Table of Contents

Table of Contents

Chapter 1

 
Introduction and Context Setting 10
Introduction 10
The Big Picture: the Trading Backdrop 11
Simply Selling Oil 13
The Joy of Trading 14
Conventional Wisdom about the Future 15
Conventional Wisdom about Oil Production and Consumption 19
OPEC and National Oil Companies 23
The Evolution of Pricing Conventions 25
Important Pricing Convention 27
The Three Components of the Oil Price Formula 28
Consilience Terminology A, T & G 29
   

Chapter 2

 
Logistics of Trading Physical Oil 30
Introduction 30
Licence Agreements and Production Sharing Contracts 30
  Cost Recovery 32
  Profit Share 32
  Royalty and Tax 32
  Domestic Obligations 33
  Ring Fencing 33
  Market Price 33
Joint Operating Agreements 36
Transportation Agreements 39
  Tariffs and Conflict of Interest 39
  Value Adjustment Mechanisms 40
  Terminal Logistics 42
  FPSOs 43
Lifting Agreements 44
Vessel Nomination and Failure to Lift 46
Physical Sale and Purchase Agreements 47
Freight Contracts 51
  Freight Costs 52
  Laytime and Demurrage 54
   

Chapter 3

 
The Absolute Price of Oil (A) 57
Introduction 57
What is a Benchmark? 58
  Dubai 59
  ESPO 60
  "WTI" 61
  ASCI 63
  TAPIS 64
  Brent 64
Changes Needed to the Brent Benchmark 68
The Regulation of Benchmarks 69
Determining the Value of A: Forwards and Futures 72
The Forward Market and the Value of A 72
  Cui Bono? Who Benefits from Trading? 73
  Forming Brent Chains 74
  15-Day Brent and the Metamorphosis into 25-Day BFOE and Beyond 77
  Credit Security in the Forward market 78
The Futures Market and the Value of A 80
Lessons from MF Global 82
  Initial Margin 82
  Variation Margin 83
  Physical Delivery 84
  EFPs and Physical Delivery 85
Hedging the Value of A  
  Basic Hedging Theory 87
  Practical Complications 88
  Dated Brent Risk Hedged with a Forward Brent Contract 89
  A Floating Priced Cargo Hedged with a Fixed and Flat Price Contract 90
  Which Month? 91
A Postscript on Speculation 92
A Quick Recap 93
   

Chapter 4

 
The Time Differential (T) 94
Arbitrage 95
The CFD Contract 97
What is the Right Time to Set the Price? 98
What Really Happens when Two Traders Transact A Deal 99
The CFD Market and the Value of T 100
Fixing the Value 103
Floating, Fixing or Hedging Value 104
Hedging and the Slope of the Forward Oil Curve 106
Term Contract Price Too Good to be True? Examine T! 108
   

Chapter 5

 
The Grade Differential (G) 109
The Grade Differential, G 109
Crude Oil Quality 110
The New Crude Discount 110
Important Message 112
The Refining Assay 113
  Paraffinic and Naphthenic Crude Oil 114
  Refining Processes 117
The Gross Product Worth (GPW) 118
Location and Freight 120
Any Other Relevant Factors 121
The Time Differential within the Grade Differential- the Missing Link 122
   

Chapter 6

 
Hedging the Crude Oil Price 124
Hedging 124
Strategic and Operational Hedging Compared 125
  Brent Again 125
Important Point about Hedging 128
  Correlation and Basis Risk 128
  Tax Basis Risk 129
Horses for Courses- Choosing the Right Tool for the Job 133
  Risk Profile 133
  Risk Appetite 135
  Market Price View 137
When to Close a Hedge 138
When Strategic Hedges Go Operational 139
Swaps 140
Options 143
  Premium 145
  The Option Style 147
  Option Strategy 148
  The Zero Cost Collar 149
An Aside on Option Valuation 151
  Tailored Option Packages 153
A Final Word 156
   
Appendix – Breaking news on Brent 158
Table of Figures 162
Glossary 163
Disclaimer 169