Energy Economics Seminar

Energy'Economics'Seminar'
Economic'Growth'and'Energy'S/D
Ljubljana'– November'10,'2011
Helios'Padilla'Mayer

Economic'Growth'and'Energy'S/D. Slide'2
Contents
• What%are%Energy%Markets? 3
• Oil%Markets 6
– Oil%Supply 7
– Oil%Demand 11
– Oil%Prices%and%Other%Oil%Products 16
• Natural%Gas%Markets 20
• Electricity%Markets 23
• Coal%Markets 28
• Renewable%Energy%Markets 32
• Economics%and%Energy%Markets 35

Why'are'Energy'Markets'Key?
• Influence(on:
+ Economy + Markets
Macroeconomic Fixed(Income
Fiscal(Policies Equity
Industry(( Foreign(Exchange
Other(commodities
+ Politics
Domestic
Foreign

What'are'Energy'Markets?
• Oil
• Natural)Gas
• Electricity
• Coal
• Renewable)Energy

Global'Energy'Reserves
Petroleum
39%
Coal
23%
Nuclear1Electric1
Power
8%
Natural1Gas
24%
Renewable1Energy
6%
Total&Energy&=&97.6&Quadrillion&Btu
Wind%&2%
Hydroelectric%&
45%
Geothermal%&
5%
Biomass%&47%
Solar%&1%
Renewable&Energy&=&5.9&Quadrillion&Btu
Source:&Bloomberg.

Oil'Markets
• Oil$Reserves
• Vertically$Integrated
3 Exploration
3 Production
3 Refinery
• Oil$Field$Services

Oil'Supply'
Table&1:&Oil&Reserves&as&of&2011
Reserve&life&(1)
Billion&bbl Billion&m3
Million&bbl/d
Thousand&
m3
/d
years
Saudi&Arabia 264.52 42.055 8.9 1,410 81
Venezuela 211.5 33.63 2.1 330 129
Canada 175 27.8 2.7 430 178
Iran 151.2 24.04 4.1 650 101
Iraq 143.1 22.75 2.4 380 163
Kuwait 101.5 16.14 2.3 370 121
United&Arab&Emirates 97.8 15.55 2.4 380 112
Russia 74.2 11.8 9.7 1,540 21
Libya 47 7.5 1.7 270 76
Nigeria 37 5.9 2.5 400 41
Kazakhstan 30 4.8 1.5 240 55
Qatar 25.41 4.04 1.1 170 63
China 20.35 3.235 4.1 650 14
United&States 19.12 3.04 5.5 870 10
Angola 13.5 2.15 1.9 300 19
Algeria 13.42 2.134 1.7 270 22
Brazil 13.2 2.1 2.1 330 17
Total&of&top&17&reserves 1,324 210.5 56.7 9,010 64
(1)&Reserve&to&Production&Ratio
Source:&IEA.
Country
Reserves Production

Economic'growth'and'Energy'S/D. Slide'8
Oil'Supply
Figure'1:'Annualized'OPEC'and'Non6OPEC'crude'oil'production''
growth'rates'%,'March'20106 December'2011
Global&oil&production&
decreased&in&October&to&
36.01&million&bbl/day
from&36.53&million&bbl/day&
in&September.&By&end>
2011&it&is&expected&to&
decrease&to&35.95&million&
bbl/day.&
Source:&Bloomberg,&EIA,&Enpetrorisk.
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
Mar-10 May-10 J ul-10 Sep-10 No v-10 J an-11 Apr-11 J un-11 Aug-11 Oct-11 Dec-11
No n-OP EC Crude P ro ductio n Supply OP EC Crude P ro ductio n Supply
Figure'2:'Total'Stock'Draw'in'million'barrels/day,'March'20106 December'2011
Total&stock&draw&continues&to&
pick&up.
-2.5
-1.5
-0.5
0.5
1.5
2.5
Mar-10 J un-10 Sep-10 Dec-10 Mar-11 J un-11 Sep-11 Dec-11
To tal Sto ck Draw mln barrels /day

Oil'Supply Figure'3:'Annualized'growth'rates'of'crude'oil'supply'by'Saudi'Arabia,'Iran'and'the'
rest'of'OPEC'suppliers'%,'March'2010F September'2011'
Annual&crude&oil&supply&growth&
continues&to&grow&in&Saudi&Arabia,&
as&well&as&in&other&OPEC&suppliers.
Figure'4:'Surplus'productive'crude'oil'capacity'for'OPEC'countries,'million'
barrels/day,'March'2010F December'2011
Total&surplus&productive&capacity&
decreased&in&September,&but&is&
forecast&to&increase&by&endD2011.
Source:&Bloomberg,EIA,&Enpetrorisk.
-10
-5
0
5
10
15
Mar-10 May-10 J ul-10 Sep-10 No v-10 J an-11 Mar-11 May-11 J ul-11 Sep-11
Saudi Arabia Iran Other OP EC P roducers
2.0
2.5
3.0
3.5
4.0
4.5
5.0
Saudi Arabia OP EC To tal

Oil'Supply
Figure'5:'Annualized'growth'rates'of'production'in'Russia,'USA,'China'and'Canada'
%,'March'2010B December'2011
Canadian&oil&production&surprised&
on&the&upside&in&October,&followed&
by&Chinese&production.&Russian&oil&
production&is&decreasing.
-8
-3
2
7
12
17
-4.00
-2.00
0.00
2.00
4.00
6.00
8.00
10.00
China (lhs ) Canada (lhs ) Rus s ia (lhs ) USA (rhs )

Oil'Demand Figure'6:'Annualized'crude'oil'OECD'and'Non7OECD'demand'growth'rates'%,'March'
20107 December'2011
While&October&oil&demand&
remained&stable&in&both&OECD&and&
non5OECD&countries,&annual&
growth&rates&fell&in&non5OECD&
countries,&but&surprisingly&
increased&in&OECD&countries.
Figure'7:'Annualized'oil'demand'growth'rates'in'USA,'Europe,'Japan,'FSU'and'China'
%,'September'20107 September'2011
On&an&annual&basis,&OECD&oil&
demand&returned&to&positive&
territories.&Non5OECD&countries,&
such&as&China,&significantly&
increased&its&oil&demand.&
-5
-3
-1
1
3
5
7
OECD Oil P ro duct Demand No n-OECD Oil P ro duct Demand
-10
-5
0
5
10
15
20
USA Euro pe J apan Fo rmer So viet Unio n China

Oil'Demand
Figure'8:'Annualized'finished'petroleum'products'growth'rates'in'the'USA'%,'March'
2010A December'2011
Annual&October&demand&growth&
rates&for&finished&petroleum&
products&in&the&USA&are&positive.&
Figure'9:'Annualized'domestic'production'and'oil'net'imports'growth'rates'in'the'
USA'%,'March'2010A December'2011'
While&the&US&domestic&production&
growth&increased&in&October,&US&
imports&growth&decreased.&
-8
-6
-4
-2
0
2
4
6
8
10
12
Mo to r Gas o line J et Fuel Dis tillate Fuel Oil
-12
-7
-2
3
8
Do mes tic P ro ductio n Crude Oil Net Impo rts

Oil'Demand'9 Crack'Spreads'and'Refining'Capacity
Figure'10:'Crack'spreads'ratios'for'North7West'Europe,'Transatlantic'and'USA,'
March'20117November'2011
Crack&spreads&in&October&
decreased&amid&slower&global&
demand&and&lower&refinery&
margins.
Source:&Bloomberg,&Enpetrorisk
4
6
8
10
12
14
16
18
20
Mar*11 Apr*11 May*11 Jun*11 Jul*11 Aug*11 Sep*11 Oct*11 Nov*11
15
20
25
30
35
40
Dated?Brent?Crude?Refined?Oil?211?Crack?Spread/Northwest?Europe?(lhs)
Dated?Brent?Crude?Refined?Oil?211?Crack?Spread/Trans*Atlantic?(lhs)
Dated?Brent?Crude?Refined?Oil?211?Crack?Spread/NYH?RBOB?gasoline?(rhs)

Figure'11:'World'crude'throughput,'monthly'data,'in'million'barrels/day,'January'
2009'– December'2011
October(global(throughput(
decreased(with(respect(to(
September(on(the(back(of(weaker(
demand(and(outages(in(several(
countries.(End;year(global(
throughput(is(expected(to(increase.
Source:(Bloomberg,(EIA,(Enpetrorisk.
70
71
72
73
74
75
76
77
J an Feb Mar Apr May J une J uly Aug Sept Oct No v Dec
2008 2009 2010 2011
Figure'12:'Total'OECD'crude'throughput,'monthly'data,'in'million'barrels/day,'
January'2009C December'2011
The(October(OECD(throughput(
decreased(as(well.
Source:(Bloomberg,(EIA,(Enpetrorisk.
34.5
35.0
35.5
36.0
36.5
37.0
37.5
38.0
38.5
39.0
39.5
J an Feb Mar Apr May J une J uly Aug Sept Oct No v Dec
2008 2009 2010 2011

Figure'13:'US'crude'throughput'(gross'oil'total'refinery'output'into'distillation),'
weekly'data,'in'million'barrels/day,'January'2009E November'2011
The$US$October$crude$throughput$
increased$with$respect$to$
September$and$it$was$above$the$
last$3:year$average.$
Source:$Bloomberg,$EIA,$Enpetrorisk.
13.5
14.0
14.5
15.0
15.5
16.0
16.5
J an Feb Mar Apr May J une Aug Sep Oct No v Dec
11.5
12.0
12.5
13.0
13.5
14.0
14.5
15.0
15.5
16.0
16.5
2009(lhs ) 2010 (lhs ) 2011(lhs ) 2008 (rhs )

