hedging futures

hedging futures

Postby par_putt » Wed May 15, 2019 5:04 pm

examples shown in URL

https://www.mercatusenergy.com/blog/bid/86597/the-fundamentals-of-oil-gas-hedging-futures

This article is the first in a series where we will be exploring the most common strategies used by oil and gas producers to hedge their exposure to crude oil, natural gas and NGL prices.

In the energy markets there are six primary energy futures contracts, four of which are traded on the New York Mercantile Exchange (NYMEX): WTI crude oil, Henry Hub natural gas, NY Harbor ultra-low sulfur diesel (formerly heating oil) and RBOB gasoline and two of which are traded on the IntercontinentalExchange (ICE): Brent crude oil and gasoil.

A futures contract gives the buyer of the contract, the right and obligation, to buy the underlying commodity at the price at which he buys the futures contract. On the other hand, a futures contract gives the seller of the contract, the right and obligation, to sell the underlying commodity at the price at which he sells the futures contract. However, in practice, very few commodity futures contracts actually result in delivery, most are utilized for hedging and are sold or bought back prior to expiration.
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Re: hedging futures

Postby dan_s » Fri May 17, 2019 9:57 am

Thanks for posting this link. We all need a general understanding of how hedges work. As noted in the article, very few oil futures are actually filled by physical delivery (less than 5%).

The upstream companies all sell their physical oil into the market directly (usually to a midstream company) or through contracts with marketing companies. Their hedges are "paper" and they are settled with the counter parties in cash.

All of my forecast/valuation models take into account the company's hedges and regional price differentials. It is difficult, but after doing this for almost two decades I've gotten fairly good at it. In each forecast model you will see two lines for hedge gains and losses when actuals are reported. The companies split out the cash settlements closed each quarter and the non-cash mark-to-market adjustments. The actual oil and gas prices received each quarter for oil, gas and NGLs (shown at the bottom of the spreadsheet) include the cash settlements received or paid in the quarter.

The SEC accounting rules are confusing and IMO very misleading, which is why investors in upstream oil & gas companies eventually learn to ignore "Reported Net Income" and focus on Operating Cash Flow.

See you in Dallas on May 21
Dan Steffens
Energy Prospectus Group
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Re: hedging futures

Postby par_putt » Fri May 17, 2019 10:34 am

There are other good links at the bottom of the article.

See you
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