606OGE: Energy Trading and Economics
Background
‘A petroleum refiner, like most manufacturers, is caught between two markets: the raw materials he needs to purchase and the finished products he offers for sale. The price of crude oil and its principal refined products are often independently subject to variables of supply, demand, production economics, environmental regulations and other factors. As such, refiners and nonintegrated marketers can be at enormous risk when the price of crude oil rises while the prices of the refined products remain stable, or even decline.’
Introduction to Crack Spreads by CME
Completion of this assignment will address the following learning outcomes:
- Evaluate and critically assess oil price determinants and the major prices drivers of the markets;
- Critically evaluate price formation theory and practice;
- Critically analyse the spot and futures markets;
- Evaluate the effectiveness of derivative contracts;
Task
You are required to write a 2,500 words report analysing the impact that volatile oil prices and stagnant demand have on global downstream oil companies explaining how these companies can mitigate some of the risks and protect their business operations. The report should include the following aspects:
- Introduction to the topics
- Analyse the current trends in global oil supply and demand and how these trends are impacting oil prices. (LO1)
- Examine the relationship between supply and demand and price movements. You should highlight the main factors driving these price movements within the context of price formation theory and practice. (LO1) and (LO2)
- Examine some of the strategies downstream oil companies can deploy to mitigate the risks of adverse price movements focusing particularly on the use of derivative contracts as a defensive mechanism to protect their business operations. (LO4)
- Differentiate between Spot prices and Futures price contracts and analyse the effectiveness of Futures contracts as hedging instruments providing appropriate examples. (LO3)and (LO4)
- Conclusion