Fuel hedging as oil stays ‘lower for longer’

The last decade has seen extreme volatility with unprecedented price swings. Having been at $115 per barrel in June 2014, oil slipped below $30 at one point in less than two years, driven lower by overproduction, harking back to the kind of volatility we saw during the global financial crisis of 2008-09. 

While the latter was down to a dip in demand, and the former is being caused by oversupply sentiment, volatility makes hedging crucial for fuel consuming companies. Two experts from financial consulting firm Volguard – Simo Mohamed Dafir and Vishu N. Gajjala – have made a brilliant attempt to tackle subject via their book Fuel Hedging and Risk Management published under the current batch of the Wiley Finance series.

Acknowledging the turbulent times faced by fuel derivative providers, Dafir and Gajjala, set about offering their own hedging solutions to those hoping to manage fuel price volatility, by putting forward strategies from origination to execution of a hedge within confines of a holistic risk management structure.

This book, of just under 300 pages split by 10 detailed chapters, begins with a basic overview of inherent market risks and the strategic nature of the oil and gas business, before moving on to tackling fuel derivative instruments.

Subsequent strategic dialogue moves on to scenario analysis, derivative term sheets and market curves for those starting out on their careers. Concurrently, advanced practitioners in the fuel derivatives market will appreciate Dafir and Gajjala’s treatment of price, volatility and exposure optimisation models, as well as credit risk and associated Company Voluntary Arrangement [or “CVA”] cost examinations.

Key bits of the text are accompanied by detailed case studies and examples treating real-life trading scenarios. The Oilholic feels such a format helps readers appreciate the tone and complexity of risk management of derivatives far better than a bland linear treatment of the subject. One find’s the narrative is just as useful for established players, as well as newcomers to the fuel hedging world.

However, this blogger would attach a caveat – for those contemplating a career in the fuel hedging business – Dafir and Gajjala’s work is not a starter kit, rather a very solid, splendid second title that serves as a constructive follow-up to an initial baptism to the derivatives world. 

The Oilholic would be happy to recommend this book to commodity traders seeking a refresher course, quantitative professionals in the fuels space, risk managers and corporate treasurers at transportation firms, including airlines and shipping businesses whose needs and concerns it directly addresses. It could also be of immense help to those looking to develop a corporate framework for financial risk analysis.

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© Gaurav Sharma 2016. Photo: Front Cover – Fuel Hedging and Risk Management © Wiley Publishers, 2016

Perspectives on a changing energy landscape

That we're in the midst of a profound change in the energy markets in unquestionable. However, fossil fuels still remain the default medium of choice. Within those broader confines, the oil market is seeing a supply-driven correction of the sort that probably occurs once in a few decades.

Meanwhile, peak oil theorists are in retreat following in the footsteps of peak coal theorists last heard of during a bygone era. However, what does it all mean for the wider energy spectrum, where from here and what are the stakes?

Authors and industry experts Daniel Lacalle and Diego Parrilla have attempted to tackle the very questions in their latest work The Energy World is Flat: Opportunities from the end of peak oil (published by Wiley).

In a way, the questions aren’t new, but scenarios and backdrops evolve and of course have evolved to where we currently are. So do the answers, say Lacalle and Parrilla as they analyse the past, scrutinise the present and draw conclusions for future energy market pathways.

In this book of 300 pages, split by 14 interesting chapters, they opine that the energy world is flat principally down to "ten flatteners" along familiar tangents such as geopolitics, reserves and resources, overcapacity, demand displacement and destruction, and of course the economics of the day. 

Invariably, geopolitics forms the apt entry-point for the discussion at hand and the authors duly oblige. As the narrative subtly moves on, related discussions touch on which technologies are driving the current market changes, and how they affect investors. Along the way, there is a much needed discussion about past and current shifts in the energy sphere. You cannot profit in the present, unless you understand the past, being the well rounded message here.

“New frontiers” in the oil and gas business, today’s “unconventional” becoming tomorrow’s “conventional”, and resource projections are all there and duly discussed.

To quote the authors, the world has another 1.5 trillion barrels of proven plus probable reserves that are both technically and economically viable at current prices and available technology, and another 5 trillion-plus barrels that are not under current exploration parameters but might be in the future. Furthermore, what about the potential of methane hydrates?