Oil'Prices'and'Other'Oil'Products
Figure'14:'WTI,'Brent,'European'Urals'and'Arabian'Gulf'Dubai''Spot'Prices,'
US$/barrel,'January'– November'2011,'daily'data
On#the#back#k#of#better#economic#
data#in#the#US,#WTI#prices#
increased#in#October,#followed#by#
an#initial#increase#in#other#three#
crude#oil#prices.#
Source:#Bloomberg,#Enpetrorisk
75
85
95
105
115
125
Jan+11 Feb+11 Mar+11 Apr+11 May+11 Jun+11 Jul+11 Aug+11 Sep+11 Oct+11 Nov+11
WTIACushingACrudeAOilASpotAPrice,A$/barrel
BrentACrudeAOilASpotAPrice,A$/barrel
ArabianAGulfADubaiACrudeAOilASpotAPrice,A$/barrel
URALSACrudeAOilASpotAPrice,A$/barrel

Figure'15:'US'total'change'in'crude'oil,'gasoline'and'distillate'inventories'in'million'
barrels/day,'January'– 28.'October'2011
October(brought(an(increase(in(US(
crude(oil(inventories,(however,(
gasoline(and(distillate(inventories(
decreased((with(exception(of(
gasoline(inventory(increase(in(the(
last(week(of(October).(
Source:(Bloomberg,(Enpetrorisk.
!8000
!6000
!4000
!2000
0
2000
4000
6000
Jan!11 Feb!11 Mar!11 Apr!11 May!11 Jun!11 Jul!11 Aug!11 Sep!11 Oct!11
Crude<oil<inventories<change Gasoline<inventories<change
Distillate<inventories<change
Figure'16:Crude'Oil'Futures'IPE,'First'Month,'US$/barrel,'January'– November'2011,'
daily'data
First(month(future(curves(are(on(an(
increasing(trend.(
Source:(Bloomberg,(Enpetrorisk
75
80
85
90
95
100
105
110
115
120
Jan+11 Feb+11 Mar+11 Apr+11 May+11 Jun+11 Jul+11 Aug+11 Sep+11 Oct+11 Nov+11
WTIAFirstAFuturesAContract,A$/barrel BrentAFirstAFuturesAContract,A$/barrel
ArabianAGulfADubaiAFirstAFuturesAContract,A$/barrel

Figure'18:'Gas'Oil'Futures'IPE'Futures'IPE,'US$/barrel,'January'– November'2011,'
daily'data
Gasoil'2011'future'contract'was'
declining'in'October,'while'2012'
and'2013'contracts'were'on'an'
increasing'path.
Source:'Bloomberg,'Enpetrorisk
Figure'17:'4:WTI'and'Brent'Implied'Future'Curves,'US$/barrel,'November'2011K
2019,'daily'data
After'November'2011,'both'curves'
turned'into'contango:'forward'
price'is'trading'above'the'expected'
future'spot'price.
Source:'Bloomberg,'Enpetrorisk
80
85
90
95
100
105
110
115
Nov)11 Nov)12 Nov)13 Nov)14 Nov)15 Nov)16 Nov)17 Nov)18 Nov)19
WTI2Implied2Future2Curve Brent2Implied2Future2Curve
780
830
880
930
980
1030
Jan*11 Feb*11 Mar*11 Apr*11 May*11 Jun*11 Jul*11 Aug*11 Sep*11 Oct*11 Nov*11
Gasoil@October@2011@future@contract@(USD/100@tons) Gasoil@October@2012@future@contract@(USD/100@tons)
Gasoil@October@2013@future@contract@(USD/100@tons)

Figure'19:Non.commercial'net'short'contracts'and'crude'oil'total'open'interest'
contract,'January'– 25'October'2011,'number'of'contracts
On#aggregate,#the#number#of#total#
open#interest#contracts#as#well#as#
non6commercial#net#short#
contracts#decreased#through#
October.#
Figure'20:'GSCI'and'CRB'Spot'Indices,'July'2010.August'2011,'daily'data
There#was#an#increase#in#indices#
activity#in#October.
1350000
1400000
1450000
1500000
1550000
1600000
1650000
Jan*11 Feb*11Mar*11 Apr*11May*11 Jun*11 Jul*11 Aug*11 Sep*11 Oct*11
0
50000
100000
150000
200000
250000
300000
CFTC=Crude=Oil=Non*Commercial=Net=Short=Contracts/Futures=Only=(rhs)
CFTC=Crude=Oil=Total=Open=Interest/Futures=Only=(lhs)
500
510
520
530
540
550
560
570
580
Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11
580
600
620
640
660
680
700
720
740
760
780
CRB<Spot<(lhs) GSCI<Spot<(rhs)

Natural'Gas'Markets
Table&2:&Natural&Gas&Reserves&as&of&January&2010
Source:&EIA,&The&World&Factbook.
Country Reserves,in,m
3
Reserves,in,%
Russia 47,570,000,000,000 25.02%
Iran 29,610,000,000,000 15.57%
Qatar 25,470,000,000,000 13.39%
Turkmenistan 7,504,000,000,000 3.95%
Saudi,Arabia 7,461,000,000,000 3.92%
United,States 6,928,000,000,000 3.64%
UAE 6,071,000,000,000 3.19%
Nigeria 5,246,000,000,000 2.76%
Venezuela 4,983,000,000,000 2.62%
Algeria 4,502,000,000,000 2.37%
Iraq 3,170,000,000,000 1.67%
Australia 3,115,000,000,000 1.64%
China 3,030,000,000,000 1.59%
Indonesia 3,001,000,000,000 1.58%
Azerbaijan 2,600,000,000,000 1.45%
Kazakhstan 2,407,000,000,000 1.27%
Malaysia 2,350,000,000,000 1.24%
Norway 2,313,000,000,000 1.22%
EU 2,250,000,000,000 1.18%
The,rest 20,582,119,460,000 10.73%
Total&World 190,163,119,460,000

Natural'Gas'Markets
Table&3:&Total&Natural&Gas&Production&in&trillion&cubic&feet,&2006:2010
Source:&EIA.
2006 2007 2008 2009 2010
North-America 33.15 34.17 35.30 34.92 35.28
Canada 7.78 7.63 7.37 6.93 6.70
Mexico 1.83 1.88 2.18 1.98 1.72
United8States 23.54 24.66 25.75 26.01 26.86
Central-&-South-America 7.17 8.00 8.56 8.72 8.77
Europe 12.91 12.65 12.86 12.26 12.53
Kazakhstan 0.93 1.04 1.18 1.26 1.31
Russia 24.22 24.17 24.38 21.32 22.97
Turkmenistan 2.23 2.43 2.49 1.35 1.60
Uzbekistan 2.22 2.30 2.39 2.17 2.12
Middle-East 17.14 18.02 19.04 20.98 23.00
Iran 5.93 6.15 6.37 7.43 7.77
Iraq 0.42 0.48 0.52 0.59 0.60
Kuwait 0.51 0.47 0.49 0.41 0.42
Qatar 2.19 2.73 3.21 3.63 4.61
Saudi8Arabia 3.00 2.94 3.05 3.16 3.43
United8Arab8Emirates 2.56 2.65 2.83 2.68 2.82
Yemen 0.65 0.62 0.53 1.05 1.15
Africa 12.97 13.65 14.47 13.66 14.06
Algeria 6.84 7.00 7.10 6.95 6.79
Egypt 1.78 1.87 2.31 2.44 2.37
Libya 0.96 1.03 1.07 1.03 1.07
Nigeria 2.18 2.42 2.57 1.84 2.39
Asia-&-Oceania 14.71 15.18 15.91 16.82 18.37
China 2.07 2.45 2.69 2.98 3.33
India 1.12 1.14 1.17 1.47 1.88
Indonesia 2.95 2.80 2.88 3.06 3.41
World 128.59 132.90 138.09 135.00 141.62

Natural'Gas'Markets
Table&4:&Total&Natural&Gas&Consumption&in&trillion&cubic&feet,&2006;2010
Source:&EIA.
2006 2007 2008 2009 2010
North-America 27.19 28.55 28.76 28.09 29.16
Canada 3.31 3.42 3.41 3.11 2.94
Mexico 2.20 2.02 2.13 2.13 2.13
United8States 21.69 23.10 23.23 22.84 24.09
Europe 20.23 20.06 20.46 19.38 20.64
France 1.76 1.66 1.74 1.67 1.70
Germany 3.52 3.41 3.46 3.30 3.44
Italy 2.98 3.00 3.00 2.76 2.93
Netherlands 1.69 1.64 1.71 1.73 1.94
United8Kingdom 3.21 3.24 3.35 3.11 3.33
Eurasia 23.65 24.16 24.22 21.13 23.54
Russia 16.60 16.75 16.80 15.52 17.50
Middle-East 10.26 10.67 11.66 12.50 13.24
Africa 2.90 3.08 3.62 3.38 3.55
Asia-&-Oceania 15.31 16.73 17.54 18.41 20.47
China 1.99 2.49 2.73 3.13 3.77
India 1.37 1.46 1.52 1.88 2.28
Indonesia 0.99 1.22 1.20 1.34 1.46
Japan 3.44 3.75 3.65 3.65 3.72
World 104.06 107.63 110.91 107.24 115.45

Electricity Markets
• The$electric$utility$industry$converts$energy$rather$than$supplying$it.
• Differs$from$fossil$fuel$industries,$but
: has$a$lot$of$common$with$natural$gas$resources$in$terms$of$regulation.$
• Contrasts$to$gas;$traditional$to$assume$that$generation$is$linked$to$
distribution,
: hence,$natural$monopoly.
• Key$aspects$of$the$industry:
: heavy$fixed$costs$and$cannot$store$electricity
• Encourage$use$to$benefit$from$economies$of$scale
• Since$no$storability,$
: utility$must$carry$enough$capacity$to$meet$seasonal$and$daily$peaks.

Electricity'Markets
Source:(EIA.
• Rapid&diffusion&of&electric&power&availability&and&consumption&up&until&
1970s.
• Regional&difference&in&electricity&use&and&some&of&the&growth&over&time&is&
due&to&
= substitution&of&electricity&for&other&sources.

