Oil Trading : From Supply / Demand Balancing To Price Risk Management Frederic Baule TOTALFINAELF Trading Division 1
Once upon a time 2
Nymex decided to trade «futures» contracts for electricity in Palo Verde 65 US$/MWh 60 55 50 45 40 35 30 25 20 15 10 5 Apr 96 SPOT And FORWARD 1996 1997 3 1998 1999 2000
Forward prices were no cristal ball but Power Merchants were keen to learn. 65 US$/MWh 60 55 50 45 40 35 30 25 20 15 10 5 Apr 97 1996 1997 4 1998 1999 2000
Each learning curve has its price But they learned fast. 65 US$/MWh 60 55 50 45 40 35 30 25 20 15 10 5 sometimes, a very high price! Apr 96 Apr 97 Apr 98 1996 1997 5 1998 1999 2000
Power Price Risk Management was their future 65 US$/MWh 60 55 50 45 40 35 30 25 20 15 10 5 Apr 96 Apr 97 Apr 98 1996 1997 6 1998 1999 2000
as they did find The Martingale! 65 60 55 50 45 40 35 30 25 20 15 10 1996 1997 1998 1999 2000 2001 7
Or so they thought 240 220 200 180 for a while! USD/MWH 160 140 120 100 80 60 40 20 0 1996 1997 1998 1999 2000 2001 2002 8
And California went dark. 9
But the show had to go on 700 650 600 550 500 450 400 350 300 250 200 150 100 50 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 10
And on 700 650 600 550 500 450 400 350 300 250 200 150 100 50 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 11
And on 700 650 600 550 500 450 400 350 300 250 200 150 100 50 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 12
And 700 650 600 550 500 450 400 350 300 250 200 150 100 went Off Line 50 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 13
What went wrong when? 14
What about Crude Oil Trading? Sea Transportation Production Storage Refining Storage Marketing 15
A Different Story? 70 60 Nominal $/bl '98 $/bl Latest Low '98$ (17/11/98) 50 40 30 20 10 0 1861 1866 1871 1876 1881 1886 1891 1896 1901 1906 1911 1916 1921 16 1926 1931 1936 1941 1946 1951 1956 1961 1966 Sources: BP, Platts 1971 1976 1981 1986 1991 1996
Challenged by «Macro» Parameters 45 40 35 Irak invades Kuwait BRENT PRICES Kuwait increases Production 9/11 30 CIS Failed Putch Expectation Irak/UN USD/BBL 25 20 Low Demand 15 10 5 Excess Offer OPEC New Quotas 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 17
and rising Volatilities Volatility 70 In % 60 50 Time 40 30 20 10 1 5 9 12 Dec-94 Jun-95 Maturities Dec-95 Jun-96 Dec-96 Jun-97 Dec-97 Jun-98 Dec-98 Jun-99 Dec-99 Jun-00 Dec-00 Jun-01 Dec-01 Jun-02 Brent - Historical 30 days annualised volatility 18
Crude Oil Trading relies on a robust Pricing Mecanism facilitating International Trades + Freight Differential + FinancingDifferential + QualityDifferential Crude Oil Price + Physical to Paper Differential «Paper» Crude Price 19
built gradualy 1975/1985 Long Term Contracts Fixed prices/volumes 2000 / 2002 within a Price Band? 1985/1986 Netback Formulas Product Prices Indexation 1980 s A Fixed Price Per Spot Cargo 1987 Indexation to a Crude Oil Reference 20
Without Supply Disruption 21
as Trading fills in short term imbalances. 1135 2810 30 To Asia 1375 145 From Asia 1630 3605 2615 210 120 345 2265 3590 470 1000 1065 China 233 China 1407 4970 395 To Japan 3435 105 From Latin America 100 Crude Oil inter-regional regional movements in 2000 = 33.2 Mbd 22
The Result : an Integrated Market Combining Physical Trading. Forward Markets Brent 15 day... Physical Market «Dated» Brent Oil Markets Organised Markets IPE Brent Over the Counter Products Brent swap with Price Trading 23
Price Traders Floor Brokers e-trading OTC Brokers Supply / Demand NEWS! 24
Focused on Crude Oil Markers London New York Rotterdam Tokyo US Gulf Coast MED AG Singapore WTI Brent25 Dubai Oman Tapis
