riskmanager stability in energy marketsri.pemex.com/files/dcf/babourine_tijbosch.pdf · GDP Prior...
Transcript of riskmanager stability in energy marketsri.pemex.com/files/dcf/babourine_tijbosch.pdf · GDP Prior...
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bpriskmanagerstability in energy markets1st International Meeting on Enterprise Risk ManagementNovember 4, 2002Presenters: Konstantin Babourine
Georges Tijbosch
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Agenda
1. BP Risk Management Team – who we are
2. Oil Markets Overview
3. Introduction to Energy Risk Management
4. Risk Management Program Design
5. Bpriskmanager.com
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LondonLondon
SingaporeSingapore
ChicagoChicago
BP Risk Management
• BP has global 24hrs trading Coverage, employing about 150 energy traders
• Provision of Risk Management solutions for external and internal client
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Market Overview
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Oil Markets – Current Status
1. Main drivers: Demand, OPEC and non OPEC Supply2. Gulf War I and II3. Recent events4. Movements in Product Prices5. Forward Prices6. Longer Term View
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Market Drivers
! Major trends:" Severity of global economic downturn" OPEC restraint – Saudi, Kuwait, Iran" Non-OPEC production – Russian barrels" Bush agenda re Iraq
! Onset of winter in US & Europe! Changing markets:
" Trending market - speculative Fund activity" Inventory levels – cashflow / volatility" Companies hedge programmes “catching up”
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Global Oil Demand
Weak demand in 2002 but pick-up in 2003
68.00
70.00
72.00
74.00
76.00
78.00
80.00
97 98 99 00 01 02 03
-1.00
-0.50
0.00
0.50
1.00
1.50
2.00
2.50
3.00Demand World (mb/d pa) RHS Demand World (mb/d) LHS
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Non-OPEC Supply
Burst of non-OPEC supply in 2002 and further
41.00
42.00
43.00
44.00
45.00
46.00
47.00
48.00
49.00
50.00
97 98 99 00 01 02 03
-1.00
-0.50
0.00
0.50
1.00
1.50
2.00
2.50Supply Non-OPEC Total (mb/d pa) RHS Supply Non-OPEC Total (mb/d) LHS
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OPEC Oil Supply (incl. Iraq)
Increased output in 2000 but OPEC has cut since then
21.00
22.00
23.00
24.00
25.00
26.00
27.00
28.00
29.00
30.00
97 98 99 00 01 02 03
-4.00
-3.00
-2.00
-1.00
0.00
1.00
2.00
3.00
4.00Supply OPEC Crude (mb/d pa) RHS Supply OPEC Crude (mb/d) LHS
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OPEC Quota
Since Jan-01, tighter quotas have led to increased non-compliance
OPEC Production (kb/d)
21000
22000
23000
24000
25000
26000
27000
28000
Jan-
98
Apr-
98
Jul-9
8
Oct
-98
Jan-
99
Apr-
99
Jul-9
9
Oct
-99
Jan-
00
Apr-
00
Jul-0
0
Oct
-00
Jan-
01
Apr-
01
Jul-0
1
Oct
-01
Jan-
02
Apr-
02
Jul-0
2
Oct
-02
0
500
1000
1500
2000
2500
3000
OPEC-10 Production
OPEC-10 Quota
Non-compliance (HRS)
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Conclusion – Call on OPEC
0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
97 98 99 00 01 02 03
-3.00
-2.00
-1.00
0.00
1.00
2.00
3.00
4.00 Call on OPEC Crude + Stock ch. (mb/d pa) RHS Call on OPEC Crude + Stock ch. (mb/d) LHS
“Call” is unchanged for 2003 – Any increased OPEC output would weaken prices
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Gulf War – what happened
! Flat Prices" Significant flat price gains,
most markedly for jet." Price peak sometime before
air war begins" Price falls at start of air war
and by ceasefire is back to normal.
! Cracks" Product cracks remained
within historical patterns )other than for jet.
" Fuel oil lagged crude move, pressurising straight run margins.
