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An Introduction to Fuel Hedging

Natural Gas Hedging for End-Users

The Mercatus Energy Pipeline

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Oil & Gas Hedging Without Futures, Swaps & Options

 

Financial derivatives do not always provide satisfactory risk mitigation. Your risk profile may be more deeply exposed to risks beyond commodity prices. The market may not be sufficiently developed to allow you to mitigate your risk with fixed forwards, futures, swaps or options. Maybe you are in a location or consume, produce or process a commodity that isn’t traded in with any meaningful volume or transparency to merit hedging with financial derivatives. Maybe the market is supportive, but pursuing an alternative presents a competitive opportunity or more effective use of capital. In this post we explore some of these alternatives to financial derivatives.

Crude Oil & Natural Gas Producer Hedging & Marketing Conference

 

On September 10 in Fort Worth, Mercatus Energy Advisors is co-hosting a crude oil, natural gas and NGL producer hedging and marketing conference. Our partners for the event are Energy Aspects, Pioneer Solutions and Platts with more to be confirmed later this week.

July 2014 Oil & Gas Hedging Update - New Features

 

The one year forward curves for crude oil and refined products have all increased significantly since our June update with Dubai and LLS (light Louisiana sweet) leading the way higher, up 3.55%. The Brent-WTI one year forward curve moved back in the opposite direction over the past month, widening $0.85/BBL to 9.09/BBL. On average, crude oil and refined product forward prices have increased by 2.64%, on average, since our last update.

June 2014 Oil & Gas Hedging Update

 

Since our May update, the one year forward curves for crude oil and refined products are once again mixed with LLS and WTI crude oil leading the way higher, up 2.55% and 2.48%, respectively, and NWE jet fuel leading the way lower, down 0.84%. After widening between April and May, the Brent-WTI one year forward spread has declined by $1.84/BBL to $8.24/BBL. On average, crude oil and refined product forward prices have increased by 0.46% since our May update.

Is Your Crude Oil Hedging Strategy Overly Optimistic?

 

In our last post, we addressed natural gas producers' tendency to be overly optimistic, how it exposed many of them to unnecessary risk, and caused them to to miss opportunities. We used the previous decade’s natural gas price peak and trough to demonstrate the point. Current crude oil prices provide us with a real-time example of a similar situation.

Has Your Gas Hedging Program Failed Because of Your Optimism?

 

Behavioral finance and economics researchers consistently confirm the consequences of personal bias in all forms of trading. Many firms make these mistakes without even realizing that their hedging programs are unintentionally complicated or are actually a form of speculation rather than hedging. In addition, these errors commonly cause hedging programs to underperform, or worse, fail.

An Introduction to US Gulf Coast Crude Oil Hedging

 

As the Gulf Coast continues to becoming an ever more active crude oil trading hub, the interest in hedging Gulf Coast crude oil is increasing as well. While much of the hedging activity is taking place in the bi-lateral OTC (over-the-counter) market, we can also see evidence of the increasing activity in the exchange cleared products such as the NYMEX's LLS-WTI basis swap. Since early 2012, the open interest in the NYMEX cleared LLS-WTI basis swap has increased from approximately 20,000 contracts to just shy of 42,000 contracts as of the close of business yesterday.

May 2014 Oil & Gas Hedging Update

 

Since our last update, the one year forward curves for crude oil and refined products are a mixed bag with RBOB gasoline leading the way higher, up 2.09%, and NWE fuel oil leading the way lower, down 1.02%, respectively. After narrowing for four months in a row, the Brent-WTI one year forward spread has reversed course, widening $1.61/BBL to $10.29/BBL. On average, crude oil and refined product forward prices increased by a modest 0.14% since our April update.

April 2014 Oil & Gas Hedging Update

 

Since our last update, forward prices for the crude oil and refined product forward are all trading lower, led by LLS (Light Louisiana Sweet) crude oil, which has declined by 3.30% since last month. For the fourth month in a row the Brent-WTI one year forward spread has continued to narrow, declining $0.54/BBL to $8.68/BBL. On average, the crude oil and refined product forward curves have declined by an average of 2.08% since our last month.

Bunker Fuel Hedging with Crude Oil Options & Crack Spread Swaps

 

As many participants in the bunker fuel market are constantly seeking better strategies to hedge their exposure to fuel price risk, we wanted to explore a hedging strategy which we don't see utilized regularly but could be a great strategy for many companies. While this strategy may seem complex, it's really quite simple if you break it down into two separate components, an option on WTI or Brent crude oil and a USGC fuel oil crack spread.

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