Environmental Engineering Reference
In-Depth Information
The new ways of trading
As the old system of administrative setting of prices first by the Seven
Sisters, then by OPEC broke down definitively in the mid-1980s, trading
was mainly on a spot basis - sellers had to deliver and buyers had to take
delivery immediately. This naturally limited trading to those with oil and
those with a use for oil or storage for oil. But futures trading quite quickly
developed, partly for the usual reason of reducing price risk and partly
because the Western oil majors needed a price benchmark to show to
their tax authorities (which were now able to take a more active interest
in the newly opened-up internal workings of the oil companies) in order
to prove their balance-sheets were legitimate.
In contrast to spot transactions, trading oil futures is theoretically open
to an infinite number of players - far beyond the necessarily limited
number of people with a need or capability to buy, sell or store physical
oil. In particular, futures trading brings in the speculators - people whose
only interest in physical oil is what they put in their car or lawn mower but
with a yen for a bit of risk-taking. That is what makes speculators, despite
their popularly disreputable image, the vital complement to hedgers in
futures markets.
Hedgers and speculators
Hedgers are people, usually producers and users of oil, who want to avoid
the risk of the price of that oil changing in the future. A hedger could be
a small oil company which, to underwrite a bank loan it has taken on to
develop a new project, has had to guarantee to the bank that it will be able
to sell future oil from the project at, say, $70 a barrel four years hence. In
“selling its oil forward” at $70 in four years time, the oil company is will-
ing to forego the possibility of the market price for oil going higher than
$70 in four years time, just in order to be sure its own oil will fetch no
less than $70.
Equally, a hedger might be a consumer , rather than a producer of oil.
A chemical company, say, might wish to ensure that it will not have to
pay more than $70 a barrel for its crude oil feedstock in four years' time.
Again, the chemical company is willing to pay a possible price to gain
certainty - the price being the possibility that the market price for crude
might be below $70 in four years' time and that if the chemical company
had not hedged its oil purchase it could have got its feedstock cheaper.
In sum, hedgers are willing to give up the opportunity to benefit from
 
Search WWH ::




Custom Search