Electricity'Markets
Table&5:&Total&Electricity&Installed&Capacity&in&million&Kw,&2004=2008
Source:&EIA.
2004 2005 2006 2007 2008
North-America 1134.86 1152.27 1164.30 1177.83 1195.38
Canada 120.46 122.84 123.95 126.38 127.64
Mexico 51.12 51.07 53.80 56.23 57.23
United8States 962.94 978.02 986.21 994.89 1010.17
Europe 835.65 851.69 875.83 894.45 917.71
France 116.98 115.79 115.72 116.55 117.82
Germany 124.57 125.03 131.58 134.07 139.28
Italy 81.34 85.50 89.49 93.60 98.63
Spain 69.58 76.57 81.23 88.67 93.53
United8Kingdom 80.75 82.38 83.61 84.50 85.61
Eurasia 344.75 345.81 348.71 351.93 351.06
Russia 218.38 219.57 222.11 224.68 224.24
Middle-East 135.60 143.51 152.62 158.68 164.75
Africa 110.94 113.29 117.10 119.33 122.55
Asia-&-Oceania 1198.06 1285.11 1406.18 1528.09 1632.32
China 444.11 518.95 625.46 717.35 797.08
India 139.29 147.58 156.64 170.23 177.38
Japan 275.27 277.32 278.71 279.15 280.53
World 3975.10 4112.44 4293.08 4467.56 4624.77

Electricity'Markets
Table&6:&Total&Electricity&Net&Generation&in&trillion&KwH,&2005:2009
Source:&EIA.
2005 2006 2007 2008 2009
North-America 4.89 4.90 5.03 5.00 ()
Canada 0.61 0.60 0.62 0.63 0.60
Mexico 0.23 0.24 0.25 0.25 0.24
United(States 4.06 4.06 4.16 4.12 3.95
Central-&-South-America 0.91 0.96 1.00 1.04 ()
Europe 3.49 3.54 3.58 3.61 ()
France 0.54 0.54 0.54 0.54 0.51
Germany 0.58 0.59 0.59 0.59 0.56
Italy 0.28 0.29 0.29 0.29 0.27
Spain 0.27 0.28 0.28 0.29 0.28
United(Kingdom 0.37 0.37 0.37 0.36 0.35
Eurasia 1.33 1.38 1.41 1.43 ()
Russia 0.90 0.94 0.96 0.98 0.93
Middle-East 0.60 0.64 0.68 0.73 ()
Africa 0.53 0.55 0.58 0.59 ()
Asia-&-Oceania 5.59 6.05 6.51 6.71 ()
China 2.37 2.72 3.04 3.22 3.45
India 0.66 0.71 0.76 0.79 0.84
Japan 1.03 1.03 1.06 1.02 0.98
World 17.34 18.02 18.79 19.10 ()

Electricity'Markets
Table&7:&Total&Electricity&Net&Consumption&in&trillion&KwH,&2005>2009
Source:&EIA.
2005 2006 2007 2008 2009
North-America 4.54 4.54 4.67 4.66 &'
Canada 0.54 0.53 0.54 0.55 &'
Mexico 0.19 0.20 0.21 0.20 &'
United&States 3.81 3.82 3.92 3.91 3.74
Central-&-South-America 0.77 0.80 0.84 0.87 &'
Europe 3.23 3.29 3.33 3.36 &'
France 0.45 0.45 0.45 0.46 &'
Germany 0.54 0.55 0.55 0.54 &&'
Italy 0.31 0.31 0.31 0.31 &'
United&Kingdom 0.35 0.35 0.35 0.34 &'
Eurasia 1.14 1.19 1.23 1.24 &'
Russia 0.78 0.82 0.84 0.86 &'
Middle-East 0.52 0.57 0.59 0.63 &'
Africa 0.47 0.49 0.52 0.53 &&'
Asia-&-Oceania 5.06 5.51 5.95 6.15 &'
China 2.19 2.53 2.83 3.02 &'
India 0.48 0.53 0.58 0.60 &'
Japan 0.98 0.98 1.01 0.96 &'
World 15.74 16.40 17.14 17.44 &'

Coal'Markets
• Coal%is%relatively%cheap%and%abundant.
• Criteria%pollutant%targets%(SOx,%NOx,%particulates,%Hg)%can%be%met%at%
reasonable%costs%through%at%least%2020%and%probably%well%beyond.
• However,%climate%change%concerns%are%worrysome.%
• Co2 capture%and%storage%is%the%technology%that%could%allow%coal%use%to%
expand%even%in%a%greenhouse%gas%constrained%world.%

Coal'Markets
Table&8:&Total&Coal&Reserves&in&billion&short&tons,&2008
Source:&EIA.
Reserves&&in&billion&short&tons Reserves&in&%
North&America 269.34 28.41%
Canada 7.26 0.77%
Mexico 1.33 0.14%
United&States 260.55 27.48%
Central&&&South&America 13.79 1.45%
Brazil 5.03 0.53%
Colombia 7.44 0.78%
Europe 84.20 8.88%
Germany 44.86 4.73%
Poland 6.29 0.66%
Serbia 15.18 1.60%
Eurasia 251.36 26.52%
Kazakhstan 37.04 3.91%
Russia 173.07 18.26%
Ukraine 37.34 3.94%
Africa 34.93 3.69%
South&Africa 33.24 3.51%
Asia&&&Oceania 293.04 30.91%
Australia 84.22 8.88%
China 126.21 13.31%
India 66.80 7.05%
Mongolia 2.78 0.29%
Pakistan 2.28 0.24%
World 948.00

Coal'Markets
Table&9:&Total&Primary&Coal&Production&in&million&short&tons,&2006;2010
Source:&EIA.
2006 2007 2008 2009 2010
North-America 1,248.17 1,236.89 1,259.14 1,153.75 ,-
Canada 72.76 76.46 74.68 69.38 74.84
Mexico 12.66 13.79 12.65 11.63 10.30
United,States 1,162.75 1,146.64 1,171.81 1,072.75 1,085.28
Central-&-South-America 88.49 92.57 97.75 98.46 ,-
Brazil 6.49 6.58 7.29 6.85 7.42
Colombia 72.31 77.05 81.02 80.87 82.57
Europe 791.94 802.67 787.95 739.86 ,-
Bulgaria 28.31 31.36 31.73 30.00 32.34
Czech,Republic 69.34 69.03 66.36 62.19 60.94
Germany 220.55 225.53 214.27 203.74 202.31
Greece 71.42 73.09 72.44 71.34 61.86
Poland 171.13 159.77 157.99 148.32 145.06
Romania 38.50 39.44 39.53 33.74 33.97
Serbia 40.54 40.95 42.67 42.20 ,-
Turkey 70.83 83.07 87.53 79.77 79.77
Eurasia 507.32 514.06 546.49 520.60 ,-
Kazakhstan 106.08 107.84 122.44 111.91 122.21
Russia 313.68 318.59 336.16 327.12 342.50
Africa 275.58 278.38 283.28 278.93 ,-
South,Africa 269.82 273.01 278.06 272.60 276.14
Asia-&-Oceania 3,860.15 4,161.63 4,528.16 4,886.47 ,-
Australia 405.05 430.10 438.47 440.09 448.89
China 2,573.90 2,781.13 3,086.47 3,362.05 3,661.27
India 500.19 531.52 568.45 611.44 626.73
Indonesia 249.70 287.23 301.59 332.37 395.52
World 6,773.33 7,088.00 7,504.52 7,679.79 ,-

Coal Markets
Table&10:&Total&Primary&Coal&Consumption&in&million&short&tons,&2006:2010
Source:&EIA.
2006 2007 2008 2009 2010
North-America 1,197.74 1,212.21 1,199.12 1,072.22 )*
Canada 64.91 63.64 61.86 51.91 52.12
Mexico 20.54 20.58 16.71 19.89 19.41
United)States 1,112.29 1,128.00 1,120.55 1,000.42 1,048.30
Central-&-South-America 41.20 42.50 45.46 46.61 )*
Brazil 23.61 24.66 24.61 25.36 26.89
Colombia 4.18 4.05 4.77 6.69 6.07
Europe 1,052.63 1,077.49 1,028.42 943.71 )*
Germany 270.53 281.44 267.88 249.70 250.70
Poland 154.82 149.58 148.91 141.12 139.85
Romania 45.19 44.51 44.47 36.11 37.48
Serbia 42.40 42.36 43.81 43.45 44.80
Turkey 92.45 108.92 108.84 102.53 110.11
United)Kingdom 74.44 69.67 64.51 53.83 54.47
Eurasia 415.58 409.97 427.65 395.56 )*
Kazakhstan 77.38 77.37 75.92 87.36 99.41
Russia 240.25 230.40 249.80 222.63 227.31
Ukraine 76.10 76.96 78.01 63.99 66.68
Asia-&-Oceania 3,785.50 4,071.05 4,400.39 4,889.98 )*
Australia 148.92 149.36 157.90 149.67 119.74
China 2,537.64 2,743.38 3,004.41 3,474.67 3,733.73
India 539.49 587.26 632.36 685.65 759.70
Indonesia 56.78 66.08 71.50 71.07 80.81
Japan 198.11 207.58 203.80 181.50 206.91
World 6,719.96 7,047.86 7,345.64 7,577.38 )*

Renewable'Energy'Markets
• Some%calculations%on%the%scale%of%future%energy%demand.
• Issues%of%scale.
• Politics%vs.%Reality.
• World’s%willingness%to%pay%for%a%technology%solution.%

Table&11:&Total&Biofuels&Production&in&thousand&barrels&per&day,&2005<2009
Source:&EIA.
2005 2006 2007 2008 2009
North-America 265.21 340.15 472.83 667.78 767.43
United1States 260.61 334.95 457.33 649.68 746.42
Brazil 276.42 307.31 395.68 486.35 477.53
Europe 82.12 141.06 168.61 202.20 234.64
France 10.90 16.60 28.00 51.40 62.60
Germany 41.80 77.80 85.10 71.70 64.20
Italy 7.80 13.80 10.20 14.10 14.10
Poland 2.30 4.60 3.60 7.00 9.60
Spain 8.40 8.10 9.50 10.20 19.00
Sweden 1.60 1.70 2.80 3.30 5.00
United1Kingdom 0.90 3.80 3.20 4.90 4.00
Eurasia 0.60 0.82 1.32 3.20 5.10
Asia-&-Oceania 28.20 41.70 54.20 76.83 93.47
China 21.50 28.10 34.70 42.30 45.00
India 3.90 4.50 4.70 4.80 6.20
Thailand 1.60 2.60 4.20 13.40 17.40
World 661.51 854.60 1,127.03 1,489.72 1,635.52

