Handbook of Multi-Commodity Markets and Products (eBook)

Structuring, Trading and Risk Management

Andrea Roncoroni, Gianluca Fusai, Mark Cummins (Autoren)

eBook Download: EPUB

2015
John Wiley & Sons (Verlag)
978-0-470-66183-3 (ISBN)

Infos

The comprehensive guide to working more effectively within the multi-commodity market.

The Handbook of Multi-Commodity Markets and Products is the definitive desktop reference for traders, structurers, and risk managers who wish to broaden their knowledge base. This non-technical yet sophisticated manual covers everything the professional needs to become acquainted with the structure, function, rules, and practices across a wide spectrum of commodity markets. Contributions from a global team of renowned industry experts provide real-world examples for each market, along with tools for analyzing, pricing, and risk managing deals. The discussion focuses on convergence, including arbitrage valuation, econometric modeling, market structure analysis, contract engineering, and risk, while simulated scenarios help readers understand the practical application of the methods and models presented.

Gradual deregulation and the resulting increase in diversity and activity have driven the evolution of the traditionally segmented market toward integration, raising important questions about opportunity identification and analysis in multi-commodity deals. This book helps professionals navigate the shift, providing in-depth information and practical advice.

• Structure and manage both simple and sophisticated multi-commodity deals
• Exploit pay-off profiles and trading strategies with a diversified set of commodity prices
• Develop more accurate forecasting models by considering additional metrics
• Price energy products and other commodities in segmented markets with an eye toward specific structural features

As one of the only markets strong enough to boom during the credit crunch, the commodities markets are growing rapidly. Combined with increasing convergence, this transition presents potentially valuable opportunities for the development of a robust multi-commodity portfolio. For the professional seeking deeper understanding and a more effective strategy, the Handbook of Multi-Commodity Markets and Products offers complete information and expert guidance.

ANDREA RONCORONI is Professor of Finance at ESSEC Business School (Paris-Singapore), regular Visiting Professor at Bocconi University (Milan), and Director of the ESSEC Energy and Commodity Finance research center. He holds PhD's in Applied Mathematics and in Finance. His research interests primarily cover energy and commodity markets, corporate financial risk analysis and management, quantitative modelling, derivative design and valuation. Andrea put forward the Threshold Model for price simulation in spiky electricity markets, and devised FloRisk Metrics, an effective analytics to monitor and manage corporate financial exposure. He publishes in academic journals, professional reviews, financial book series, and acts as Associate Editor for the Journal of Energy Markets and Co-Editor for Argo Review. Andrea has co-authored the reference volume Implementing Models in Quantitative Finance. As a professional advisor, he consulted for private companies and public institutions, including Dong Energy, Edison, Enel, GDF, Natixis, and Trafigura Electricity Italia (TEI Energy). He is founder and CEO of Energisk, a start-up company developing cutting-edge risk analytics for corporate clients.

GIANLUCA FUSAI is Full Professor in Financial Mathematics at the University of Eastern Piedmont, Italy, and a PT Reader in Mathematical Finance at Cass Business School, City University of London, UK. He holds a PhD in Finance from Warwick Business School, an MSc in Statistics and Operational Research from the University of Essex and a BSc in Economics from Bocconi University. His research interests focus on Energy Markets, Financial Engineering, Numerical Methods for Finance, Quantitative Risk Management. He has published extensively on these topics in top-tier international reviews. Gianluca has also co-authored the best-selling textbook Implementing Models in Quantitative Finance. Gianluca has cooperated to several projects in energy markets including a multi-energy risk assessment tool developed in conjunction with a pool of energy and industrial companies and a forward curve builder for the power and gas markets nowadays used for trading and marking to market. He has also been a consultant for private and public sector on building pricing tools of derivative products. Gianluca has been an expert witness in several derivative disputes.

MARK CUMMINS is Senior Lecturer in Finance at the Dublin City University Business School and holds a PhD in Quantitative Finance. Mark's research interests include a broad range of energy and commodity modelling, derivatives, risk management and trading topics. Mark has published in international journals such as Energy Economics, Applied Energy and the Journal of Energy Markets, as well as mainstream finance journals such as the Journal of Financial Markets, International Review of Financial Analysis and Quantitative Finance. Mark has previous industry experience working as a Quantitative Analyst within the Global Risk function for BP Oil International Ltd. As part of the Risk Quantitative Analysis team, primary responsibilities included derivatives and price curve model validation and development, with a global remit across BP's energy and commodity activities. Mark is engaged in ongoing industry training and consultancy activities, focused on the energy sector primarily.