Politics, of course, is never far from the crude stuff, as Lacalle and Parrilla note delving into OPEC shenanigans and the high stakes game between US shale, Russian and Saudi producers leading to the recent supply glut – a shift with the potential to completely alter economics of the business.

What struck the Oilholic was how in-depth analysis has been packaged by the authors in an engaging, dare one say easy reading style on what remains a complex and controversial discussion. For industry analysts, this blogger including, it’s a brilliant and realistic assessment of the state of affairs and what potential investors should or shouldn’t look at.

The Oilholic would be happy to recommend the book to individual investors, energy economists, academics in the field and of course, those simply curious about the general direction of the energy markets. Policymakers might also find it well worth their while to take notice of what the authors have put forward.

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© Gaurav Sharma 2015. © Photo: Front Cover – The Energy World is Flat: Opportunities from the end of peak oil © Wiley Publishers, Feb, 2015.

An instructive approach to energy trading tenets

In the challenging world of energy trading, fortune favours the prepared. Whether one is brave enough (or not) comes second and not having a clear strategy would be borderline foolishness.

Given such a backdrop, almost inevitably, there are resources aplenty targeting those who feel the need to be better informed and equipped. Among the latest reference sources, industry veteran and academic Dr Iris Marie Mack’s book Energy Trading and Risk Management published by Wiley is a pretty compelling one.

The Oilholic instantly warmed up to the book barely a chapter in, struck by its practical approach, balanced tone, contextualised narrative and a genuine desire on the author’s part to define terms and methodologies for the benefit of those with a mid-tier investment knowledge base.

Furthermore, the instructive narrative seeks to bring about a holistic understanding of how energy markets work to begin with, leading on to an adequate treatment of risk, speculation and portfolio diversity tenets. The format in which Energy Trading and Risk Management is minutely sub-sectioned point to point is simply splendid. So should you wish to salami slice and pick up bits of the subject, it would serve you just as well as a cover to cover read through.

Conversely, if you are confident enough to skip the basics and go straight through to concepts and formulas, the sequential flow of text in each chapter helps you breeze through basic definitions usually quoted in boxed text on to what you are after.

Accompanying the text are charts, case studies, background briefs, notes on macro drivers and definitions at various points split into ten weighty sub-sectioned chapters in a book of around 270 pages. From contango to the modern portfolio theory, from risk management in the renewables business to mitigation in an ever changing market climate – it’s all there and duly referenced.

While the Oilholic appreciated Dr Mack's work in its entirety, a chapter on exotic energy derivatives (which follows a passage on the plain vanilla variety) stood out for this blogger. One would be happy to recommend this title to energy professionals, fellow energy analysts and those with a desire to pursue energy trading as a career pathway.

It would most definitely appeal to entrants finding their feet in the market as well as established participants wanting to refresh their thinking and methodologies. Ultimately, for every reader this title is bound to morph from being an informative and educational book at the point of first reading, to an invaluable reference source as and when subsequently needed. That makes it worthy of any energy sector professional’s bookshelf.

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© Gaurav Sharma, October, 2014. Photo: Front Cover – Energy Trading and Risk Management © Wiley Publishers, May, 2014.

Dissecting & summarising PM methodologies

Projects in all sectors of the economy, large or small, need careful planning and consideration. Over the years, project management has evolved considerably to become a crucial standalone genre of management studies.

Perhaps unsurprisingly, literature on the subject has mushroomed. Industry veteran and UCL academic Peter Morris has lent his thoughts via Reconstructing Project Management, which though intentioned as an academic text - is not bland and dry like some other titles vying with it for attention.

In a book of over 300 pages split into four parts and 22 chapters, Morris has offered his take on project management techniques, modes and methodologies drawing on lessons from the past, current discourse and ongoing trends to chart the road ahead. Part I of the book (Constructing Project Management) discusses the history of modern project management and how it evolved into a standalone discipline.

Invariably among the sub-components, oil & gas projects come into view and the author does justice to the sector by flagging it up early on in one of the chapters. He then moves on to the development of project management methodology and standards such as, but not limited to PERT, CPM, APM, PMBOK, etc. In order to contextualise and substantiate his thoughts, there are case studies aplenty.

Moving on to Part II (Deconstructing Project Management), Morris discusses management principles, governance and most importantly the impact (and facets) of risk, governance, people and procurement.

