ICE (LS) Gasoil Markets Forum
ICE (LS) Gasoil Markets ForumOil futures forward curves:economics explainedwww.pjk-international.comwww.enfx.net
Oil futures forward curves ir. Patrick Kulsen, MSc. B.Mail: patrick.kulsen@pjk-international.comTel: 31-(0)76-7676 325 Managing Director @ PJK International B.V. PJK International:‘Market research company specialized in NWE oil markets’–––––ARA / Rhine barge freight ratesARA oil product stocksMarket analysis reportsConsultancy & Quant researchFreight Control App
Contents1. Forward curves in focus2. Economics of forward curves3. Relevance of ARA gasoil stocks for ICE gasoil forward curve4. ICE gasoil & Brent forward curves: analysis of recentdevelopments
Forward curves in focus (1)Oil futures forward curves?Futures prices on Nov. 11th 2012 at 14:14 CET:
Forward curves in focus (2)What do we know about forward curves . . and why is this important? Relevance for various market players Stylized facts of oil forward curves
Forward curves in focus (3)Relevance for various market players:1. Physical traders:––––Physical differentials (Gasoil 0.1% barges fob ARA)Basis risk of hedge using derivatives (futures / swaps)Inventory management: max. inventory or JITAvailability of product / storage capacity2. Tank storage companies:–Demand for tank capacity is linked to shape Contango: much demandBackwardation: little demand3. Futures traders:–Speculative spread trading
Forward curves in focus (4)Stylized facts of oil forward curves:Most important:1. Shape of curve:– Upwards sloping (contango) or– Downwards sloping (backwardation)2. Shape is persistent and fairly independent of dailyswings in futures prices3. Crude and oil products forward curves are linked
Forward curves in focus (5)Stylized facts of oil forward curves:1. Slope of curve: contango / backwardation
Forward curves in focus (6)Stylized facts of oil forward curves:Shape is persistent and fairly independent of daily swings in oil prices look at time spreads to see dynamics Time spread price differential between two consecutive futurescontractsTime spread2.Feb. – Mar. 2013
Forward curves in focus (7)Dynamics of time spreads:Shape is persistent:21Long period of: Contango (1) Backwardation (2)
Forward curves in focus (8)Stylized facts of oil forward curves:3.Crude and oil products forward curves are linked:
Economics of forward curves (1)What fundamentals drive crude oil forward curves?Distinguish between front-end and back-end of forward curve1. Back-end of curve2. Front-end of curve} Both ends are connected by arbitrage mechanismsFront-end of curveBack-end of curve
Economics of forward curves (2)What fundamentals drive crude oil forward curves?1. Back-end of curve long term fundamentalsSupply side of crude market Price to justify investments/divestments in exploration anddevelopment of oil wellsDemand side of crude market Price to justify investment/divestment programs for developing alternative fuels increasing fuel efficiency Etc.Price expected marginal ‘exploration, development andproduction’ costs to balance market in the “long run”
Economics of forward curves (3)What fundamentals drive crude oil forward curves?2. Front-end of curve short term fundamentals––Current and expected supply and demandCurrent and expected inventory levelsIf supply demand: price drops to stimulate players toincrease inventories to balance marketIf demand supply: price rises to stimulate players to free upinventories and/or lower or postpone consumption to an extentthat the market is balanced
Economics of forward curves (4)Arbitrage mechanisms connect front and back end of curveStorage arbitrage play Prevents time spreads from becoming too large Links futures prices along the curve
Economics of forward curves (5)Storage arbitrage play?If contangoand-(time spread) marginal storage cost: Long 1st month, short 2nd monthHold both futures contracts till expiryAfter expiry 1st month: collect and store productAfter expiry 2nd month: deliver productProfit -(time spread) – storage costsStorage costs: Transportation costs (transport product to tank terminal) Tank Terminal lease fee (opportunity costs: only if ‘spot’ market forstorage capacity) Finance costs
Economics of forward curves (6)Storage arbitrage play?If backwardationandtime spread shipping costs - interestSubject to:inventory level min. level replenishment lot: Short 1st month, long 2nd month Hold futures contracts till expiry After expiry 1st contract: deliver product from storage tank After expiry 2nd contract: collect product stock is replenishedProfit time spread – shipping costs interestShipping costs: Freight rate Insurance
