In the first two posts in our series our on bunker fuel hedging and price risk management, we explained how marine fuel consumers can utilize the two most common fuel oil hedging strategies, fixed price swaps and call options. Today we’re going to explore a strategy known as a collar, often a “costless” collar. While many often find the term collar to be confusing, the strategy isn't as complex as it might sound, as it simply the combination of buying one option (in the case of a fuel consumer, a call option) and selling another option (in this case, a put option) to create a price ceiling (also known as a max or maximum) and floor (as known as a min or minimum).
The Mercatus Energy Pipeline
This post is the second of several in a series covering the most common energy hedging strategies. You can access the first post, which covered energy futures, via this link. In subsequent posts we will also be exploring the basics of energy commodity options as well as more "complex" hedging structures such as basis swaps, collars and option spreads.
In a previous post, , we explored how oil and gas producers can implement a conservative hedging strategy utilizing a combination of call and put options to structure a strategy known as a three-way collars. Today we're going to explain how large fuel consumers, such as airlines, can also use three-way collars as a conservative fuel hedging strategy.
Are crude oil prices headed back below $40/BBL or even $30/BBL? Prompt NYMEX WTI futures settled last night at $42.92/BBL, while prompt Brent futures settled at $44.87/BBL and both are trading lower by an additional 75 cents at the moment. Recall it was only a few months ago that we witnessed crude oil trading below $30/BBL before the recovery back above $50/BBL.
Given the recent volatility in crude oil and refined products prices, as well as natural gas prices, we thought it would be beneficial to take another look at the various energy hedging instruments available to the various participants in the energy commodity markets.
Over the course of the past year, refining profit margins have been all over the map. As an example, over the course of the past year, the WTI-NY Harbor ultra-low sulfur diesel (ULSD) crack spread has traded as high as $22.92/BBL and as low as $6.89/BBL while averaging $14.03/BBL. Crack spreads on other crude oils (Brent, Light Louisiana Sweet, etc.) and various refined products (diesel, gasoline, jet fuel, etc.) have been similarly volatile.
As many companies are currently planning for 2017 and beyond, now is an ideal time to review your energy risk management program, including whether your team is prepared for the challenges of the upcoming year. Regardless of whether you're a Fortune 500 company or a small, family owned business, you need to determine whether or not your team your team is well prepared to do all of the following:
1. Identifiy, Analyze and Quantify All Risks
In the first post in this series, Bunker Fuel Hedging & Price Risk Management - Swaps, we examined how companies in the maritime and shipping industries can hedge their exposure to volatile bunker fuel prices with a strategy known as a fixed price swap.
The need for effective hedging and marketing is greater in the current price environment i.e. $50/BBL than it is in a higher price environment i.e. $100/BBL. Indeed, high prices can mask the consequences of poor commodity price risk management. At $50/BBL, oil and gas producers are greatly exposed to price volatility. Every $1 change in the price of oil is felt more intensely at these levels because margins are quite thin, many producers’ credit facilities are maxed out and lenders are nervous. Most producers are conflicted: they face real risk of lower prices, but they fear missing out on higher prices, and they have limited hedging budgets. Budgets are squeezed, but price risk remains present.