Table&12:&Total&Biofuels&Consumption&in&thousand&barrels&per&day,&2005<2009
Source:&EIA.
2005 2006 2007 2008 2009
North-America 276.67 379.95 494.83 675.62 765.23
United0States 270.67 374.55 472.53 650.48 740.49
Brazil 181.96 195.23 268.48 355.65 420.27
Europe 76.41 135.20 186.89 242.10 287.77
France 9.52 18.40 34.30 54.50 60.80
Germany 44.70 80.10 87.90 72.10 68.20
United0Kingdom 2.10 4.50 8.60 18.70 22.40
Asia-&-Oceania 27.85 38.61 50.41 71.45 86.75
China 21.50 28.10 34.70 42.40 45.00
Thailand 1.30 2.30 4.10 13.20 17.60
World 565.52 755.90 1,009.78 1,359.30 1,583.71

Economics'and'Energy'Markets
Figure'21:'Global'Equity'Volatility,'January8November'2011,'daily'data
Global&volatility&indices&decreased&
in&October.&
Source:&Bloomberg,Enpetrorisk
Figure'22:'Monthly'industrial'production'growth'in'the'USA'and'Eurozone,'July'
20108September'2011,'YoY'%'change*
Industrial&production&picked&up&in&
both&the&USA&and&Eurozone,&but&
this&is&a&lagged&indicator&and&does&
not&reflect&properly&current&
economic&events.&
Source:&Bloomberg,&Enpetrorisk *For&Eurozone latest&data&is&August.
14
19
24
29
34
39
44
49
Jan)11 Feb)11 Mar)11 Apr)11 May)11 Jun)11 Jul)11 Aug)11 Sep)11 Oct)11 Nov)11
VIX?(CBOE?SPX?Volatility?Index) VSTOXX?(Dow?Jonoes?EUR?50?Volatility?Index)
2
3
4
5
6
7
8
9
10
J ul-10 Sep-10 No v-10 J an-11 Mar-11 May-11 J ul-11 Sep-11
USA Indus trial P ro ductio n Euro zo ne Indus trial P ro ductio n (do es no t include co ns tructio n)

Figure'23:'Consumer'confidence'indices'in'the'USA'and'Eurozone,'July'2010A
October'2011
Consumer)confidence)decreased)in)
both)the)Eurozone)and)the)USA.
Source:)Bloomberg,Enpetrorisk
Figure'24:'Monthly'inflation'in'the'USA'and'Eurozone,'June'2010'– August'2011,'
YoY'%'change
Inflation)in)both)the)USA)and)
Eurozone)is)picking)up,)making)
additional)worries)amid)limited)
monetary)policy)actions.)
Source:)Bloomberg,Enpetrorisk
-20
-18
-16
-14
-12
-10
-8
40
45
50
55
60
65
70
75
Euro zo ne (lhs ) USA (rhs )
1.0
1.5
2.0
2.5
3.0
3.5
4.0
Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 J un-11 Aug-11 Oct-11
USA CP I Euro zo ne HCP I

Figure'25: 10-year'Treasury'Spreads:'Greece,'Italy,'Spain,'Portugal'vs.'German'Bund,'
in'%,'January'-November'2011,'daily'data
Greek%debt%crisis%is%reflected%in%an%
explosive%Greek%Treasuries%
divergence%from%the%German%Bund,%
followed%by%Portugal.
Source:%Bloomberg,Enpetrorisk
Figure'26:10-year'US'and'Eurozone'Treasury'note'interest'rates,'in'%,'June'2010-
August'2011,'in'%,'monthly'data
10%year%TDnote%interest%rates%
surprised%upwards%in%October%in%
both%the%USA%and%Eurozone.
Source:%Bloomberg,Enpetrorisk
0
5
10
15
20
25
Jan(11 Feb(11 Mar(11 Apr(11 May(11 Jun(11 Jul(11 Aug(11 Sep(11 Oct(11 Nov(11
Italy Portugal Spain Greece
1.8
2.0
2.2
2.4
2.6
2.8
3.0
3.2
3.4
Euro zo ne USA

Figure'27: CDS'Greece,'Portugal,'Spain,'Italy,'January'; November'2011,'in'%,'daily'
data
CDS$spreads$are$also$on$a$rising$
trend,$indicating$a$demand$for$
higher$insurance$when$it$comes$to$
holdings$of$troubled$Eurozone$
countries$financial$instruments.$
Source:$Bloomberg,Enpetrorisk
Figure'28:'Monthly'credit'to'private'sector'(households)'growth'in'the'USA'and'
Eurozone,'July'2010'– September'2011,'YoY%'change
Credit$to$households$decreased$
significantly$in$the$USA$(August$
data),$it$decreased$at$a$smaller$
rate$in$the$Eurozone$in$September,$
but$as$industrial$production,$this$is$
also$a$lagged$indicator.
Source:$Bloomberg,Enpetrorisk
50
150
250
350
450
550
650
750
850
950
Jan.11 Mar.11 May.11 Jul.11 Sep.11 Nov.11
500
1500
2500
3500
4500
5500
6500
7500
Italy<(lhs) Portugal<(lhs) Spain<(lhs) Greece<(rhs)
-2.0
-1.5
-1.0
-0.5
0.0
-10
-8
-6
-4
-2
0
2
4
6
8
Euro zo ne USA

Energy'Price'Forecast'Model''
Ljubljana'– November'10,'2011

Energy'Price'Forecast'Model. Slide'40
Contents
• Financial'Programming 4
• The'Accounts'Integration 5
7 The'Goods'Market 5
7 The'Money'Market 7
7 The'Foreign'Exchange'Market 8
7 The'Energy'Market 9
• The'Model 10
• Simulation'Results'and'Price'Forecast 29
• Main'Observations 39

Financial'Programming
• Financial'Programming provides)a)diagnosis)of)the)macroeconomic)
performance)and)analysis)of)the)effects)of)macroeconomic)and)structural)
policies)on)the)main)variables)on)the)economy.
• FP emphasizes)the)importance)of)monetary,)fiscal)and)exchange)rate)
policies)in)controlling)domestic)demand)and)conecting)balance)of)
payments)desequilibrium.
• We)extend)FP'by)adding)an)energy)market)component.
• Supply)and)demand)factors)which)take)into)consideration)the)US)economy)
as)one)of)the)biggest)oil)consumption)economy.
• To)observe)a)behavioral)relationship)between)energy)and)economics.
• To)provide)explicit)links)between)monetary)and)exchange)rate)policies)on)
energy)prices.)

The'Goods'Market

The'Goods'Market
• Output%model%is%GDP:
• The%GDP'deflator'is%computed%as:
• National'income'entity'is%derived%in%the%following%way:

The'Money'Market'
• Monetary'Policy is#closely#related#to#fiscal#and#exchange#rate#policies.
• The#money#demand#equation#can#be#written#as#follows:
• The#quantity#of#real#money#balances#demanded#depends#on#the#
interest#rate#(i) and#on#the#income#(Y).
• Since#money#market#equilibrium#is#found#at#the#intersection#of#money#
demand#and#money#supply,#which#also#determines#equilibrium#
interest#rate.

The'Foreign'Exchange'Market
• Current'Account'Balance (CAB)&is#identical#to#the#economy’s#resorces#gap#as#
the#difference#between#economy’s#savings#(S)#and#investment#(I).#
• On#the#other#hand#the#trade'balance'is#defined#as#the#sum#of#net#exports#of#
goods#(TB),#net#factor#income(&&&&&)and#net#transfers#from#abroad##(#####).
• The#current#account#also#reflects#the#gap#between#income#(GNDI)#and#
absorption#(A)#in#the#economy.
• The#capital#and#financial#account#records#an#economy’s#net#foreign#
borrowing#and#capital#transfers.
•
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The'Energy'Market
• Financial models are concentrated on the relationship between spot
and future prices.
• Structural models (SM) assign a key role to variables explaining the
characteristics of the physical oil market.
• We apply a (SM) linear simultaneous equation model to forecast oil
price.
• The demand function is:
• The supply function is:
•
• Thus the equilibrium oil price is:

The'Model
• Error Correction Model (ECM). Disequilibrium error term can be
regarded as a stationary variable.
• Easy to fit the ECM into a general to specific approach.
• Overcomes the problem of non<stationarity of variables.
• Where the current change in Y depends on the change in X in period
t$1.
• We use quarterly data and we take into account up to four<order lags,
which is the most we can take considering the time period, under
which we estimate our equations.

The'Model
• The$production$function$(supply'side)$defined$as:
• The$labour$input$defined$as:
• The$stock$of$capital$in$period$t"as$the$sum$of$total$investment$plus$
stock$of$capital$in$period$t91.
• Total$investment$can$be$divided$into$public$investment$(IG)"and$
private$investment$(IP).$

The'Model
• Therefore,(IG is(public(investment(as(a(share(of(GDP,(PQ is(the(implicit(
GDP deflator(and(PI is(the(price(level(of(investment(goods.
• Rewriting(our(production(function(in(log(form(and(add(a(disturbance(
terms(leads(to:

The'Model
Actual'(LQA)&and'forecast'(LQ1)'log'form'of'GDP.

The'Model
• The$production$function$(demand'side)defined$as:
• Dividing$consumption$into$private$(CP)%and$public$(CG)%and$adding$
investment$in$inventories$(IS)%to$total$investments$leads$to$the$equation:
• Private$consumption$depends$on$many$factors$such$as:$Private$sector$
disposable$income$(YDP),$Interest$rates$(I),$Financial$liabilities$of$
households$(FL)%and$Unemployment$(U).
• LongCterm$private$consumption$is$defined:
• The$log$form$is$written$as:

The'Model
• Inflation is#determined#by#the#intersection#of#aggregate#demand#and#
aggregate#demand:
• Where#######is#the#actual#rate#of#inflation########is#the#expected#inflation,#K is#
an#increasing#function#and#######is#the#output#trend#in#the#long9term.
• Real#output#only#deviates#from#trend#in#the#model#if#the#central#bank#
increases#money#supply#growth#rate#in#a#surprise#way,#causing#a#surprise#
increase#in#inflation.
• Estimating#the#above#equation#gives#us:
• Surprisingly#the#coefficient#is#negative.
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displayed.
The picture can't be
displayed.
The picture
can't be
displayed.

