The Global Oil Demand and Supply - Example

Running head: Anew Derivative Produce Development ANEW DERIVATIVE PRODUCT DEVELOPMENT Name: Institution: Date: Demand and supply Based on the fact that the global economy is expected to rise up to 4.8% in the year 2011 when compared to a 2010 figure of 4.3%, the supply and demand of crude oil for the regional areas are based on the futures strip. The prices of the global crude oil are approximately at $90/barrel for the WTI. This is a rise of $9/barrel that it was assumed in December 2010 and January 2011 respectively. The crude oil prices have been gaining since the month of September 2010.The prices based on demand and supply characteristics, did gain impulsion in early 2011 due to various factors. i. The opinionated turbulence in Egypt ii. Uncertainties for supply through the Suez Canal and the SUMED channel iii. The regional pollution that was and still is distressing other producers of oil in the middle East The global oil demand and supply is shown in the table below The global demand and supply in graphical format is as shown; From the above graphs, demand and supply of crude oil is easily deduced. The graphs do suggest the likeliness of prices strengthening due to the rise in demand and the inability to satisfy demand in regard to the 2011 oil market fundamentals estimates. The graphical representation is an implied tightening which is likely to be to the tune of 1.1mb/d during the final two quarters of the year. This due to the fact that the global crude oil demand did overrun the supplies. For instance, the OECD stocks depicted a trend of sideways movement in 2010 and 2009 and an average of 0.6mb/d in the final two quarters of 2010. In addition the OECD accumulation projection against the five year average projection narrowed from 200mb; a figure in 2009 to 30mb in 2011. Demand summary The global demand forecast for the crude oil products covering the year 2010 and 2011 stands at 120kb/d on average. The global oil demand is as shown below; These figures are higher than it is expected to be the casein the Non-OECD Asia and the superior cost-effective prospects for OECD North America. The global economic demand was estimated at 87.9 mb/d in 2010 and it is anticipated to up in 2011 and 2012 to 89.4 mb/d. This is a +1.7% or +1.5% mb/d on a year by year analysis. In a tabular from, the global crude oil demand up to the year 2009 is as shown; Year consumption change 2000 76,963.45 1.17% 2001 77,737.52 1.01% 2002 78,328.50 0.76% 2003 79,954.77 2.08% 2004 82,718.90 3.46% 2005 84,314.25 1.93% 2006 85,396.49 1.28% 2007 86,218.84 0.96% 2008 85,605.94 -0.71% 2009 84,213.48 -1.63% The global OECD demand for crude oil was in 2010 adjusted by 20kb/d and in 2011 the adjustment is by 90kb/d. The demand growth is attributed to the engineering and haulage fuels as opposed to heating fuels. The overall OECD demand is assessed at 46.1 mb/d (million barrels per day)which as a +1.6% or 0.8 mb/d on a year by year basis by 2010.The decline in 2011 is averaging at 46.0 mb/d which is -0.2% or -100 kb/d against the previous year; 2010. In addition, the estimated non OECD oil demand for 2010 and the year 2011 is expected to realize a rise by 60kb/d on the average. The increased demand from the Asian countries such as china with 10.4mb/d in December 2010, which was a rise in demand of 12.2%; +1.0 mb/d is expected to be partly compensated by a lower demand of the Middle East countries such as Iran. The full figure of the OECD demand is estimated at 41.7 mb/d; +5.5% or 2.2 mb/d (million barrels per day) on year by year breakdown in the year 2010 period. It is projected to get to around 43.2 mb/d in 2011 which is +3.71% or +1.6 mb/d (million barrels per day) against 2010 figures. Supply summary The global crude oil supply in January of the year 2011 did rise by a 0.5 mb/d. This is an increment that is on a month by month statistics to 88.5mb/d. The global oil supply is as shown below; This increase in supply was on the higher OPEC and NGL fabrication. Basing on year by year basis, the universal crude oil output levels did go up by 2.4mb/d in January 2011. This ride is divided among the OPEC crude and the organizations that are non-OPEC members and the OPEC gas liquids such as the natural gas. On other basis the non-OPEC supply of crude oil did stagnant in the month of January 2011 from the similar figures obtained in December 2010. The supply remaining at 53.0 mb/d; such stagnation in supply is attributed to production hindering. The supply estimates were expected to remain 52.8mb/d in 2010 and the 2011outlokk on supply has been pushed up by .1mb/d to 53.5mb/d. Such estimates on supply are on higher North American estimates which do enable the offsetting of the descending revised yield from the OECD pacific and FSU plus the global biofuel statistics. The following chart does show the global oil productions and supply; In addition the total world crude oil reserves from where supply does commence are as follows; The global crude oil productions growth trends did depict a fall graph in between 2005 and 2008. According to the analysis and the result report undertaken by International energy agency, the universe oil supply composed of the biofuels, the non crude sources of petroleum and the utilization of the strategic reserves was an average of 85.24 mb/d (million barrels per day). This figure was up by 0.76 mb/d from the previous year. The yearly global supply in 2005 was 1.2 million barrels per