leading contributors to Oil Price Formation 700 Futures Contracts Accrued Volumes 600 500 NYMEX Volumes 400 300 200 IPE Volumes 100 World Oil Demand 76.5 0 Jan-84 Jan-85 Jan-86 Jan-87 Jan-88 Jan-89 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 26
translating Information into Prices,, in size. WTI Share 30% Non-Commercials Positions On Nymex WTI Contract $/Bbls 40 25% 20% 36 32 28 15% 24 10% 5% 20 16 12 0% Jan-86 Jul-87 Jan-89 Jul-90 Jan-92 Feb-93 Oct-93 Jun-94 Mar-95Nov-95Jul-96 Apr-97 Dec-97 Aug-98 Apr-99Jan-00 Sep-00 May-01Jan-02 8 Short Position % Long Position % 27
Oil is Liquid! 63 Inventories $33 Prices 61 $30 $27 59 $24 57 $21 $18 55 53 $15 $12? J F M A M J Jy A S O N D 1995 1996 1997 1998 1999 2000 2001 2002 2003 $9 95 96 97 98 99 00 01 02 03 Stocks in days of forward consumption 28
Oil Professionals care about Oil Fundamentals Stocks Kbbl 310,000 300,000 290,000 280,000 T-spread $/bbl 3.00 2.50 2.00 1.50 1.00 270,000 0.50 260,000 0.00 250,000-0.50 240,000-1.00 230,000-1.50-2.00 220,000 Jan-89 Mar-90 Apr-91 Jun-92 Aug-93 Oct-94 Dec-95 Jan-97 Mar-98 May-99 Jul-00 Aug-01 Aug-02 Weekly API Crude Oil Stocks Time Spread (WTI 1 - WTI 2) 29
meaningful Time Structures. 40 35 30 25 20 15 10 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 30
Products Trading? Production Storage Refining Storage Marketing 31
Price Forecasting Gas Oil - IPE 350 300 250 USD/MT 200 150 100 50 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 32
not a Trader s job $MT 100 80 60 40 20 0-20 -40-60 -80-100 -120 Daily changes of IPE Gasoil Prices 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 33
fighting to survive day to day Price Actions... $MT20 15 10 5 0-5 -10-15 -20-25 -30 1996 1997 1998 1999 2000 2001 2002 34
in much narrower Markets. 8 7 North America 8 27 Latin America 20 14 6 11 Europe 8 22 7 Africa 6 11 43 Middle East Ex-USSR & E. Europe 109 4 Asia-Pacific Only trade flows >4 Mt en 2000 World Oil Products Inter-regional regional Trade Flows 35 335 Mt in 2000
Time Structure Gas Oil - IPE 350 300 250 Weather Arbitrage USD/MT 200 150 Offer Demand 100 50 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 36
Time Structure : Propane North West Europe 400 350 300 USD/MT 250 200 150 100 50 1998 1999 2000 2001 2002 2003 2004 37
Time Structure : Unleaded Gasoline North West Europe 400 350 300 USD/MT 250 200 150 100 50 1998 1999 2000 2001 2002 2003 2004 38
Time Structure : Automotive Gasoil North West Europe 400 350 300 USD/MT 250 200 150 100 50 1998 1999 2000 2001 2002 2003 2004 39
Time Structure : Low Sulfur Fuel Oil North West Europe 190 170 150 USD/MT 130 110 90 70 50 1998 1999 2000 2001 2002 2003 2004 40
Energy Merchants Weather Renewables A BUSINESS MODEL Emissions Multi Currency OIL IMPORTED COAL & COKE NATURAL GAS HYDRO + NUCLEAR + LOCAL COAL 41
European Energy Market Gas (and Power) Markets Oil Professionals Physical Gas Gas Derivatives Physical Oil Oil Derivatives Oil Trading Trading Firm Gas Price Formulae Gas Trading Energy Merchants 42
European Energy Market Improved Forward Liquidity 40 35 USD/BBL 30 25 Gas formulae 20 15 10 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 43
Facilitates forward refinery margins hedging Usd / Bbl 11 10 9 8 7 6 5 4 3 2 1 0-1 -2 1998 1999 2000 2001 2002 Spot Refinery Margin based on Med indices 12 months Forward Refinery Margin 44
The Refiner : at the Center of the Supply Chain Crude Oil Products Production Storage Storage Marketing Trading Trading 45
facing a real managerial challenge. Petchem Market NatGas Market LPG Market Power Market Naphtha Market Crude Oil Market Gasoline Market Feedstocks Market Kerosene Market Fuel Market Heating Oil Market Diesel Market 46