The'Model
• Oil'prices will$have$a$direct$impact$on$the$GDP$model$and$the$private$
consumption.
• However$we$cannot$insert$a$price$in$the$Cobb:Douglas$function,$as$it$is$
not$a$production$factor$such$as$K or$E.$The$oil$price$will$have$an$
influence$on$the$US$output$through$private$consumption$and$imports.
• Private'consumption'effect:
where$t is$deterministic$trend.$

The'Model
Actual'log'form'of'private'consumption'(LCPA),'forecast'log'forms'of'
private'consumption'without'WTI'(LCP1)'and'with'WTI'(LCP2).

The'Model
• Inflation'effect'when%we%add%WTI prices%and%interest%rates,%which%
measure%the%effect%of%monetary%policy%on%inflation:
• The%coefficients%on%the%output%gap%and%on%the%WTI price%is%now%positive.
Nevertheless,%repercussions%of%the%rise%in%oil%price%on%inflation%might%be%
limited%because%of%governments%try%to%meet%an%inflation%target%through%
monetary%policies.
• Higher%oil%prices%lead%to%inflationary%expectations%and%thus%higher%
money%demand.%In%the%observed%period,%WTI and%GDP%deflator%(PQ)%are%
highly%collinear,%as%well%as%the%effect%of%WTI on%M1(demand%is%absorbed%
by%inflation%rate.%Therefore,%we%do%not%have%to%(and%we%cannot)%insert%oil%
price%variable%directly%into%the%money%demand%model.

The'Model
• Foreign'exchange'effect%on%our%basic%demand%for%imports:%
• where%Mt,%demand%for%real%imports,%is%a%function%of%national%income%
(YDt),%prices%of%domestic%goods%and%non9factor%services%or%cross%prices%
(Pt)%and%prices%of%imports%or%own%prices%(PMt).%
• We%divide%national%income%(YDt)%into%its%final%demand%expenditure%
components%(CONSt +%ITt +%Xt)%and%specify%a%computable%disaggregate%
import%demand%model%as%follows:

The'Model
• As#expected,#imports#increase#with#higher#level#of#domestic#
consumption,#investment#and#exports#(most#of#time#imported#goods#are#
used#as#inputs#for#production#of#final#export#goods),#as#well#as#higher#
level#of#price#of#domestic#goods.#However,#imports#decrease#with#an#
increase#own#prices.#
• Increasing#oil#price#will#have#an#impact#on#the#import#model#and#
therefore#we#add#the#WTI variable#to#the#econometric#relationship.#The#
estimated#equation#is#as#follows:

The'Model
Actual'log'form'of'imports'(LMA),'forecast'log'forms'of'imports'
without'WTI'(LM1)'and'with'WTI'(LM2).

The'Model
• Oil'demand'equation is#an#aggregate#value#of#the#OECD#and#non5OECD#
countries’#demand#for#oil.#In#our#analysis#we#assume#that#oil#demand#
equals#oil#supply#as#we#use#crude#oil#production#as#endogenous#variable.
• We#are#interested#to#observe#impact#of#monetary#policies#on#oil#prices.#In#
particular,#we#want#to#test#how#shocks#on#interest#and#exchange#rates#
affect#oil#price#developments.#
• NEER#is#used#since#the#dollar#is#still#used#as#the#medium#of#exchange#for#
most#of#oil#transactions.#As#WTI#crude#oil#prices#are#denominated#in#US$,#
depreciation#of#US$#makes#oil#imports#cheaper#in#non5US$#currencies.

The'Model
• We#want#to#see#whether#nominal#interest#rates#could#serve#as#important#
explanatory#variable#in#the#oil#demand#equation.#We#examine#3:month#T:
bill#and#6:month#LIBOR#rates#as#a#trade:off#between#short: and#long:term#
interest#rates.#
• We#expect#that#the#interest#rate#coefficient#will#have#a#negative#sign#in#oil#
demand#equation#as#worldwide#low#interest#rates#stimulate#aggregate#
demand#and#therefore#energy#demand.
• Our#estimate#equation#is#given#by:#
• There#was#no#correlation#between#the#oil#demand#and#the#interest#rates.

The'Model
• Variable(as(coefficient(proved(to(be(non2significant.(
• Oil(demand(is(relatively(inelastic(so(interest(rates(do(not(have(such(
significant(effect(as(for(other(consumption(goods(consumption.
• As(expected,(oil(demand(reacts(inversely(to(oil(price,(positively(to(economic(
activity(and(negatively(to(the(exchange(rate .
• An(economy(enters(in(a(recession,(a(slow2down(in(economic(activities(will(
cause(a(decrease(in(demand(for(oil.(

The'Model
• Biasness'of'coefficients'and'correlations.

The'Model
• Oil'supply'equation is#the#aggregate#value#of#the#OPEC#and#non5OPEC#oil#
producing#countries.#
• Higher#oil#prices#stimulate#production#in#theory,#we#expect#to#observe#a#
positive#coefficient#on#oil#prices#as#explanatory#variable#in#the#oil#supply#
equation.
• Higher#level#of#oil#reserves#(OR)%indicates#possible#higher#production#
capacity.

The'Model
• Our$estimate$equation$is$given$by:
• Only$oil$price$and$the$oil$reserves$seem$to$impact$oil$production.
• Their$coefficients$have$expected$sign$but$are$not$really$significant.
• Increase$in$the$oil$price$will$stimulate$a$rise$in$the$quantity$supplied.
• Constant$increase$in$production$will$lead$to$excess$supply,$increase$in$
inventories$and$that$would$lead$to$a$decrease$in$oil$prices.$

The'Model
• Higher'prices'do'not'bring'forth'new'capacity'because'suppliers'are'
unwilling'or'unable'to'increase'production.
• Biasness'of'coefficients'and'correlations.
• The'correlation'between'oil'price'and'oil'reserves'is'low'enough'to'believe'
that'explanatory'variables'are'not'correlated.
• Therefore,'our'estimators'are'unbiased.

Simulation'Results and'Price'Forecast
• Assumptions.
• Energy0Market0section,0we0use0the0oil0demand0and0the0oil0supply0equations0
to0explain0the0movements0of0oil0prices.
• As0expected,0these0two0econometric0relationships0do0not0yield0the0same0
quantity0of0oil0(demanded0and0supplied).
• Oil0price0as0a0function0of0the0gap0between0oil0supply0and0oil0demand.
• Considering0the0oil0supply0as0exogenous0in0order0to0make0shocks0on0oil0
supply.

• Assumptions*made*on*the*missing*exogenous*variables:
• Investment*in*inventories*that*represents*goods*produced*during*a*given*
period*but*not*sold*during*this*period*(IS).*Due*to*its*nature*this*variable*is*
not*easily*predictable.
• Nominal*Effective*Exchange*Rate*(NEER)(is*computed*as*a*benchmark*of*
U.S*dollar*with*respect*to*other*currencies.
• Unemployment*(UN):*the*employment*is*rather*stable*so*we*keep*the*
same*value*than*in*2006:4 .
• Government*Revenues*(REV):*Time*series*data*indicate*that*government*
revenues jump*by*30%*in*the*second*quarter*of*the*year.*We*assume*the*
same*increase*for*our*forecasted*value.*
• The*government*revenues*are*decreasing*but*stay*around*10%*above*the*
value*before*the*jump.

• After&this&jump,&the&government&revenues&are&decreasing&but&stay&around&
10%&above&the&value&before&the&jump.
• Our&forecast&runs&until&the&third&quarter&of&2007.&The&results&are&given&in&
the&table&below:

• Impact'of'shocks'imposed'on'exogenous'variables'on'the'key'major'
endogenous'variables.
• We'choose'three'exogenous'variables:
• Oil'supply'because'it'has'a'major'influence'on'oil'price.
• The'interest'rate.
• The'nominal'effective'exchange'rate.

• Oil$supply$decreased$by$1%$in$2006:$4.

• We#report#percentage#changes#of#forecasted#values#with#respect#to#a#
decrease#in#oil#supply:
• The#only#variable#directly#affected#by#the#oil#supply#shock#is#oil#price.
• Percentage#variation#of#oil#price#due#to#a#1%#downward#shock#push#up#the#
oil#price#by#16%.#
• 1%#decrease#in#the#supply#increases#oil#price#to#US$#69.6#per#barrel#from#
the#predetermined#level#of#US$#60#per#barrel.

• Real%interest%rate%decreased%by%1%%in%2006:%4%6 shock%of%22.6%%on%the%
interest%rate%index.

• Interest'rate'has'no'effect'on'oil'price.
• However,'in'reality,'we'could'expect'the'interest'rate'affecting'the'oil'price'
through'the'exchange'rate.
• One'of'the'determinants'of'the'propensity'to'consume'current'income'is'
the'real'interest'rate.'
• If'interest'rate'is'growing,'consumers'will'substitute'their'present'
consumption'to'the'future'and'increase'current'savings.'
• But'this'higher'interest'rate'will'also'increase'the'amount'of'future'
consumption.

• Nominal(effective(exchange(rate(decreased((depreciated)(by(5%(in(2006:(4

• Dollar&devaluation&increases&demand&for&oil&in&countries&with&non4dollar&
appreciating&currencies.
• A&5%&downward&shock&on&exchange&rate&increases&oil&price&by&5.6%&or&to&
around&US$&62.5&per&barrel&from&the&US$&60&per&barrel&benchmark.
• The&impact&will&be&similar&as&in&the&case&of&the&oil&supply&shock .&

Main'Observations'
• Financial'programming'models'are'rather'theoretical'and'empirical'
implications'are'very'difficult'to'link'with'the'real'world'performance'of'
economic'variables.
• The'level'of'accuracy'decreases'with'the'increase'of'the'length'of'the'
forecast'period.
• The'behavioural'equation'for'money'demand,'which'is'critical'for'fiscal'and'
monetary'policies,'should'include'more'sophisticated'specifications'to'
better'mirror'the'reality.
• Our'model'adds'value'to'other'financial'programming'models.
• Three'relevant'markets'of'financial'programming,'the'foreign'exchange'
market,'the'money'market'and'the'goods'market,'are'modelled'jointly'with'
the'energy'market.