Part III (Reconstructing Project Management) sees the author come into his element, offering his take on the context and character of project management as we know it (or we think we know it) and join the dots to organisational performance. The final Part IV of the book contains a summary and the author's concluding thoughts.

Overall, it’s a good read and a written work likely to retain its value for another couple of decades if not more. The only caveat the Oilholic would like to flag up as an industry observer (and not a practitioner) is that this book is not the meatiest volume out there on project management.

For an outside-in look, what’s here is more than sufficient but some practitioners may beg to differ and demand more detail. Nonetheless, there is strength and uniqueness in brevity too when it comes to tackling such a detailed subject. Hence, this blogger is happy to recommend it to those interested in or involved with project management.

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© Gaurav Sharma 2013. Photo: Front Cover - Reconstructing Project Management © Wiley 2013

Is "assetization" of Black Gold out of control?

Crude oil price should reflect a simple supply-demand equation, but it rarely does in the world of oil index funds, ETFs and loose foresight. Add to the mix an uncertain geopolitical climate and what you get is extreme market volatility. Especially since 2005, there have been record highs, followed by record lows and then yet another spike. Even at times of ample surpluses at Cushing (Oklahoma) - the US hub of criss-crossing pipelines - sometimes the WTI ticker is still seen trading at a premium defying conventional trading wisdom. The cause, according to Dan Dicker, author of the book Oil’s Endless Bid, is the rampant "assetization" of oil.

The author, a man with more than 20 years of experience on the NYMEX floor, attributes this to an influx of "dumb money" in to the oil markets. Apart from introducing and taking oil price volatility straight to the consumers' wallets, this influx has triggered a global endless bid for energy security. Via a book of just under 340 pages split by three parts containing 11 chapters, their epilogue and two useful appendices, Dicker offers his take on the state of crude affairs.

While largely authored from an American standpoint, Dicker throws up some unassailable truths of global relevance. Principal among them is the fact that visible changes that have taken place in the oil markets over the past 20 years. Go back a few decades, and everyone can recollect the connection between price volatility and its association with a major economic or geopolitical crisis (economic woes, Gulf War I, OPEC embargo, etc.)

Presently, there is near perennial volatility as the trading climate and instruments of trade available place an incessant upward pressure on black gold. Reading Dicker's thoughts one is inclined to believe that at no point in history was the phrase "black gold" more appropriate to describe the crude stuff than it is now; particularly in the last six years, as investment banks, energy hedge funds and managed futures funds have come to dominate energy trading and wreak havoc on prices.

In his introduction to the book, Dicker makes a bold claim - that we've lost control of our oil markets and it has become the biggest financial story of the decade. When the Oilholic began reading it, he was sceptical of the author's claim, but by the time he reached the ninth chapter the overriding sentiment was that Dicker has a point - a huge one, articulated well and discussed in the right spirit.

Ask anyone, even a lay man, a non-technical question about why the price of oil is so high - the answer is bound be China and India's hunger for oil. A more technical person might attribute it to the US Dollar's weakening and perhaps investors playing with the commodities market as the equities markets take a hit.

But are these reasons enough to explain what caused prices to soar 600% from 2003 to 2008, only to take a massive dip and soar again over the next couple of years? Something is fundamentally wrong here according to the author and the latter half of his book is dedicated to discussing what it might mean and where are we heading.

Whether you agree or disagree is a matter of personal opinion, but the author's take on what broke the oil markets, and how can they be fixed before they drag us all down into an economic black hole, strikes a chord. He also uses part of the narrative to reflect on his life as a trader before and after passage of the US Commodities Futures Modernization Act opened up the oil markets to a flood of "dumb money."

Sadly, as Dicker notes, the biggest victim of oil markets frenzy is the average consumer, who pays the price at the pump, and in the inflated costs of everything - from food and clothing to electric power and even lifesaving medications. The Oilholic is happy to recommend this book to those interested in crude oil markets, the energy business, US crude trading dynamic, petroleum economics or are just plainly intrigued about why getting a full tank of petrol has suddenly lost the element of predictability in the last half decade or so.

© Gaurav Sharma 2011. Photo: Cover of ‘Oil’s Endless Bid’ © Wiley Publishers, USA 2011.