day. In the year 2008, the IEA did estimate the production and its supply a decline from 3.7% to 6.8% annually. The arrival to such figures was by actual research on the individual worldwide production fields. The graph below depicts this; The global oil control over supply is linked to the following units; A. Governments B. Cartels by limitation of supply though policies such as; Nationalizing oil Cutting back on production Limiting drilling rights and imposing taxes C. International sanctions D. Corruption E. And any military conflicts Pricing NYMEX,IPE and SGX are the principal current and days to come markets for the global crude oil production; supply and demand. The global crude oil market characteristic is the main determinant of its pricing. The universal market transactions of crude oil do cerate a benchmark for pricing by the sense of bill of lading principles. For instance, the crude oil after duration does realize a rise in the spot transactions or the futures trading price due to the discounting of crude oil with the fall of the bid as the final price. The potential markets for crude oil in days to come do influence pricing significantly. For instance as the leading institutions the New York mercantile exchange and its European counterpart; London international petroleum exchanges are the ones leading to benchmark price by futures price. The global politics does influence the crude oil pricing much. For instance, since the unrest in Afghanistan, current in Egypt and Libya as well as Tunisia the crude oil prices have short up. The prices since then are always rising. Statistically the crude oil future price formula is F0 = S0erT Whereby; r: risk-free interest rate for maturity T T: refers to the logistical duration or time until delivery date S0: spot price today and F0: future price today It is globally and statistically known that; The Australian risk free interest rate is only 0.49% per year. The table below shows the theoretical price as a comparison with the market prices of crude oil in the globe and how they do fare for weeks during the month of October (Bern,2011); Trading day Maturity Day market price mb/d theoretical price Maturity Day the market price theoretical price 02/10/011 1st OCT 97.95 1st NOV 99.49 97.00 03/10/011 1st OCT 98.96 97.12 1st NOV 99.99 98.91 04/10/011 1st OCT 99.53 97.18 1st NOV 100.02 98.97 05/10/011 1st OCT 99.88 97.63 1st NOV 100.65 98.92 06/10/011 1st OCT 100.00 98.16 1st NOV 103.56 99. 42 07/10/011 1st OCT 100.29 99.10 1st NOV 104.46 102.18 08/10/011 1st OCT 102.00 99.99 1st NOV 105.28 103.89 09/10/011 1st OCT 102.28 101.23 1st NOV 105.86 104.12 10/10/011 1st OCT 103.17 102.36 1st NOV 106.46 105.24 11/10/011 1st OCT 104.8 103.52 1st NOV 108.56 106.79 12/10/011 1st OCT 104.82 104.25 1st NOV 109.81 107.89 13/10/011 1st OCT 107.50 104.39 1st NOV 110.86 107.98 14/10/011 1st OCT 109.38 107.81 1st NOV 111.23 108.00 15/10/011 1st OCT 110.54 109.47 1st NOV 112.12 109.25 16/10/011 1st OCT 111.43 109.23 1st NOV 108.29 107.01 17/10/011 1st OCT 111.49 109.79 1st NOV 109.34 108.12 18/10/011 1st OCT 112.00 110.25 1st NOV 110.25 108.99 19/10/011 1st OCT 113.52 111.48 1st NOV 112.96 109.14 21/10/011 1st OCT 114.25 113.25 1st NOV 113.96 109.86 28/10/011 1st OCT 116.00 114.56 1st NOV 114.26 110.24 29/10/011 1st OCT 118.54 115.56 1st NOV 114.53 112.67 31/10/011 1st OCT 122.56 118.49 1st NOV 115.23 112.92 The analysis of these statistical figures shows that the market price of crude oil is always higher than the respective theoretical price. This is due to the authentic and factual do business that is associated with a higher risk when it is compared to the risk free assets. , On the Maturity day is 1st October 2011, the price increased from 97.95 to 122.56. This is an increase record in duration of one month, spanning four weeks. Therefore, crude oil return of each month is F0 = S0erT R1= (122.56-97.95)/97.95 =24.61/97.95 =0.251*100 =25.1% R2= (115.23-99.49)/99.49 =15.74/99.49 =0.158*100 = 15.8% Thus the crude oil average return is; R3= (R1+ R2)/2=5.85% =(25.1+15.8)/2 =40.9/2 =20.45% Statistically, from the deductions above, on the average return for 2 months duration it can be realized that the crude oil prices are always on he rise. This is anticipated to be son even in the future. The price for crude oil was on the rise way back before the global unrest in Islamic nations and since the instability it worsened. In 2008, for instance, the oil price stood at between $142 per barrel. In the last 2 months the estimates are as follows; 9/23/2011 9/30/2011 10/7/2011 10/14/2011 10/21/2011 10/28/2011 Crude Type 108.58 103.17 100.1 106.33 108.84 108.89 Total World Due to the civil unrest in oil producing countries the oil prices shot up with more than 20 dollars. The shortage is what did spur the upward movement of the crude oil prices. Following our 4 week observation, we found that; Week 1: The crude oil price stood at $98.96 market price and $97.12 of theoretical price. These figures were below the $100 mark and keep going up till the end of the first observations week. Week 2: Crude oil price stood at $102.28 market price and $101.23 of theoretical price. This was an increment of about $3 from the previous week analysis. Week 3: The crude oil price was at $110.28 market price and $109.47 of theoretical price. This was a very high rise of close to $8 up from the previous rise of $3. Week 4: The crude oil price went up to $122.56 market price and $118.49 of theoretical price. This was an $11 rise. The