" Start of air war pushed jet crack back to late-1990 levels
0
10
20
30
40
50
60
70
May-90 Jul-90 Sep-90 Nov-90 Jan-91 Mar-91 May-91
$/bbl
Brent IPE 1M
Jet/Kerosene
Gasoil
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Gulf War II – what’s different (1/2)
Greater market uncertainty in 1990/91Greater market uncertainty in 1990/91
Issue Gulf War I Gulf War II
Effects Immediate impact on production and capacity once Iraqi invasion took place
No loss of capacity in the build-up to US intervention
Production Immediate loss of output recently averaging 4.15mb/d (from Kuwait and Iraq) Loss of current Iraqi output of 2.0mb/d
Spare Capacity
Spare capacity largely eliminated following Saudis matching the 4.5mb/d removal of Iraqi and Kuwati capacity.
Currently substantial spare capacity (5.5mb/d). As before most (60%) is in Saudi.
GDP Prior to invasion, global GDP of 2.5%Currently global economy is growning more slowly at 1% GDP. Jet fuel demand has been impacted by 9/11.
Oil BalanceBalances tightened and stocks drew substantially in 2H90, but less than expected due to higher oil prices and weak demand (4Q90 -1.5m/b yoy)
Balances are tightening and stock declining but industry sees adequate re-supply.
Inventories OECD stocks at 4Q90 at 64.0 days, larger than a year earlier. (Were high and declining)
4Q02 OECD stocks at 52-53 days (Stocks are balanced but declining).
Demand for Inventory
Increased demand for inventory even though inventory was high caused soaring prices.
Demand to build as expectation of war builds. But prices to be moderated by experience of SPR/IEA actions in 1991. But relatively low inventories provides major upside to prices if war escalates.
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Gulf War II – what’s different (2/2)
Destruction of capacity assumed not to be war aimDestruction of capacity assumed not to be war aim
Issue Gulf War I Gulf War II
PricesImmediate skyrocketing from supply and capacity loss. Prices collapse once war risks go demand weakens and SPR/IEA actions.
Price rises to be moderated by spare capacity, knoweledge of SPR/IEA. Also prices will dampen weak global economy, setting scene for price collapse.
Knowledge Initially huge uncertainty of outcome Experience from 1991 re Forces/ IEA/ SPR/ demand effects.
War Precise in timescale and area of action Imprecise in timescale and area of action.Destruction of Capacity Destruction of Kuwati capacity by Iraq Destruction of Iraqi capacity not a US war aim.
USA More reliant on Arabian Gulf Oil in US oil import mix Less reliant on Arabian Gulf Oil in US import mix
Middle East Oil Western markets remained particularly important. Proportionately far more moving East.
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Recent Prices
Better margins as crude falls more than product prices
Spot Crude Prices ($/bbl)
23
24
25
26
27
28
29
30
31
32
7/29 8/12 8/26 9/9 9/23 10/7 10/21
Brent Dated WTI Cushing 1mth (Adj) Dubai 1mth (Adj)
3-2-1 Crack Spread ($/bbl)
2
3
4
5
6
7
8
9
10
7/29 8/12 8/26 9/9 9/23 10/7 10/21
Rotterdam Mediterranean NY Harbour Singapore
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Market Outlook Products (1)
! In absence of late summer gasoline spike, refiners now looking to winter distillate demand for margin relief. Atlantic Basin distillate stocks now slightly below the previous 5-year average.
! Stronger demand, but adequate stocks, except in the USA
! Relative strength in nat gas prices and forecast of colder than normal winter is supportive for heating oil.
! Refining capacity still recovering from recent tropical storms in the Gulf of Mexico.
OECD Total Gasoil Inventories (k.tonnes)
55000
60000
65000
70000
75000
80000
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
1996-2000 2000 2001 2002
OECD Gasoil Demand (kt/d)
13501400145015001550160016501700175018001850
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
1996-2000 2000 2001 2002
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Market Outlook Products (2)
! Recovery in jet fuel demand taking longer than expected and may be permanently impacted by potential structural shift from flying to driving particularly for short business trips.
! Transition to lower sulfur fuels in Europe has potential to divert low sulfur products from the US, thus creating possibility of some supply tightness.
! Gasoline remains well supplied in both the US and Europe.
! Relatively heavy turnaround schedule on the Gulf Coast into the first half of 2003 will be supportive to product prices.
