies
• Geopolitical Reasons
• Inventory; Reserves
• Weather
• Currency movement
• Other Markets
Sulphur content
Of course, the price of crude depends on these factors. The lighter the crude and sweeter it is
the higher is the price
……..
Currency Movement ..
……..
……..
• Transportation
– Ships or pipelines
– Sizes involved in crude and product transportation
• Processing
– Different types of crude and their relative values
– Refinery configuration
• Storage
– Specialised storage tank at every point in supply chain
WTI and
brent
Brent
Zone
Dubai/Oman
Tapis/Minas
Zone
Short (Sell):
• If the market goes up, money is lost
If the market goes down, money is made
Physical Derivatives
OTC Exchange
Spot Forwad
Options
……
Market Players
Risk Management
3
4 Functioning of Derivative Markets
Financial Markets
Potential for loss arising from unfavorable movements in interest rates, exchange
rates or commodity prices.
Financial Risk
prices People
Shipping rates Geographical
Exchange rates Regulatory
Crude Oil->
Producer Refiner
Thin margin
Large consumers High price
Consumer Large distribution companies
(Natural gas)
Unstable prices
11/14/2019 Overview of Oil trading
Airlines and Shippers High fuel price
Introduction – Setting the context 1
Risk Management 3
Forward Contract
31/01/13
A agree to Buy 1000 bbl of Crude @ $120/bbl from B on 31st March ,13
Forwards Futures
Bilateral trades & negotiated Transparent price discovery
pricing mechanism
Inadequate dispute settlement Well defined dispute settlement
mechanism mechanism
Difficulty in reporting and The exchange is the central
regulating various trades reporting and regulating entity
Options
• Options are traded both on exchanges and in the over-the-counter
market.
• Two basic types of options.
A call option gives the holder the right to buy the underlying asset by a
certain date for a certain price.
A put option gives the holder the right to sell the underlying asset by a
certain date for a certain price.
• The price in the contract is known as the exercise price or strike price.
• The date in the contract is known as the expiration date or maturity.
• American options can be exercised at any time up to the expiration
date.
• European options can be exercised only on the expiration date.
Example
• Mr A buys a European call option with a strike price
of $5/mmbtu to purchase 1mmbtu of Natural gas,
the expiration date of the option is in one month,
the premium price is $1/mmbtu.
• If price in exchange is $8/mmbtu on the expiration
date.
• Mr A will have an option whether to execute the
contract.
• If he executes the contract there will be a profit of
$2/mmbtu.($8-$5-$1)
• If he doesn’t loss of $1(premium).
Example
• Mr A bought an European put option with a strike price
of $5/mmbtu to sell 1mmbtu of Natural gas, the
expiration date of the option is in one month, the
premium price is $1/mmbtu.
• If price in exchange is $8/mmbtu on the expiration date.
• Mr A will have an option whether to execute the
contract.
• If he executes the contract there will be a loss of $2($8-
$5-$1).
• In case he doesn’t execute the contract there will be
loss of $1.
Options – Basic Terminology
• Call Option The right to buy a specified amount of commodity
at a specified rate
• Option holder Buys the option, has rights, has a long option position
• Option writer (seller) – Sells the option, has obligations, has a short option position
Mechanics of options
Call Option
-- Buyer
Has the right to buy a futures contract at a predetermined price on or before a defined
date. Expectation: Rising prices
-- Seller
Grants right to buyer, so has obligation to sell futures at predeter- mined price at buyer's
discretion. Expectation: Neutral or falling prices
Put Option
-- Buyer
Has right to sell futures contract at a predetermined price on or before a defined
date. Expectation: Falling prices
-- Seller
Grants right to buyer, so has obligation to buy futures at a predetermined price at buyer's
discretion. Expectation: Neutral or rising prices
Swaps
• “ Swap converts an unknown future price into current fixed price”
• A swap is a purely financial transaction designed to transfer price risk between the swap
purchaser and the swap provider.
• Plain vanilla OTC agreement
• Fixed for floating exchange of risk
• Purely a financial transaction – no delivery
• Settlement:
– If floating price lower than fixed (swap) price – swap provider pays swap buyer
– If floating price is higher than fixed (swap) price – buyer pays seller/provider.
Example – four month fix for Brent crude oil at $25.00 bbl:
Jan Feb March April
• Floating price ($/bbl) 24.50 24.75 25.40 26.80
• Quantity (bbls) 10,000 10,000 10,000 10,000
• Actual cost $ 245,000 247,500 254,000 268,000
• Swap seller pays 0 0 4,000 18,000
• Swap buyer pays (5,000) (2,500) 0 0
• Final cost to buyer 250,000 250,000 250,000 2,50,000
• Cost to buyer $/bbl 25.00 25.00 25.00 25.00
Types of Traders
• Hedgers-reduce their risk by taking an opposite
position in the market to what they are trying to
hedge.
• Speculators- make bets or guesses on where they
believe the market is headed.
• Arbitrageurs- Attempts to profit from price
inefficiencies in the market by making simultaneous
trades that offset each other and capturing risk-free
profits.
Example (Arbitrageurs)
• Price in CME is $100/barrel.
• Price in MCX is $101/barrel.
• Cost of transportation from US to India is
$.5/barrel
• In this case a traders will take long position in
US market and short position in Indian Market
thereby making a profit of $.5/barrel.
THANK YOU