Given the signiicant volatility in fuel prices in recent weeks, we’ve been fielding numerous inquiries from companies who are interested in developing a fuel hedging program for the first time in their company’s history. If you lack the knowledge to consider yourself a fuel hedging expert, this post along with several more that we'll be publishing shortly, will help you better obtain a better understanding of most common fuel hedging strategies available to commercial and industrial fuel consumers.
The Mercatus Energy Pipeline
After many excruciating months of non-stop media coverage, the US presidential election is over and for better or worse, Donald Trump will indeed be the next president of the United States. While it's probably safe to say that there have already been dozens, if not hundreds, of articles written which speculate about how Trump's yet to be determined administration will govern, we thought it would be worthwhile to explore a related topic that is much more in our wheelhouse than politics, energy commodity prices. More specifically, how have crude oil prices performed during the first terms of the most recent US presidents?
Over the course of the past few months we've met with numerous government ogranizations and state owned companies, both producers and consumers, regarding hedging their oil and gas revenues or costs, respectively. Some of these have been hedging for many years while others are just beginning to look into the matter for the first time or at least the first time in many years.
For the first time since 2008, OPEC (Organization of the Petroleum Exporting Countries) has agreed to reduce its aggregate output by 700,000-800,000 barrels per day (BPD), or to around 32.5 million to 33 million BPD, an agreement that has suprised the vast majority of oil market analysts. That being said, the lackluster reaction in both WTI and Brent futures is quite telling to say the least. Perhaps most market participants have grown tired of OPEC "crying wolf" and not adhering to the quotas?
We have just launched a new, unique weekly newsletter covering the global energy markets. In short, in order to deliver our clients with the advice, data and strategies that they expect from us, we spend a large part of each week reading hundreds of articles, blogs & reports and analyze gigabytes of data related to the global energy markets. We're now curating this data and information in the form of a weekly newsletter, which is free of charge and delivered direct to your inbox, The Week in Energy Markets.
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).
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.