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Price Risk Management: An Oil Company’s Perspective MEJET 2004 May 12, 2004 - Bahrain

Price Risk Management: An Oil Company’s Perspective MEJET 2004 May 12, 2004 - Bahrain. TOTSA Total Oil Trading SA Risk Management Services. Forecasting Jet Fuel Prices ? Mission impossible. NWE Cargoes CIF - Jet . 450. Gulf War. New OPEC policy. 400. Irak. 350. 2004 ?. 300.

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Price Risk Management: An Oil Company’s Perspective MEJET 2004 May 12, 2004 - Bahrain

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  1. Price Risk Management:An Oil Company’s PerspectiveMEJET 2004May 12, 2004 - Bahrain TOTSA Total Oil Trading SA Risk Management Services

  2. Forecasting Jet Fuel Prices ? Mission impossible. NWE Cargoes CIF - Jet 450 Gulf War New OPEC policy 400 Irak 350 2004 ? 300 USD/MT 250 Low demand 200 Excess offer 9/11 150 100 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

  3. Despite Formal Price Signals … 40 23 APR 04 35 30 25 20 15 10 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

  4. Jet Fuel: a Market turning Global Historical correlation between Singapore Kerosene and… Kerosene CIF NWE DUBAI Crude Oil 1.000 0.950 0.900 0.850 0.800 0.750 0.700 0.650 0.600 0.550 0.500 0.450 0.400 0.350 0.300 Apr-96 Apr-97 Apr-98 Apr-99 Apr-00 Apr-01 Apr-02 Apr-03 Apr-04 Dec-95 Aug-96 Dec-96 Aug-97 Dec-97 Aug-98 Dec-98 Aug-99 Dec-99 Aug-00 Dec-00 Aug-01 Dec-01 Aug-02 Dec-02 Aug-03 Dec-03

  5. WTI Brent Dubai Oman Tapis Worldwide Products Markers ? Fuels Gasoline Gasoil Naphta Jet

  6. Price Risk Management ?

  7. WTI Brent Dubai Oman An Oil Company’s Perspective LPG Naphta Gasoline Jet Gasoil Fuels As Provider of Price Risk Management Solutions To Airlines, Charter Companies, Tour Operators Since the late 1980’s. Tapis

  8. December 2003: our Specialists are called in Diagnosis Step 1: Facts Step 2: Toxicity Step 3: Control

  9. Brent Prices Volumes in Bbls 900,000 29 Usd 800,000 Physical Exposure 700,000 600,000 27 Usd 500,000 “Delta Position” resulting from Derivatives Portfolio : long 6.3 M Bbls 400,000 25 Usd 300,000 200,000 100,000 - Jul-04 Jul-05 Jul-06 Apr-04 Apr-05 Feb-06 Apr-06 Jun-04 Aug-04 Sep-04 Oct-04 Jan-05 Feb-05 Jun-05 Aug-05 Sep-05 Oct-05 Jan-06 Jun-06 Sep-06 Oct-06 Feb-04 May-04 Nov-04 Dec-04 Mar-05 May-05 Nov-05 Dec-05 Mar-06 Aug-06 Nov-06 Mar-04 May-06 Jan-04 Dec-06 Diagnosis – Step 1: Fact Finding Price Indices Mark to Market: - 11.7 M$ % hedge cover at close of business: 22 % Basis Risk: yes

  10. Basis Risk: don’t forget your Actual Exposure ! Well, Crude Oil or Gas Oil are not such a bad approximation of your risks… In The Long Run ! But why not hedge Your Physical Jet Purchases with ….. Jet ?

  11. Basis Risk: Commodity Risk USD/BBL 30 Jet Cargoes CIF North West Europe Versus 1st Maturity Brent IPE 25 20 From 01 JAN 90 to 29 APR 04 15 10 5 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

  12. Basis Risk: Location Risk USD/Bbl 10 8 6 4 2 0 -2 -4 -6 Cargoes CIF North West Europe Versus Cargoes FOB Singapore -8 -10 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

  13. Diagnosis – Step 2: from « Exotics » to Toxic Portfolio With the exception of January 2004, the calendar exposure of our Partner was made of • options transactions, • with an unusual Exotic vs Vanilla ratio, • giving to the Derivatives Provider involved the right to decide on our Partner’s level of Price Protection.