Main'Observations
• We#can#then#measure#the#impact#of#macroeconomic#variables#on#oil#price#
and#vice5versa.
• Our#model#can#also#forecast#the#oil#price#futures.
• We#prove#that#an#increase#in#WTI#prices#leads#people#to#consume#less#and#
vice5versa.
• Private#consumption#positively#affects#GDP#through#the#accounting#
identity.
• A#rise#in#oil#prices#has#also#a#negative#effect#on#GDP.
• Rising#oil#prices#add#inflationary#pressures.
• Imports#can#be#interpreted#as#private#consumption#of#foreign#goods.#We#
notice#that#total#consumption#is#positively#related#with#imports.#Moreover,#
oil#price#affects#both#oil#and#total#imports.

Main'Observations
• Since&part&of&oil&consumed&in&the&USA&is&imported,&an&increase&in&oil&price&
will&indicate&that&a&bigger&part&of&income&must&be&used&for&the&same&
quantity&of&oil&imports.
• Effects&of&macroeconomic&variables&on&oil&prices.&US&economic&situation&
does&not&affect&oil&price.&However, oil&price&is&valued&in&US$&and&we&have&
noticed&the&effect&of&the&US&exchange&rate&on&oil&price.&
• The&most&important&factor&seems&to&be&the&gap&between&the&demand&and&
the&supply.&Oil&supply&is&considered&as&an&exogenous&variable.&In&this&way,&
we&are&able&to&measure&the&reaction&of&oil&price&to&supply&shocks.&
• A&decrease&in&oil&supply&and&a&depreciation&of&the&US$&lead&to&an&increase&
in&oil&price,&which&in&turn&reduces&private&consumption.
• Economic&activity&slows&down&and&the&purchasing&power&decreases.

Main'Observations
• At#the#same#time,#the#rise#in#oil#price#pushes#up#inflation#that#leads#to#a#
bigger#depreciation#of#the#US$#which#then#reinforces#the#increase#in#oil#
price.#
• We#enter#into#an#inflationary#spiral.
• FED#intervention#to#lower#interest#rates#impact#private#consumption#and#
will#increase#along#with#an#increase#in#gross#domestic#product#and#
improvement#in#the#purchasing#power.
• The#interest#rates#cut:#the#inflation#will#increase,#triggering#depreciation#of#
the#US$.#Such#depreciation#pushes#up#oil#price#and#the#spiral#is#engaged.
• The#model#confirms#the#general#relationship#between#selected#
macroeconomic#variables#and#oil#price.

Investment(Strategies(on(Energy(
Ljubljana(– November(10,(2011
Helios(Padilla(Mayer

Investment(Strategies(on(Energy. Slide(81
Contents
• Energy'Derivatives 3
• Energy'Forwards 5
• Energy'Futures 14
• Futures'Hedging'Example 21
• Risk'with'Futures 28
• Value'at'Risk'(VaR)'for'Energy 29'

Energy(Derivatives
• Derivatives(are$particularly$useful$for$managing$price$risk.
• Deregulation$of$domestic$energy$industries$has$shown$price$
risk$greater$for$energy$than$other$commodities:
9 in$a$sense,$energy$derivatives$are$a$natural$outgrowth$of$
market$deregulation
• Derivatives$allow$investors$to$transfer$risk$to$others$who$could$
profit$from$taking$the$risk,$and$they$are$a$popular$way$to$
isolate$cash$earnings$from$fluctuations$in$prices.

Energy(Derivatives
• Derivatives)are)divided)into:
. Forwards)(OTC);
. Futures)(Exchange)Traded);
. Swaps)(OTC);))and
. Options)(OTC)and)Exchange)Traded).

Energy(Forwards
• Forward'contracts'are'a'simple'extension'of'cash'or'cash4and4carry'
transactions,
4 whereas'in'a'standard'cash'transactions'the'transfer'of'ownership'
and'possession'of'the'commodity'occurs'in'the'present.
4 Delivery'under'a'forward'contract'is'delayed'to'the'future,'but
4 asset'exchange'and'price'are'agreed'in'present'time'(today).'

Energy(Forwards
• In#energy#markets,#an#oil#refiner#may#enter#into#forward#contracts#to#
secure#crude#oil#for#future#operations,
7 in#order#to#avoid#both#volatility#in#spot#oil#prices#and
7 the#need#to#store#oil#for#extended#periods#(for#future#consumption).

Energy(Forwards
• All#forward#contracts#specify
– the#type,
– quality#and#quantity#of#commodity#to#be#delivered,#and
– a#price#or#pricing#formula.
• The#simplest#forward#contract#sets#a#fixed#(firm)#price.#
• More#elaborate#price@setting#mechanisms#include#floors,#ceilings,#and#
inflation#escalators.
• By#setting#such#a#price,#the#buyer#and#seller#are#able#to#reduce#or#
eliminate#uncertainty#with#respect#to#the#sale#price#of#the#commodity#
in#the#future.
• Knowing#such#prices#with#certainty#may#allow#forward#contract#users#to#
better#plan#their#commercial#activity.#

Energy(Forwards
• Finally,(the(contract(may(contain(miscellaneous(terms
2 such(as(responsibilities(of(the(parties(under(circumstances(where(
one(party(fails(to(perform(in(an(acceptable(manner:
2 lack(of(delivery,
2 late(delivery,
2 poor(quality…
• Overall,(forward(contracts(are(designed(to(be(flexible(so(as(to(match(
the(commercial(merchandising(needs(of(the(parties(entering(into(
them.

Challenges(and(Risks(with(Forwards
• Forward'contracts'have'problems'that'can'be'serious'at'times.
• Buyers'and'sellers'(counterparties)'have'to'find'each'other'and'settle'
on'a'price.
• For'example,
– After'the'collapse'of'the'California'power'market'in'the'summer'of'2000,'the'
California'Independent'System'Operator'(ISO)'had'to'discover'the'price'of'electricity,
– because'there'was'no'market'price'for'future'electricity'deliveries.
• When'they'agreedGupon'price'is'far'different'from'the'market'price,'
one'of'the'parties'may'default'(nonGperform).
• Companies'signed'contracts'with'California'for'future'deliveries'of'
electricity'at'$100/MWh'when'current'price'dropped'to'$35/MWh.

• The$only$way$for$a$party$to$back$out$of$a$forward$contract$is$to$
renegotiate$it$and$face$penalties.
• Direct$risks$of$the$forward$pricing$and$delivery$features$of$forwards$are:
– default$risk$and
– credit$risk.
• For$long<term$forward$contract$the$exposure$to$default$and$credit$risk$
is$high.
• Parties$to$forward$contracts$must$be$concerned$about$the$other$party’s$
performance.

• For$example,$if$an$oil$refiner$has$contracted$to$purchase$oil$at$$75$per$
barrel,
– its$level$of$concern$that$the$other$party$will$perform$by$delivering$oil$rises$
progressively$as$the$price$of$oil$rises$above$$75$per$barrel,$and
– the$incentive$for$the$counterparty$to$walk$away$from$the$contract$increases.
• To$deal$with$such$a$risk$of$default,$parties$scrutinize$the$
creditworthiness$of$counterparties.
• Limit$how$much$they$will$buy$from$or$sell$to$a$particular$trader$based$
on$his$credit$rating.
• Parties$may$also$ask$counterparties$to$post$collateral$or$good$faith$
deposits$to$assure$performance.
• Ultimately,$how$parties$deal$with$default$and$credit$risk$in$a$forward$
contract$is$up$to$them.

Energy(Forwards(Pricing
• S ="spot"price"of"the"asset
• e ="continuously"compounded"interest"rate
• rT ="continuous"dividend"yield"on"asset
• Difference"between"forward"and"spot"price"reflects"cost"and"benefits"of"
delaying"payment"for.
• Example:
• Country"X"has"fixed"the"price"of"oil"at"S"="$95/bbl."Assume"that"the"
fixed"price"is"not"expected"to"change"over"the"next"month."
• Suppose"you"can"take"long"and"short"positions"in"wheat"with"equal"
facility"and"costlessly"(i.e.,"no"transactions"costs,"no"shorting"costs,"etc).
F = SerT

Energy(Forwards(Pricing
• Assume&there&are&no&holding&costs&or&benefits&associated&with&oil.&The&
one7month&interest&rate&is&r&=&6%&in&continuously7compounded&and&
annualized&terms.
• Question?&
• Using&S&=&95,&r&=&0.06,&and&T&=&1/12,&calculate&F&and&show&that&if&the&
forward&price&is&not&equal&to&F,&there&is&always&arbitrage.
• Applying&the&formula:&
• The&unique&arbitrage7free&forward&price&for&wheat&is&$95.476/bbl.
• If&the&forward&price&is&not&equal&to&F,&there&is&always&arbitrage.
12
1
*06.0
95eSeF rT
==

Energy(Futures
• Futures'contracts'are'firm'commitments'to'make'or'accept:
– delivery'of'a'specified'quantity'and
– quality'of'a'commodity.
• Futures'contracts'are'exchange'traded,
– unlike'forwards'which'are'OTC.
• The'buyer,'known'as'the'long,
– agrees'to'take'delivery'of'the'underlying'commodity.
• The'seller,'know'as'the'short,
– agrees'to'make'a'delivery.
• Only'a'small'number'of'contracts'traded'each'year'result'in'delivery'of'the'
underlying'commodity.