Products Exchanges Drivers of Growth Lower barriers to trade Standardized products Increased competition Now! Risk management techniques Gold Butter, eggs, poultry Silver CBOT, NYMEX, CME, LME, Turkey futures Copper Futures for eggs, butter, cheese, potatoes, onions 47 Pork bellies Platinum Live hog futures Nickel Live cattle futures Mortgage futures Live hog futures options Palladium Aluminium Platinum options & futures Certificate of deposit futures Pork belly futures options Oil forwards and futures Feeder Heating oil cattle futures Paris Ammonia futures Broadband Natural gas options futures Gas futures Pulp futuresweather Live cattle futures optionsbarge freight index Edible oils index Catastroph y futures Propane Emissions futures Boneless beef futures & options Paper pulp swaps Steel scrap futures Biffex, Nordpool Lean hog futures & options Late 1800s - early 1900s 1940 1960 1980 1994 1998 Number of derivative contracts traded annually Source: Annual reports, press clippings... produced by IMAREX Commodity Derivatives Growth IMM Singapore Norway Finland Brazil Japan London China Germany Russia Sydney Tanker freight 0 250M 750M 1.2B
Risk Management in Europe Sea Transportation Production Storage Refining Storage Marketing 48
European Energy Market Energy Merchants Distribution Company Residential Refiners & Power Generators Industrial & Commercial 49
European Energy Market Oil Professionals Energy Merchants Marketing Marketing Gas Price Formulae Oil Price Formulae Oil Derivatives Power Price Formulae Energy Endusers 50
European Energy Market Coal Markets Steam Coal Now! Forward Contracts Coal Derivatives Coking Coal Pet Coke 51
Energy Intensive Industries A Multi-Commodity Demand Limited Short term Arbitrage European Cement Industry Gas Fuel Combined Mad Risk cow Management Coal Offer Required Coke 52
Energy Risk Management Customer s Risk Mapping Tangible Risk + Events Commodities Flows + Equipments + Financing = Energy At Risk Intangible Risk + Skills 53
Energy Risk Management Risk Strategies Eliminate? Divestment Energy At Risk Retain? Insurance Transfer? Outsourcing 54 Hedging
Energy Risk Management Management Tools OUTSOURCING? Retainable Risk Equity LT Resources Working Capital Financing Risk Management Insurable Risk Credit Default «Derivatives» EventInsurance Policies Emission & Weather «Derivatives» CONSULTING? Hedgeable Risk Derivatives Instruments ENERGY Pricing Engineering DERIVATIVES Physical Forwards 55
Energy Risk Management Risk Merchants? E-Markets Insurance Brokers (Re) Insurers Energy At Risk ENTERPRISE-WIDE RISK MANAGEMENT Investment Banks Rating Agencies IT Vendors Consulting Firms «Big Five» Four 56
Energy Risk Management Endusers Risk Management Hedging Committee SKILLS Derivatives Physical procurement Hedge execution Hedging Committee Members : CEO + CFO + Supply Manager carry a potential financial risk? hence have to follow Ad Hoc procedures 57 Energy Endusers
Energy Risk Management Intermediation or Market Powers? Capital Adequacy Finance Manager Banks Balance Sheet CUSTOMER Event AT Insurance RISK A Risk CORPORATE Manager SOLUTION (Re-)Insurers Price Management Purchase Manager Know How Traders 58
What s next? USD/BBL 38 36 34 32 30 28 26 24 22 20 18 16 14 12 10 8 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 59
Can Market Powers be left on their own to regulate Supply Demand Imbalances? 60
Energy Risk Management On a way Beyond Petroleum Trading! 198819891990199119921993199419951996199719981999200020012002 61