  14. Toxic Hedges The Sale, today, of a Call Option or of a Put Option Enables you to collect Cash – today – Are you properly equiped To evaluate the Liabilities Associated with the Premium received ?

  15. Selling Volatility… The mark to market of the options portfolio could be affected by a change in market volatility Volatility Change in %- 15 - 10 0 + 10 + 30 (on the spot + diffusion) Change in portfolio valuation+ 9.9 + 6.7 0 - 15 - 37 (in Million $) Selling Options on Options is also a Bet On Forward Volatility !

  16. Changes in Portfolio’s Valuation using historical values (spot and forward) Portfolio valuation K$ IPE Brent prices 0 35 -50,000 30 25 USD/BBL -100,000 20 -150,000 15 10 -200,000 -250,000 Jul-01 Jul-96 Jul-97 Jul-98 Jul-99 Jul-00 Jan-01 Jul-02 Jul-03 Apr-01 Oct-01 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-02 Jan-03 Apr-96 Oct-96 Apr-97 Oct-97 Apr-98 Oct-98 Apr-99 Oct-99 Apr-00 Oct-00 Apr-02 Oct-02 Apr-03 Oct-03

  17. Derivatives Position Bbls + Market price _ Change in portfolio valuation using daily price shocks hypothesis Change in value in K USD 20,000 10,000 Today’s spot 0 - -10,000 -20,000 -30,000 -40,000 -50,000 Daily price change in Usd -10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 19 Usd 24 Usd 29 Usd 34 Usd 39 Usd Implied IPE Brent Price Note : a volatility diffusion model is used to determine the term structure

  18. Our Partner’s “Oil Bill” (physical + derivative) over 2004 /2006 1,300 Millions $ 1,200 1,100 Spot Price 1,000 900 800 700 600 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 Spot prices scenarios

  19. What Airlines & Oil Companies have in Common Diagnosis Step 1: Facts Step 2: Toxicity Step 3: Control And Governance !

  20. Third Party Third Party … in implementing Corporate Risk Management Programmes Production Retail Wholesale Refining Optimizing the value chain while mastering corresponding price exposures.

  21. The Trading Temptation • “Opportunistic Hedging” / “Procurement Optimization” Taking advantage of “Cheap Prices » whenever they occur, • be it by buying Physical Jet in Bulk • or by trading Derivatives, related to the then Cheapest Geographical Price Index (crude oil, gasoil or jet). To take a market view on what is “Cheap” Cash Availability / Credit Crunch

  22. No Credit Exposure LCCH Trading on the International Petroleum Exchange A I R Clearer A Clearer B Both “Principals” – via their respective Clearing Brokers - pay deposits to the Clearing House, the amount of such deposits being adjusted daily so as to compensate for adverse price fluctuations

  23. Act Regularly in the Market, using Budget Values Hedge Programmed Quantities up to 4 years forward Hedge in Crude Oil, then Gasoil, then Jet Fuel Use Swaps and Options (Exotism under Control) Secure Access to Liquidity (ISDA with Collaterals) Make sure the required Hedge Funding is available Most reliable Set Ups: Strategic Risk Management Programmes Real Involvement of a Risk Management Committee

  24. Price Risk Management for Industrial & Commercial Companies ? Hedging is Neither a Source of Profit, nor a way to Raise Cash ! Hedging is about Securing TODAY Forward Cash Flows Expected over specific Time Horizons Selected Derivative Transactions Have to qualify as Hedges Accounting wise !

  25. Oil Price Risk Management ? From an Oil Company’s Perspective: …a lot more than just Selling Oil Derivatives !

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