OECD Jet/Kerosene Demand (kt/d)
400
450
500
550
600
650
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
1996-2000 2000 2001 2002
OECD Total Jet/Kerosne Inventories (k.tonnes)
12000
13000
14000
15000
16000
17000
18000
19000
20000
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
1996-2000 2000 2001 2002
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Forward Prices
Front Months weakening by more than Outer Months, backwardation remains but is more shallow.
IPE Brent Forw ard Price Curve ($/bbl)
22.00
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25.00
26.00
27.00
28.00
29.00
30.00
M1 M2 M3 M4 M5 M6 M7 M8 M9 M10 M11 M12
8-Oct-02 15-Oct-02 22-Oct-02 29-Oct-02
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The longer-term outlook
Adjusted DOE forecast indicates OPEC share not recovering to 2000 levels.
0102030405060708090
100
98 99 00 01 02 03 04 05 06 07 08 09 10
mb/d
Demand OPEC Supply Non-OPEC Supply
mb/d 2000 2010 mb/d %Demand 76.0 89.9 13.9 18.2%OPEC Supply 30.9 36.3 5.5 17.7%Non-OPEC Supply 46.0 53.5 7.6 16.4%OPEC Supply (% of Total) 40.6% 40.4% 39.5%
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Introduction to Energy Risk Management
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Risk Management Overview
! Historically low involvement in risk management"Misinterpretation of risk management goals"Lack of liquidity in some regional markets"Narrow spectrum of risk management products available"Derivatives debacles
! The level of sophistication in the market has grown exponentially! Strong competitive pressure to better manage costs! Physical suppliers created greater forward price transparency in some
regional markets ! Specialized risk management teams offer customized tailor-made programs
unique to customer’s exposure
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! Margin Risk – Mismatch in revenue and cost sides of the business
! Budget Risk – Risk of exceeding a preset budgetary targets
! Cash Flow Risk – Fuel price volatility generates uncertainty in future cash flow
! Performance Risk – Unexpected market events (caused by military tensions, etc.) can create cost prohibitive environment for business
! It all depends on how a customer measures Performance
Energy Price Risk
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Risk Management Process Map
! Identify Exposure
! Risk Profile
! Forecasting and Market View
! Authority Levels
! Buy-in by management and investors
! Design the program
! Disciplined execution
! Close Monitoring
! Settlement
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Know your exposure
!Energy producers" face fixed costs and high investment levels" look for certainty of revenues
!Energy users"airlines, shipping companies, factories etc" fuel can be a large percentage of total costs" look to protect margins, budgets
!Oil refiners"exposed to crude price and to product selling prices" look to protect refining margins
!Speculators"use derivatives as a speculative trading tool
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Risk Management – Myths and Reality
! Term Structure"Myth: Forward prices decline – should I hedge?
"Reality: Term structure is NOT prediction, i.e. “backwardation” does not mean “bearish” and “contango” does not mean “bullish”
! Hedge + Physical = 0"Myth: My hedge made $5M dollars last year
"Reality 1: Paper P/L offsets physical
"Reality 2: Basis risk
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Basis Risk
BP can help you study your basis risk
NYMEX Crude
Nymex Products
Platts Oilgram
LiquidityMarket Efficiency Basis Risk
Fixed Price PhysicalPhysical (Wet)
Paper
NO Basis RiskNO Basis Risk
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Risk Management Options
!Do nothing!Hedge by yourself through NYMEX
"Operationally expensive"Hedge monitoring" Initial margin and margin calls"Risk of accidental obligation to deliver or take delivery
!Using professional over-the-counter (OTC) RM providers "Basis risk management"Efficient execution"Strong market/industry presence"“Wet Barrel” risk management
• Physical players are able to offer “wet barrel” risk management• Price managed product is physically delivered
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Risk Management Program Design
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Hedging Strategy
! Tactical Hedging" Couple of months-1yr" Flat price" Changing strategies
depending on markets" Variable results
! Strategic Hedging" Importance of cash flow and
profit stability" Long term ( 1-4 yrs )" Use of Cracks/Diffs…" Long term markets" Targets/strategy depend on
financials" Sometimes trade in/out
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Case 1: Refining Margin Hedging
! A refiner is looking to protect its margin for Q4’03
! Currently, Q4’03 3-2-1 USGC Crack (2/3 USGC Unleaded Platts Mean plus 1/3 USGC HO#2 Platts Mean minus Nymex WTI front line) is $4.00
! Market news:" Late and mild winter" High heating oil stock levels" Refinery utilization forecasts are high" Currently, and generally, heat crack forward curve is in contango
! To create certainty around its future cash flow refiner decides to fix its future margin by selling swap on a crack
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Swaps
! Contractual agreement between two parties who agree to make regular payments to each other.