Energy(Futures
• Instead,)traders)generally)offset)their)futures)positions)before)their)contracts)
mature,
– a)buyer)will)liquidate)by)selling)the)contract,)and
– the)seller)will)liquidate)by)buying)back)the)contract.
• The)difference)between)the)initial)purchase)or)sale)price)and)the)price)of)the)
offsetting)transaction.
• Futures)contracts)trade)in)standardized)units:
– highly)visible,
– extremely)competitive,)and
– continuous)open)auction.
• Underlying)market)must)meet)three)broad)criteria:
– there)must)be)a)diverse,
– large)number)of)buyers)and)sellers,)and
– products)are)interchangeable)for)purposes)of)shipment)or)storage.

Energy(Futures(Exchanges(
• Of#most#futures#contracts#represent#only#a#minuscule#share#of#the#trading#
volume;#less#than#1%#in#the#case#of#energy.
• Exchange’s#physical#commodity#contracts#allow#actual#delivery,
– to#ensure#to#market#participants#to#transfer#physical#supply,#and
– futures#prices#will#be#truly#representative#of#cash#market#values
• Most#market#participants#choose#to#buy#or#sell#their#physical#supplies#
through,
– futures#or#options#to#manage#price#risk#and#liquidating#their#positions#before#delivery.
• The#NYMEX#is#the#world#largest#physical#commodity#future#exchange#who#
offers:
– Futures#and#options#contracts.#Crude#Oil,#Heating#Oil,#Gasoline#and#Natural#Gas.
– Futures#for#Coal,#Electricity,#Propane,#and#Palladium.
• The#COMEX##lists#futures#and#options#on
– Gold,#Silver,#Copper#and#Aluminum.

Energy(Futures(Exchanges
• The$execution$of$transactions$is$directly$on$the$trading$floor$and$is$a$process$
that$can$be$completed$in$seconds.
• Transactions$are$completed$at$the$best$bid$or$offer.
• Process$starts$when$a$customer$calls$a$licensed$commodity$broker$with$an$
order$to$buy/sell$futures.
• Broker$sends$the$order$to$his$firm$representative$on$the$trading$floor$via$
telephone$or$computer$link.
• An$order$slip$is$immediately$prepared,$stamped$and$given$to$a$floor$broker$
standing$at$the$appropriate$trading$ring.
• All$buy/sell$transactions$are$executed$between$floor$brokers:
– buyers$compete$with$each$other$by$bidding$prices$up,$and
– sellers$compete$with$each$other$by$offering$prices$down.

• The$trade$is$executed$when$bid$and$offer$meet.
• Each$broker$must$record$each$transaction$on$a$card$which$shows$the:
– commodity,
– quantity,
– delivery$month,$and
– price.
• Brokers$badge$name$and$buyer’s$name.
• Seller$must$toss$the$card$into$the$center$of$the$trading$ring$within$one$
minute$of$the$completion$of$the$transaction.
• The$cards$are$timeBstamped$and$rushed$to$the$data$entry$room$where$
operators$key$the$data$into$the$Exchange$central$computer.
• Ring$reporters$listen$to$the$brokers$for$changes$in$prices$and$enter$the$
changes$handBheld$computers.

• Markets(use(NYMEX(because(contracts(are
– standardized,(
– accepted,(and
– liquid(financial(instruments.
• The(Exchange(offers(cost@efficient(trading(and(risk(management(
opportunities.
• Futures(and(options(contracts(are(traded(in(an(anonymous(auction,(
representing(a(confluence(of(opinions(on(their(values.
• Futures(prices(serve(as(world(reference(prices(of(actual(transactions(
between(market(participants.
• Exchange’s(markets(allow(hedgers(and(investors(to(trade(anonymously(
through(future(brokers.
• Liquidity(of(the(market(allows(futures(contracts(to(be(easily(liquidated(prior(
to(required(receipt(or(to(be(delivery.

• The$Exchange$offers
– safe,
– fair,$and
– orderly$markets.
• Futures$contract$performance$is$supported$by$a$strong$financial$system.
• Backed$by$the$Exchange’s$clearing$members,
– including$strongest$names$in$brokerage$and$banking.

Futures(Hedging(Example
Date
Prices per Barrel
Contract Activity Cash In (Out)
WTI Spot December Future
January 26 28
Refiner "buys" 10
contracts for 1,000
barrels each and pays
the initial margin. ($22,000)
May 20 26
Mark to market: (26-
28)*10,000 ($20,000)
September 20 29
26)*10,000 $30,000
October 27 35
29)*10,000 $60,000
November (end) 35 35
Refiner either: (a) buys
oil, or (b) "sells" the
contracts, initial margin
is refunded
(a) buying oil
($350,000)
(b) "selling"
contracts
$22,000

• In#January#a#refiner#can#make#a#sure#profit#by#buying#10,000#barrels#of#WTI#
crude#oil#in#December#at#current#December#futures#price#of#$28#per#barrel.
• One#way#to#guarantee#the#December#price#would#be#to#buy#10#WTI#
December#contracts.
• The#refiner#pays#nothing#for#the#futures#contracts#but#has#to#make#a#goodD
faith#deposit#(initial#margin)#with#his#broker.
• NYMEX#currently#requires#an#initial#margin#of#$2,200#per#contract.
• During#the#year#the#December#futures#price#will#change#in#response#about#
the#S/D#of#crude#oil.
• December#price#remains#constant#until#May,
– when#it#falls#to#$26#per#barrel.

• At#that#point#the#exchange#pays#those#who#sold#December#futures#contracts#
and#collects#from#those#who#bought#them.
• The#money#comes#from#the#margin#accounts#of#the#refiner#and#other#buyers
• The#broker#issues#a#“marginal#call”#requiring#the#refiner#to#restore#his#margin#
account#by#adding#$20,000#to#it.
• This#“marking#to#market”#is#done#every#day.
• Brokers#close#out#parties#unable#to#pay#(margin#calls)#by#selling#their#clients’#
future#contracts.
• Usually,#the#initial#margin#is#enough#to#cover#defaulting#party’s#losses.#If#not,#
the#broker#covers#the#loss#(if#broker#cannot)#the#exchange#does.
• Following#settlement#after#the#first#change#in#the#December#futures#price,#
the#process#is#started#again.

• In#September,#the#December#futures#price#increases#to#$29#per#barrel,
– the#refiner’s#contract#is#marked#to#market,#
– he#receives#$30,000#from#the#exchange.
• In#October,#the#price#increases#again#to#$35#per#barrel,
– the#refiner#receives#an#additional#$60,000.
• By#the#end#of#November,#the#WTI#spot#price#and#the#December#futures#
prices#are#necessarily#the#same.
• The#refiner#can#either#demand#delivery#and#buy#the#oil#at#the#spot#price#or#
“sell”#his#contract.
• In#either#way#his#initial#margin#is#refunded.
• If#he#buys#oil#he#pays#$35#per#barrel#or#$350,000,
– but#his#trading#profit#is#$70,000#(30,000#+#$60,000#P $20,000).

• Effectively,+he+ends+up+paying+$28+per+barrel:
– $350,000+=$70,000/10,000,+
– which+is+precisely+the+January+price+for+December+futures.
• If+he+sells+his+contract+he+keeps+the+trading+profit+of+$70,000.
• Several+features+of+futures+are+worth+emphasizing.
• First,+a+party+who+elects+to+hold+the+contract+until+maturity+is+guaranteed+the+
price+he+paid+when+he+initially+bought+the+contract
• The+buyer+of+the+futures+contract+can+always+demand+delivery+and
– the+seller+can+always+insist+on+delivering.
• As+a+result,+at+maturity+the+December+futures+price+for+WTI+and+the+spot+
market+price+will+be+the+same.
• If+the+WTI+price+were+lower,
– people+would+sell+futures+contracts+and+deliver+oil+for+a+guarantee+profit.

• If#the#WTI#price#were#higher,
– people#would#buy#futures#and#demand#delivery#with#a#guarantee#profit.
• Only#when#the#December#futures#price#and#the#December#spot#price#are#the#
same
– is#the#opportunity#for#a#sure#profit#eliminated.
• Second,#
– a#party#can#sell#oil#futures#even#though#he#has#no#access#to#oil,
– a#party#can#buy#oil#even#though#he#has#no#use#for#it,
– speculators#routinely#buy#and#sell#futures#contracts#in#anticipation#of#price#changes,
– instead#of#delivering#or#accepting#oil,#they#close#out#their#positions#before#the#contracts#
mature,
– speculators#perform#the#useful#function#of#taking#on#the#price#risk#that#producers#and#
refiners#do#not#wish#to#bear.

• Third,
– Futures(allow(a(party(to(make(a(commitment(to(buy(or(sell(large(amounts(of(oil((or(other(
commodities)(for(a(very(small(initial(commitment,(the(initial(margin.
– An(investment(of($22,000(is(enough(to(commit(a(party(to(buy((sell)($280,000(of(oil(when(
the(futures(price(is($28(per(barrel.
– Consequently,(traders(can(make(a(large(profits(or(suffer(huge(losses(from(small(changes(in(
the(future(price.
– This(leverage(has(been(the(source(of(spectacular(failures(in(the(past.

Risk(with(Futures
• Future&contracts&are&not&by&themselves&useful&for&all&those&who&want&to&
manage&price&risk.
• Future&contracts&are&available&for&only&a&few&commodities&and&a&few&delivery&
locations.
• Nor&are&they&available&for&deliveries&a&decade&or&more&into&the&future.
• There&is&a&robust&business&conducted&outside&exchanges&in&OTC&market,
– in&selling&contracts&to&supplement&futures&contracts&and&better&meet&the&needs&of&
individual&companies.
• Less&flexibility&in&size&and&contracts&specifications.
• Must&always&have&margin&ready.

Value(at(Risk(for(Energy((VAR)
• Energy'firms'are'being'forced'to'implement'risk'management'systems'and'
procedures'to'compete'effectively'in'the'market'place.
• Energy'firms'are'still'in'the'process'of'learning'about'the'applications'of'VAR'
to'manage'energy'price'risk.
• In'order'to'disclosure'derivatives'risk'we'must'put'in'place'a'risk'
management'system'to'measure'control'and'deal'with'risk.
• VAR'tries'to'answer'the'simple'question'of'How$much$can$the$firm$lose$due$
to$normal$market$movements?
• Example:
• If'your'VAR'is'US$'10MM'and'you'have'to'set'the'time'period'to'one'day'and'
the'probability'to'95%'then'over'the'next'24Lhours'period'there'is'a'5%'
chance'your'loss'will'exceed'US$10MM.

