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Management
Dr. Prabina Rajib
Professor
Vinod Gupta School of Management
IIT Kharagpur, 721302
prabina@vgsom.iitkgp.ernet.in
adsas
20
Shale Oil & Guar Gum
Shale vs crude: Why oil prices are on a free
fall even as Opec members suffer
Guar Gum is used in fracking process
It is used as thickening agent to push fluids
sideways in the hydraulic fracturing or “fracking”
process
In 2011, guar gum export was the India’s largest
agricultural export to the United States at $915
million, USDA report
https://www.reuters.com/article/us-india-shale-guar/shale-energy-triggers-
bean-rush-in-india-idUSBRE84R07820120528
21 Dr. Prabina Rajib, VGSOM, IIT Kharagpur
Indian Crude Oil and Refined Product Market
Upstream as well as downstream(Refining and Retailing) activities
are controlled by Government of India (GoI).
Upstream
Exploration and production (E&P) sector
ONGC Ltd. and (GAIL), RIL and Cairn India etc. are also involved
in upstream activities.
Downstream
IOCL, HPCL,BPCL,NRL, MRPL,BRPL and RIL and Essar
Oil Ltd.
BPCL, HPCL, and IOCL are also major
distributors/marketers (Oil Marketing Companies)
Available inventory
Lots of information is available at
http://www.opec.org/opec_web/en/76.htm
25 Dr. Prabina Rajib, VGSOM, IIT Kharagpur
Crude Oil Contracts
CME (Chicago Mercantile Exchanges)
Both futures, regular options and Asian Options and many
other variants trade at CME.
Futures contract specification at CME
Futures Contract Specification at MCX
https://www.mcxindia.com/market-data/market-watch
CME and MCX
Hedging energy commodity price risk by Indian companies.
The State of Airline Fuel Hedging and Risk Management in
2013- Mercatus Energy Advisors
Sasol Limited of South Africa entered into zero cost collars for 30%
of its last quarter production of crude oil of 456 million barrels for
the year 2011. Sasol took long put option at USD 85 per barrel. The
exercise price for short call option was USD 127.77.
40 Dr. Prabina Rajib, VGSOM, IIT Kharagpur
Exercise (Collar)
An airline company takes a short put option on ATF
at a strike price of USD 4.1 (K1) per gallon and a
long call position at USD 4.6 (K2) on notional
volume of 20,000 gallon for every month. The short
put premium is equal to the long call premium. Find
out the payoff and also plot a graph for this collar
strategy for spot price ranging from USD 3.6 to
USD 5.0.
Barclays Capital and CEC signed a deal in May 2011. The deal
was for 10 year, USD 850 million VPP
Over the 10 year period, CEC agreed to deliver 180
bcfe(billion cubic feet equivalent) of natural gas at USD 4.82
pe mcfe to Barclays.
Barclays became the fixed rate payer and floating rate receiver.
Basically Barclays can sell the natural gas in the spot market
and realize the floating price.
Instead of keeping the VPP deal in its balance sheet (by paying
USD 850mn upfront to Chesapeake), Barclays Capital split its
future cash flow into two separate pools/trusts.
These two are known as Glenn Pool Oil and Gas Trusts I and II.
Moody’s VPP rating details
43 Dr. Prabina Rajib, VGSOM, IIT Kharagpur
Crack Spread Futures Contracts
Standalone oil marketing companies are exposed to crude oil and
refined product price risk. These entities take long futures on
crude oil and short futures on refined products to protect their
margins.
Crack spread measure the price difference between the refined
product and crude oil http://www.cmegroup.com/tools-
information/calc_crack.html
Crack spread contracts can be (1:1), (2:1:1), (3:2:1), or (5:3:2)
Table 5.8: Types of Crack Spread Futures Contracts
Contract Type Description
1:1 1 crude oil contracts, 1 gasoline ( or any other refined
product) contract
2:1:1 2 crude oil contracts, 1 heating oil and 1 diesel contract
3:2:1 3 crude oil contract, 2 heating oil and 1 diesel contract
5:3:2 5 crude oil contract: 2 heating oil contract and 2 diesel
44 contract.
Crack Spread ( Exercise)