! Fixes the price of future oil at a level agreed today.! No initial outlay.! Need to agree:
" which fuel and floating price index
" volume
" time period
" fixed price
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Refiner Margin Swap or “Crack”
! “Short” physical crude oil.
! “Long” physical fuel products.
! Difference between the two prices = refining margin.
! OTC derivatives allow the refiner to “swap” or fix the margin.
! Hedges position by “selling” margin swap
" pays floating and receives fixed
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the swap
5 days after pricing mth
USGC Crack
Oct-Dec2003
$4/bbl
100kb per month
Average of Platts USGC Mean Pl
atts
USG
C M
ean
6
5
4
3
2
1
Nov02 Dec02
RefinerBP You pay BP
BP pays you
Refiner sells a crack swap
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Refining Margin Hedge
Crude Supplier
Average Platts USGCprice for product(floating price)Refiner Customer
Average Nymex WTI price (floating price)
Swap Counterparty
$4 per barrel(fixed price)
Difference between:Platts USGC and WTI
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Case 2: Production Hedging
! A producer is looking to protect its revenue for Q4’03
! While majority of the costs is fixed all the revenue is subject to oil price volatility
! Currently, forward price for Cal’03 Maya crude is $19/bbl.
! Producer is not willing to fix the price as there is a good chance that the crude price will bounce back up, but needs to place some protection in case if the market keeps falling
! To create its future margin protection producer decides to place a floor on its future sales price by purchasing a crude oil option
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Options
! Give the right but not the obligation to buy or sell oil
! Upfront premium => Price insurance
! Need to agree
" fuel and index
" volume
" time period
" strike price i.e. floor or ceiling
" premium to be paid
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Floors (or Puts)! Purchaser has the right but not the obligation to sell oil at a certain price
during a certain period of time.
! If the price of oil falls below the strike price then the floor seller pays the average difference to the buyer.
! If the price remains above the strike price then the buyer does not exercise his option.
! Remember that the buyer has paid a premium.
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The floor (put option)
Floor Level = $19/bbl
Avg = 21 $/bblProducer Does not exercise optionActual price = (21-1) = 20 $/bbl
Avg = 16 $/bblProducer receives 3 $/bbl backActual cost = (16+3-1) = 18 $/bbl – it is a min sales price
Option Premium = $1/bbl
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Collars
!Don’t want to pay premium ? – get a cap
!Producer can buy a floor and sell a cap
" smaller premium
" or zero-cost
! If average prices exceed the floor, the producer benefits, however there is an opportunity loss if prices exceed the cap
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Case 3: Airline Hedging
! An airline is looking to manage its costs for Q1 according to its budget requirements
! Up to 30% airline’s operating costs are fuel related; a portion of revenue is often fixed (airline tickets sold in advance)
! An airline wants to determine its maximum jet price, whilst benefiting from some decrease in prices
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Three-Way Option
! Airline agrees to a maximum price (call option) and a minimum price (put option 1), similar to a collar. Furthermore, it agrees a 3rd price level (put option 2), below which Airline will start to benefit from falling prices. The three-way is agreed at a premium or at zero cost
! Protection against rising market
! Some participation in a falling market
! Significantly reduces credit exposure
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Three-way option
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… and many more
! Extendibles
! Participation
! Bullet swaps
! Basket options
! Knock-ins; Knock-outs
! Pre-pay structures
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About BP
! Leading supplier of Physical & Paper Risk management
! Specialist in tailor-made Risk Management solutions
! World Class Trading Organization – Physical & Paper
! 24h trading Organization - Execution of your strategy
! Service that meets all compliance rules and regulations
! BP offers anything from straight paper swaps to complex structured products
! Outsourcing middle and back office
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www.bpriskmanager.com
! You can track the markets on our website! Includes a risk management game! Explanation about swaps, options, …! Enhancements based on customer feedback
! Coming soon:
Daily Refiner Update