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Handbook of Multi-Commodity Markets and ProductsOver recent decades, the marketplace has seen an increasing integration, not only among different types of commodity markets such as energy, agricultural, and metals, but also with financial markets. This trend raises important questions about how to identify and analyse opportunities in and manage risks of commodity products. The Handbook of Multi-Commodity Markets and Products offers traders, commodity brokers, and other professionals a practical and comprehensive manual that covers market structure and functioning, as well as the practice of trading across a wide range of commodity markets and products. Written in non-technical language, this important resource includes the information needed to begin to master the complexities of and to operate successfully in today s challenging and fluctuating commodity marketplace. Designed as a practical practitioner-orientated resource, the book includes a detailed overview of key markets oil, coal, electricity, emissions, weather, industrial metals, freight, agricultural and foreign exchange and contains a set of tools for analysing, pricing and managing risk for the individual markets. Market features and the main functioning rules of the markets in question are presented, along with the structure of basic financial products and standardised deals. A range of vital topics such as stochastic and econometric modelling, market structure analysis, contract engineering, as well as risk assessment and management are presented and discussed in detail with illustrative examples to commodity markets. The authors showcase how to structure and manage both simple and more complex multi-commodity deals. Addressing the issues of profit-making and risk management, the book reveals how to exploit pay-off profiles and trading strategies on a diversified set of commodity prices. In addition, the book explores how to price energy products and other commodities belonging to markets segmented across specific structural features. The Handbook of Multi-Commodity Markets and Products includes a wealth of proven methods and useful models that can be selected and developed in order to make appropriate estimations of the future evolution of prices and appropriate valuations of products. The authors additionally explore market risk issues and what measures of risk should be adopted for the purpose of accurately assessing exposure from multi-commodity portfolios. This vital resource offers the models, tools, strategies and general information commodity brokers and other professionals need to succeed in today s highly competitive marketplace.

Textauszug

CHAPTER 1
Oil Markets and Products

Cristiano CampiFrancesco Galdenzi

1.1 INTRODUCTION

The price of crude oil and oil products, once discussed solely in industry and government circles, has taken centre stage in the past 15 years among the lead indicators of the state of the economy and is now always quoted when forecasting economic trends. This phenomenon has occurred in conjunction with the growing acceptance of commodities as a mainstream financial and investment asset class, with the resulting growth in the volume and variety of financial instruments linked to them and the widespread use of these financial instruments in hedging, risk management and investments products.

This chapter focuses on two important offshoots of this ‘coming of age’ of the energy markets: the implementation of financially settled risk management policies by corporations exposed to fluctuating oil and oil product prices and the growth of hedging activities for companies active in physical oil trading. Before going further, it is worth looking at some key elements that determine the economics in the oil and oil products value chain. The oil industry is based on two main types of processes:

1. Upstream. This part of the oil cycle is associated with the exploration and production of crude oil.
2. Downstream. This part encompasses the transportation, refining and marketing of refined oil products (gasoline, diesel, jet fuel, naphtha, etc.).

The production of crude represents the starting point of the oil cycle. A producer is a company dedicated to extracting crude oil, which is supplied to the refinery system for the production of products needed to satisfy the demand of its energy consumers. The oil cycle is composed of the following elements.

1. The production of crude oil by several kinds of players, including:
   1. Integrated oil companies, such as Royal Dutch Shell in the UK, Eni in Italy, China National Petroleum Corporation in China and Exxon in the United States.
   2. Independent oil companies, such as Cairn Energy in the UK and Perenco in France.
   3. National oil companies (NOCs), such as Petrobras in Brazil, Saudi Aramco in Saudi Arabia or Petronas in Malaysia.
2. The demand for crude oil by the refinery system to produce oil products from:
   1. Refineries owned and managed by integrated oil companies or NOCs sourcing crude oil from their own production as well as buying it from international oil markets.
   2. Independent refineries, such as Saras in Italy and Valero in the United States, sourcing crude oil from the international oil markets.
3. The demand for oil products by final consumers, such as utilities, airlines, shipping companies, energy-intensive manufacturers, petrochemical companies, gasoline and diesel retailers.

The cycle described above is complemented by the transportation system, a vast and complex network of pipelines, crude oil and product carriers (by sea, rail and road) and storage facilities dedicated to the logistics behind the delivery of crude oil to refineries and of products to the final consumers.

The price of crude oil and oil products is driven by many factors, from macroeconomics to environmental legislation, from geopolitics to the weather and from production levels to taxation. The list in Table 1.1 proposes a scheme of the key factors observed by market operators when trying to assess price trends for oil and oil products.

TABLE 1.1 Key factors impacting price trends of oil and oil products

Macroeconomics

Gross domestic product (GDP) growth is generally linked to the increased consumption of energy and is positively correlated with spot and forward prices for crude and refined products.

