Oil Trading: Price Risk, Hedging, Derivatives

DAY 1. 6 April 2022

Module 1: PRICING AND MARKET STRUCTURE
09:00 -11:15 (with 15 min break)

This course explains how oil is priced in commercial contracts and how this creates risk. We will then examine market structure (the shape of the forward curve of prices) and how this affects pricing and risk.

Pricing and structure will be tied to together to examine storage of oil, premiums and differentials, and arbitrage plays.

Key elements:
Price reporting agencies
Floating prices and fixed prices
Futures contracts and predictions
Contango and Backwardation
Structure and trading: contango storage, premiums and arbitrage

30 min break

Module 2: FUTURES, SWAPS AND HEDGING
11:45 – 14:00 (with 15 min break)

This course will look at price risk in oil trading and how to deal with that risk. Dealing with risk means hedging and we will examine how hedging works.

We will explain the major derivatives: futures, forwards and swaps and how they relate to the forward curve.

We will use exercises to show how hedging works. We will also discuss how these derivatives are used for trading and speculating.

Futures are a key derivative which are often used to directly price physical oil; we will look at this mechanism, the EFP.

Finally, we will discuss how traders derive prices using differentials and spreads.

Key elements:
Assessing price risk: long, short, neutral
Key derivatives: what are futures, swaps and forwards?
Exchange of Futures for Physical
Cracks, spreads and differentials
OSP’s and premiums in trading

DAY 2. 7 April 2022

Module 1: OPTIONS AND HEDGING
09:00 -11:15 (with 15 min break)

After a quick review of the basic derivatives (futures, swaps and forwards) we will explain options.

How does an option work and how is it valued? What is a call? What is a put?

Options can be daunting because of the math and the vocabulary. This module will present options as simply as possible, avoiding complex math and explaining the jargon in layman’s terms.

We will look at how options can be a trading tool and a hedging mechanism.

This module will focus on client based options for producers and consumers.

Finally we will discuss exotic options; what are they and why are they “exotic”?

Key elements:
Calls and puts
European, American and Asian options
Black-Scholes option pricing model
Volatility: historical, actual and implied
Caps and floors
Collars, spreads, three-ways, and leveraged options
Exotic options

30 min break

Module 2: HEDGING, PRICING AND RISK MANAGEMENT WORKSHOP
11:45 – 14:00 (with 15 min break)

The previous three modules built the bases for understanding and managing risk. This final module uses realistic scenarios and simulations for applying this understanding. We will work together solving hedging and pricing problems on crude oil and products. The exercises will includes use of swaps and futures to calculate prices and hedge price risk.

The number and difficulty of the exercises will depend on the participants. The module will last two hours including time for questions.

Exercises (possible):

Calculating cargo values using swaps: Gasoil from Jamnagar (India)
Calculating delivered prices and making trading decisions: Jamnagar to West Africa
Trading gasoil with an EFP: risks and hedging: Gasoil FOB Ventspils (Latvia in Baltics)
Differential swaps: Jet Diff and Diesel Diffs in Europe
Differential Risk, Arbitrage and EFP: Trading Jet from Kuwait to Rotterdam
Gasoline Arbitrage: Europe vs. US market

The class is interactive and live. Questions are welcomed throughout and web based white boards will be used to demonstrate where required. Time may be allocated for examples suggested by participants in addition to prepared exercises.