Example(of(LUX(NATURAL(RESOURCES(FUND
Source:(Bloomberg.
XPPFU
RUW ROMR 8 7453B 8D
0IQGLPFUN 00 : 5
WFUW 2FWI
3QH 2FWI -
1XUUIQG 3A
IUMRH 9RQWLO
6MVWRU RWFO IWXUQ
RWFO IWXUQ. ( ) 0IQGLPFUN. ( )-
IU RUPFQGI /QFO VMV
IU RUPFQGI. 2FMO RUW ROMR 0IQGLPFUN
RWFO IWXUQ 9RQWL V
RWFO IWXUQ 9 2
RWFO IWXUQ 2 ( (
RWFO IWXUQ E 2 ( (
RWFO IWXUQ 9RQWL V ( (
RWFO IWXUQ 9RQWL V ( (
RWFO IWXUQ EIFU V ( )
RWFO IWXUQ EIFU V - )
RWFO IWXUQ EIFU V ( - ()
MVN. CIINO RUW ROMR 0IQGLPFUN
WFQHFUH 2IYMFWMRQ EIFU V ) )
IPMYFUMFQGI EIFU V - (
0IWF EIFU V -
1RUUIOFWMRQ EIFU V
TXFUIH EIFU V (
7Q RUPFWMRQ FWMR EIFU V
LFUSI FWMR YV MVN 4UII EIFU V )
UFGNMQ 3UURU EIFU V (

Total(Return:(Fund(vs.(Benchmark
Source:(Bloomberg.

Absolute(Performance
Source:(Bloomberg.

Relative(Performance
Source:(Bloomberg.

Tracking(Performance
Source:(Bloomberg.

VAR(Distribution(Statistics
Source:(Bloomberg.

Skewness(and(Kurtosis
Source:(Bloomberg.

VAR(Distribution(Best/Worst
Source:(Bloomberg.

VAR(Distribution(Left(Tail
Source:(Bloomberg.

VAR(Distribution(Right(Tail
Source:(Bloomberg.

VAR(vs.(Relative(VAR
Source:(Bloomberg.

Sectoral(VAR
Source:(Bloomberg.

Stress(Test(Scenarios
Source:(Bloomberg.

Energy'Hedging'
Portorož – November'11,'2011

Posvet Finacnikov /.Energy.Hedging Slide.123
Contents
Why$Do$We$Hedge?$ 3
Selected$Hedging$Strategies$ 9
Oil$Futures$and$Hedging$ 11
Speculating$with$Oil$Futures 12
Hedging$and$Leverage 13
Hedging$with$Oil$Futures 14

Why.Do.We.Hedge?.
Global&Equity&Volatility,&3&Jan.3 8&Nov.&2011
Source:(Bloomberg(

Why.Do.We.Hedge?
WTI,%Brent,%European%Urals%and%Arabian%Gulf%Dubai%Spot%Prices,%US$/barrel,%Jan.%–Nov.%2011
Source:(Bloomberg(

Why.Do.We.Hedge?
WTI,%Brent,%Implied%Futures%Curves,%US$/barrel,%Dec.%2011%–June%2019
Source:(Bloomberg(

Why.Do.We.Hedge?
GSCI%and%CRB%Energy%Indices,%1%Jan.%–8%Nov.%2011
Source:(Bloomberg(

Why.Do.We.Hedge?
GSCI%and%CRB%Energy%Indices,%1%Jan.%–8%Nov.%2011
Source:(Bloomberg(
580
600
620
640
660
680
700
720
740
760
780
500
510
520
530
540
550
560
570
580
JanC11 MarC11 MayC11 JulC11 SepC11 NovC11
CRB%Spot%(lhs) GSCI%Spot%(rhs)
Poly.%(CRB%Spot%(lhs)) Poly.%(GSCI%Spot%(rhs))

Why.Do.We.Hedge?
Adding&Commodities&in&the&Asset&Allocation&Decision&Leads&to&Improved&Risk9Return&
Tradeoffs
Source:(Enpetrorisk(

Why.Do.We.Hedge?
• To#identify#an#acceptable#price#range#
over#defined#time#horizon.
• To#take#into#account#a#rise#in#market#
volatility#and#helps#mitigating#potential#
financial#losses.#
• To#assess#commodity#price#risk.
• To#apply#risk#management#techniques#
to#optimize#financial#leverage.#
• To#identify#and#execute#price#protection#
strategies.
Strategic#Price#Modelling#System#
Source: HPM+

Selected.Strategies.for.Producers
• Hedging'strategies'in'order'to'protect'
producers/consumers'from a'revenue'
loss'or'higher'cost'exposures'while'
benefiting'from'favourable'price'
movements.
• A'floor'price'contract:'producers'can'
lock'in'a'floor'price'for'selected'
commodity'and'then'participate'in'
upside'moves'and'protection'from'
downside'risks.'
• Producers'can'opt'for'lower'floor'
prices'and'preserve'more'of'their'
exposure'to'higher'prices.
• Alternately,'they'may'target'higher'
floors,'however,'they'will'be'giving'up'
more'of'the'upside'if'delivery'basis'
improves'and'futures'prices'turn'
upwards.'
A'floor'price'contract'– different'levels'of'
protection'and'risk

Selected.Strategies.for.Consumers
• A"price"ceiling"strategy:"consumers"
can"set"a"ceiling"price"for"selected"
commodity"and"then"participate"in"
downside"moves"and"being"protected"
from"upside"risks."
• Consumer"can"opt"for"higher"ceiling"
prices,"and"preserve"more"of"their"
exposure"to"higher"prices.
• Alternately,"they"may"target"lower"
ceilings,"however,"the"premium"paid"
will"be"higher"and"they"will"be"giving"
up"more"of"the"downside"if"futures"
prices"turn"downwards."
A"ceiling"price"contract"– different"levels"of"
protection"and"risk

Oil.Futures.and.Hedging
Open High Low Settle Chg High Low Open.
Interest
Oct$11 90.11 90.23 88.59 89.05 -0.29 115.55 76.15 256,780
Nov$11 90.13 90.40 88.80 89.23 -0.32 115.46 76.61 202,379
Dec$11 90.49 90.64 89.08 89.49 -0.37 115.45 77.12 200,601
Jan$12 90.56 90.83 89.29 89.70 -0.44 115.22 77.84 96,555
Crude$Oil,$Light$Sweet$(NYM)-1,000$bbls.;$$$per$bbl.

• Speculating.with.Oil.Futures
• Each%contract%calls%for%delivery%of%1,000%
barrels%of%oil.%Current%future%price%for%
delivery%in%October%(first%listed%contract)%
is%$89.05%per%barrel.
• ,%then%for%every%dollar%increase%in%
the%price%of%crude,%the%long%position%
gains%$1,000%and%the%short%position%
loses%that%amount.
• ,%then%the%short%side%gains%$1,000%
for%every%dollar%that%price%declines.
• If%crude%oil%is%selling%for%$91.05%maturity%
date,%long%side%will%profit%$2,000%per%
contract%purchased.%Short%side%loses.
• If%crude%oil%is%selling%for%$87.05,%short%
side%will%profit%$2,000.%Long%side%loses.
!WTI
!WTI

• Futures.and.Leverage
• Suppose'the'initial'margin'requirement'
(IMR)'for'the'oil'contract'is'10%.'At'first'
future'contract'price'of'$89.05','and'
contract'size'of'1,000'barrels,'this'
would'require'a:
• A'$2'jump'in'oil'prices'represents'an'
increase'of'5.066%,'and'results'in'a'
$2,000'gain'on'the'contract'for'the'long'
position.'This'is'a'gain'of'50.66%'margin'
in'the'$8,905.'10'times'the'%'increase'
in'the'oil'price.'So,'10LtoL1'ratio'of'
percentage'changes'='leverage'in'the'
futures'position'from'before'IMR='1LtoL
10'the'value'of'the'underlying'asset.
RM = .10 ! 89.05 !1,000 = $8,905

Oil.Futures.and.Hedging.
• Hedging.with.Oil.Futures
• Consider)an)oil)distributor)to)
sell)100,000)barrels)of)oil)in)
October)who)wishes)to)
hedge)on)a)possible)decline)
in)oil)prices.)Each)contract)
calls)for)delivery)of)1,000)
barrels)=100)contracts.
• Any)decrease)in)prices)would)
generate)a)profit)on)the)
contracts)that)offsets)a)lower)
sales)revenue)from)the)oil.
• Suppose)that)prices)for)oil)
are)$87.05,)$89.05,)and)
$91.05)per)barrel.

• The$revenue$from$the$oil$sale$
will$be$100,000$times$the$
price$per$barrel.$The$profit$on$
each$contract$sold$will$be$
1,000$times$any$decline$in$
the$futures$price.
• At$maturity,$the$convergence$
ensures$that$the$final$futures$
price$will$equal$the$spot$price$
of$oil.$So,$the$profit$on$the$
100$contracts$sold$will$equal$
where$is$$$$$$$is$the$oil$price$
on$the$delivery$date,$and$$$$$$
original$futures$price,$$89.05.
100,000 ! FO " PT( ),
PT
FO
$87.05 $89.05 $91.05
Revenue
oil$sale:
100,000$*$$
$8,705,00
0
$8,905,000 $9,105,000
+ Profit$on$
futures:
100,000$*
200,000 0 J200,000
Total
Proceeds
$8,905,00
0
$8,905,000 $8,905,000
FO ! PT( )
PT
Crude$Oil$Price$in$October,$$PT

• The$upward+sloping$line$is$
the$revenue$from$the$sale$
of$oil.
• The$downward+sloping$line$
is$the$profit$on$the$futures$
contract.
• The$horizontal$line$is$the$
sum$of$sales$revenue$plus$
futures$profits.
• This$line$is$flat,$as$the$
hedged$position$is$
independent$of$oil$prices.
Hedging$Revenues$Using$Futures$price$=$$89.05$$

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