Managing Crude Oil Using Derivatives

As the growth in the shale, oil market is continuously increased the input of oil supplies in the market by 11 per cent, which make an oil price fall cause of overwhelming supply (Meyer,2013).As a result of this, the buyer has more choice to seek a supplier , which has a lower prices and better contract condition. Thus, these forces become a high threat to Afren.

In order to ensure a reduction in the impact of rising crude oil prices on our company, we will take several actions to ensure that the impact of crude oil prices will not be more affected. First, we will raise the selling price by a small amount to compensate for the loss of government contracts. By raising the price to make up for the losses caused by the financial. Of course, this method has a certain risk, because if the increase is too large, the buyer may not buy from us here, so this can only micro-adjustment, can not improve too much. Second, we will need to control costs, starting from most places to ensure that can make up for financial shortfalls. Third, we will communicate with customers, such as we will take a range range of price fluctuations, and customers that will not exceed the range will not fall out, so that customers have a psychological bottom line. Thus ensuring that traffic will not lose. Fourth, we will be a large sum of money and bank loans, this is a last resort. Not to the last minute try not to use, although the reality may not be ideal. We can increase production in this way, and when prices fall, we can hedge, so that when prices rise, can produce more revenue to

The oil industry is full of economic booms and busts. Recently, the industry is in a downturn and the price of crude oil has dropped significantly. In recent times, the price of oil has dropped by more than 40% since June 2015. This crash came after nearly five years of stability and the economies hardly hit by this downturn are oil-exporting countries such as Russia, Nigeria, Iran and Venezuela. In the past one year and a half, oil prices have been cut in half and oil executives have predicted it will be years before oil prices return to $100 per barrel. The major causes of the downturn are the declining prices of a barrel of oil, which is as a result of the strong U.S. dollar, oversupply, OPEC and declining demand.

Unlike Brent, North American crude production is up amid a "shale oil revolution." To capture this fact, we use two variables published by the EIA. The first, CANADA, is the weekly amount of Canadian crude imported into the Petroleum Administration for Defense's Midwestern District ("PADD 2") where Cushing is located. The second, RIGS, is a monthly count of rotary rigs operating onand off-shore in the 50 United States. Both series increase steadily over most of our sample period, accelerating sharply from 2009 (RIGS) or 2011 (CANADA). Both variables should be inversely related to the spread: ceteris paribus, more North American supply should push down WTI's price—especially if the oil faces difficulties reaching international markets.

Beginning June 2014, the price of West Texas Intermediate (WTI) crude has dropped from $105 per barrel to where it is now currently priced at $42 per barrel on November 2015, constituting a price decrease of more than 60% over a period of eighteen months. This price drop is due to an increase in oil production primarily coming from Saudi Arabia and Iraq along with the American shale plays that is causing an outward shift in the global supply of crude oil. With the short term demand for oil being inelastic, a moderate increase in supply will cause a large decrease in the market price. Basic intuition of an oil producing firm with enough market power to face a downward sloping demand schedule, OPEC, would have it so production is scaled back in order to drive prices back up to former levels, however, this is not the case of what happened. OPEC, along with its lead producing country, Saudi Arabia, has been producing at their maximum production capacity in order to saturate the market as much as possible and drive oil prices down even lower.

Semmler W. (2006) Professor of Economics and Research Fellow at the Bernard Schwartz Center for Economic Policy Analysis (SCEPA) of the New School in New York and Professor at the Center for Empirical Macroeconomics (CEM) at the University of Bielefeld stated, that at present, but the effect is another mechanism, with the functioning of modern financial markets has to do, the rise in oil prices: trade with oil derivates in the futures markets has increased in recent years gained importance. In these markets is already the demand of tomorrow traded. For example, traders anticipate what China is the future for oil to pay could be. The prices for derivatives in turn impact on the real prices.

In the meantime, investors and financial intermediaries can either buy or sell commodities using derivatives. They put capital that is crucial to encouraging the business of the producer and of the end-user. They stand prepared to execute with these market participants; without them, producers and end-users couldn't fence their

This leads to a lower demand, and removal of the cost of shipping oil overseas. With this in mind, it is easy to see that with a local supplier the oil industry has created a surplus of crude oil, thus pushing prices down in order for these companies to compete with their competitors (economist). All of these factors took a role in the recent drop in oil prices, but the simplest explanation lies in the laws of supply and demand.

The sporadic nature of oil prices has over the years posed as a great deal of concern to economists, investors, financiers, consumers, analysts and other relevant stakeholders. In a perfect market, the price of a commodity is an indication of the present circumstances as well as future signals that could impact demand and supply. Ordinarily, we expect prices of commodities to move in response to changes that affect demand and supply at a relatively ‘normal’ rate. When prices change drastically within a short period and consistently over time, then such market is fraught with high volatility – a typical case of the crude oil market.

Just as any market experiences it’s fair share of ups and downs, the oil industry is currently running down a slippery slope. From coast to coast across the United States, the price of gasoline has plummeted to levels were last seen during the recession of 2009 (Krauss). Although prices have somewhat improved at various points throughout 2015, average prices have remained low and are expected to stay that way for the next several years. Many people are simply overjoyed that their wallet seems a little less empty and it now takes only half the cost to fill up their gas tank, however, in the greater scheme of economics this is definitely not the best for the economy

The year 2014 witnessed a dramatic decrease in the world market price of crude oil. Beginning in June 2014, the price per barrel (pb) steadily declined from $115pb to below $50pb at the start of 2015 (Bowler, 2015; US EIA, 2015; Voigt, Walls, McKemey, Bakogiannis, Williams, Morley, Warga, & Bronstein, 2015). Fluctuations in oil prices can considerably affect various aspects of both the world and individual country economies (Basnet, Vatsa, & Sharma, 2014).

In this report we have tried to highlight the fluctuations of crude oil during the period of 2001-10. The scope of this report is limited only to this period as we believe that events that took place during this decade had the potential to change the oil game so

Crude oil is one of the most economically mature commodity markets in the world. Even though most crude oil is produced by a relatively small number of companies, and often in remote locations that are very far from the point of consumption but it is shipped all over the world. The global supply and demand determines prices for oil. Events around the world can affect the prices at our home for oil-based energy. OPEC, the large oil-producing cartel, does have the ability to influence world prices, but OPEC 's influence in the world oil market is shrinking rapidly as new supplies in non-OPEC countries such as U.S. are discovered and developed.

Hedging the transaction exposure with options also offers total protection against adverse currency moves, potential profit in the case of favorable event and the flexibility of the contract itself; meaning it offers a right, but not the obligation to buy or sell

The Indian economy is witnessing a mini revolution in commodity derivatives and risk management. Commodity options trading and cash settlement of commodity futures had been banned since 1952 and until 2002 commodity derivatives market was virtually nonexistent, except some negligible activity on an OTC basis. Now in September 2005, the country has 3 national level electronic exchanges and 21 regional exchanges for trading commodity derivatives. As many as eighty (80) commodities have been allowed for derivatives trading. The value of trading has been booming and is likely to cross the $ 1 Trillion mark in 2006 and, if all goes well,