Technology developments

Technological breakthroughs in the exploration sector (such as horizontal drilling, hydraulic fracturing or ‘fracking’, oil sand extraction, deep sea drilling) often force a re-evaluation of available oil reserves and can impact spot and forward prices.

Level of proven reserves

Technological developments such as those listed above plus improved seismic surveys often lead to new discoveries or to upgrading the amount of recoverable oil in existing oil reservoirs, with a potential impact on the level of forward prices.

Commercial and strategic storage

Additions to the worldwide network of commercially operated storage facilities or to state-controlled strategic storage can impact the behaviour of spot versus forward prices.

Weather

Hurricanes and typhoons can severely disrupt the logistics around oil and oil product markets, often impacting spot prices. Unusually cold or hot weather patterns can affect the consumption of gas and electricity, with an indirect impact on the spot and forward prices of oil products.

Arbitrage among energy commodities

The relative value of oil products versus that of other energy commodities can push prices up or down. For example, if the price of natural gas goes up, some industrial consumers using natural gas for heat and steam production may decide to switch to fuel oil if this proves to be cheaper on a per unit of heat basis. This would increase the demand for fuel oil and up its price, reducing the demand and price for natural gas.

Geopolitics

Trouble in important oil-producing countries (wars, terrorism, resource nationalism, etc.) will most likely lead to spikes in spot and forward prices, especially when spare production capacity is limited.

Financial markets

Crude oil is now an established asset class for financial investors (via index products or exchange-traded funds or directly on the futures markets). Changes in investment allocations by large players such as pension funds and asset managers can lead to material changes in oil future prices.

Exchange rates

Oil markets are denominated in US dollars, so US currency movements have a direct impact on the cost of consuming oil and oil products when expressed in the local currency, thus causing increases or reductions in demand.

Refining capacity

The construction of an oil refinery is a long and capital-intensive process; thus, when a global refinery system's spare capacity is limited, sudden increases in demand for oil products will likely lead to increases in oil product prices.

Shipping

Shipping rates for the transportation of crude and oil products, among the various production and consumption points, are a traded commodity per se. Changes in shipping rate levels have a direct impact on oil and oil product prices.

Taxation policy

Taxation policy can affect oil price economics at the upstream level (royalties policy, petroleum revenue taxes, etc.) by impacting the profitability of the extraction of crude oil and at the downstream level by taxing certain kinds of oil products differently (e.g., diesel cars receive more favourable tax treatment than gasoline cars in certain countries).

Environmental policy

Environmental policies generally lead to an improvement in efficiency of the consumption of oil products (e.g., mandatory minimum fuel efficiency ratings for cars), resulting in a reduction in the demand for oil products and a progressive elimination of pollutants (e.g., reduction in the sulphur content of diesel and fuel oil), resulting in an increased demand for higher-quality crude oil (e.g., with a lower sulphur content).

1.2 RISK MANAGEMENT FOR CORPORATIONS: HEDGING USING DERIVATIVE INSTRUMENTS

1.2.1 Crude Oil and Oil Products Risk Management for Corporations

1.2.1.1 Corporate Risk Management Overview

Companies with exposure to the price volatility of oil and oil products are taking an active role in managing this risk. They do so by entering into financially settled derivatives transactions, with the goal of achieving one of the following objectives:

1. Budget and/or profit margin protection.
2. Stabilization of cash flow and control of supply chain prices.
3. Gaining competitive advantage through swift reactions to changes in market prices.

Effective energy price risk management requires expertise in both financial instruments and oil markets: one must find financial instruments that mimic the prices from the suppliers (or to the customers) and constantly analyse oil price movements in the commodity markets. Because so few organizations have the in-house resources to support such specialization, energy price risk management expertise is often externally sourced from consultants or performed with the support of the sales and trading desks of investment banks, brokers and trading companies.

Many factors affect the decision as to what is the appropriate risk management instrument, including the...

Produkt-Details

• Erscheint lt. Verlag: 19.2.2015
• Reihe/Serie: The Wiley Finance Series
• Reihe/Serie: Wiley Finance Series
• Reihe/Serie: Wiley Finance Series
• Sprache: englisch
• Themenwelt: Recht / Steuern ► Wirtschaftsrecht
• Themenwelt: Wirtschaft ► Betriebswirtschaft / Management ► Finanzierung
• Schlagworte: Finance & Investments • Financial Engineering • Finanztechnik • Finanz- u. Anlagewesen
• ISBN-10: 0-470-66183-6 / 0470661836
• ISBN-13: 978-0-470-66183-3 / 9780470661833