Economics of forward curves (7)Link crude oil & oil products forward curves? Crude oil is feedstock for refineries to produce oil products Most important input cost!Difference between oil product price and crude price:“Crack spread” Proportional to refiner’s gross profit margin
Economics of forward curves (8)ICE Gasoil – ICE Brent crack spreadsForward curves Gasoil, Brent crude10006th of Nov. 2012900Crack spreads850800Gasoil750Brent oil - Brent crack spread150Crack spread [ Nov-12Futures price [ /ton]95014013012011010090Gasoil - Brent crack
Economics of forward curves (9)Crack spread forward curve: Back-end: gross profit margin to justifyinvestments/divestments in refining assets Front-end: short term fluctuations in supply/demand inventorylevels Storage arbitrage play limits spreads Refiner’s production capacity is limiting factor in arbitrage playGasoil - Brent crack spread150130120Gasoil - Brent eb-13Jan-13Dec-1290Nov-12Crack spread [ /ton]140
Relevance of ARA oil product stocks (1)ICE gasoil futures are traded all over the world . so why should ARA stocks be important?Several reasons:1. NWE main importer of middle distillates2. ARA main trading hub in NWE3. ARA physical delivery point of ICE gasoil contract
Relevance of ARA oil product stocks (2)NWE main importer of middle distillatesS/D 'NWE' (broad definition)2500020000implied import demand10000NWE demandNWE 8M01Level [k ton/month]15000-5000Source: Eurostat (NWE incl. Iberian peninsula Scandinavia)
Relevance of ARA oil product stocks (3)ARA and hinterlandS/D ARA and Hinterland400035003000Level [k ton/month]25002000implied import demand ARAdemand BENL1500production ARAtotal demand (ARA hinterl.)1000500-1000Source: 10
Relevance of ARA oil product stocks (4)Import to ARA:Import to ARA160001400012000100008000Import to ARA6000400020000BalticsSource: EurostatAmericaFar EastScandinaviaMiddle EastMED
Brent forward curve: time spread analysis (1)
Brent forward curve: time spread analysis (2)Balance global supply / demand, Crude335112515-1Level [Mb]5245-5-33Implied stock change (RH)-15-5-25-7-35-45-9Datecumm. Stock change (LH)
07Apr-07cumm. Stock change (LH)50-5cumm. Stock change c-09Oct-09Aug-09Brent forward curve: time spread analysis (3)?
Gasoil forward curve: time spreads vs. stocks
ARA stocks vs. US stocks (PADD 3)
Gasoil forward curve: time spread analysis
More information:Visit PJK websiteFor outlook on oil forward curves see:www.pjk-international.com/scenariosFor more theory on forward curves see:www.pjk-international.com/downloads
? – Questions - ?
Outlook for forward curvesCrude oil market: main themesDownside risks: Global economic slowdown Demand destruction due to high oil prices Political risks: Eurozone crisis & Fiscal Cliff Further surge in US tight oil productionUpside risks: Unrest Middle-East Militant clashes in Libya North-Sea production outages
Relevance of ARA oil product stocks (3)Individual countries: Germany7,000Germany, gasoil/diesel6,000Level [k ton/month]5,0004,0003,000impl. import 00Source: Eurostat
Source: 8M01Level [k ton/month]Relevance of ARA oil product stocks (4)Individual countries: FranceFrance, gasoil/diesel6,0005,0004,000impl. import r (impl. import demand)1,0000
Relevance of ARA oil product stocks (5)Individual countries: UKUK, gasoil/diesel3,0002,500Level [k ton/month]2,0001,500impl. import demanddemandproduction1,0005000-500Source: Eurostatimport-export
ARA ideal location for trading in NWE
ARA: key benefits Ideal topographical position in NWE:––––North Sea oil fieldsLarge consumer markets in Benelux, Germany, France, Switzerland and UKHighly industrialized area and hinterlandGood logistics: sea ports, Rhine & canals Large oil infrastructure: refineries tank terminals Global trading hub, links to: Med, USA, Caribbean, SouthAmerica, West Africa, the Mid East and the Far-East Liquid physical oil products market and oil derivatives market ICE Europe futures exchange and OTC swap markets forhedging physical positions Brent crude, a worldwide oil pricing benchmark
EIA stocks: PADD 1 and 3
Oil futures forward curves ir. Patrick Kulsen, MSc. B. Mail: patrick.kulsen@pjk-international.com Tel: 31-(0)76-7676 325 Managing Director @ PJK International B.V. PJK International: 'Market research company specialized in NWE oil markets' - ARA / Rhine barge freight rates - ARA oil product stocks - Market analysis reports - Consultancy & Quant research
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