trading volumes were as shown; 11-Mar 11-Apr 11-May 11-Jun 11-Jul 11-Aug 1,769,520 1,776,049 1,804,746 1,807,632 1,820,014 1,800,693 From these statistics it can be deduced clearly that the crude oil prices continued to go up. This is attributed to civil unrest n oil producing nations, which saw the delay of close to 2% of global supply and natural calamities such as the Japan earthquake. The expectations are that Libya will continue with its supply with the gain of power and freedom. Using derivatives with different time to maturity suggests that the market expectation of the index in the near future. What kind of investment strategy can make it happen? The investment strategy should be a set of rules that are able to guide the investor’s selection of an investment portfolio. The strategy should be accommodating the investor’s risk of return trade-off. An active strategy such as market timing is a better choice because it does attempt to maximize returns on their investment. A buy and hold is the strategy I recommend in this case. This is because it is a strategic investment stratagem that assumes that in the long run equity markets does give a good return rate irrespective of volatility. The events that will influence the underlying asset in the near future include the strike price of the assets and the respective market price of the underlying assets. In addition the underlying assets influence in the future will also be attributed to volatility which is the price uncertainty of the respective underlying asset and the reminder life of the asset. This is the time duration until the date of expiry of the underlying asset. The other future influence is the loan interest that has term similar to the assets reminder life. More so, if there are associated payments attached to the underlying asset within the contract life such as the share divided, the anticipated size and the payment time shall influence the underlying asset in the near future. Stage 3 A derivative is an economic instrument that has a derived value from something else. The derivative could either be from another financial mechanism or an index, or moreover it can also be from a measurement of some kind. A derivative market does trade “promises” whereas the conservative spot market trades “assets” such as the stock market. In our case, the derivative product of crude oil is Natural gas. In a spot market, the dealings are on physical objects referred to as assets and a finalization of a transaction does mean a change of ownership. A derivate contract or transaction is a dealing that relates to the sale or perchance of a promise. The promise in this case is to deliver or pay something, provided particular conditions thrive. A derivative market does demand some security against the potential of price fluctuations such as the futures positions. Such does give a significant and great scope for leverage which influences the derivatives popular with speculators out to hunt for disproportionate high returns on them. For our derivative product; Natural gas it is either a futures or options derivative. Natural gas as a derivative “futures’ the cash settlement shall be made at the time that the respective position shall be closed out. Natural gas is an exchange traded derivative that makes it more advantageous as opposed to the discussing of an OTC derivative. The derivative is standardized; in that its bond terms and conditions are constant from one instrument unto the other. The derivative; natural gas as an exchange traded derivative does offer guarantees on liquidity. This is possible by the derivative provision of bazaar markers. Statistically: assuming an investor opens a long position worth $1million AUD by using the derivative product on 30th September 2011, the return of his investment strategy assuming the contract was closed on 30th October 2011 is as shown but this is subject to the fact that; a) When the price of underlying asset stays the same on 30th October 2011 b) Price of the underlying asset(s) price increases by one standard deviation of the historical volatility on 30.Oct.2011 c) Price of the underlying asset(s) increases by one standard deviation of the historical volatility on 30.Oct.2011 In a tabular from, the returns will be; The computations formula Rf (T) =100/p(T) -1 Time (T) Price P(T) 100/P(T)-1 Rf (Return ) Week 1 (9th) 102.28 100/102.28-1 = -0.022 -2.20% Week 2 (15th) 110.54 100/110.54-1 =-0.095 -9.50% Week 3 (21st) 114.25 100/114.25-1 =-0.124 -12.40% Week (31st) 122.56 100/122.56-1 =-0.184 -18.40% Thus Week 1 ROS, = 1,000,000 *2.20% =$2,200,000 =$1,200,000 is the return gotten from; 2,200,000-1,000,000 =1,200,000 (and for subsequent durations, same does apply) Week 2 ROS =1,000,000*9.25% =$9,250,000 =$8,250,000 WEEK 3 ROS =1,000,000*12.40% =$12,400,000 =11,400,000 Week 4 ROS=1,000,000*18.4% =$18,400,000 =$17,400,000 By 30th October 2011, provide the standard deviation increases by 1 unit and the underlying asset remain the same and finally the price of the asset increases by 1 standard deviation from the historical volatility, the above computations will be the respective returns with a $1milion AUD commencement of positioning. Natural gas in B2B markets B2B markets are by nature derivatives market. The B2B market in our case does mean that a market structure in which the traders and buyers do trade settled, and well distinct contracts. For instance, the trading of natural gas is based on a prior negotiated and settled contractual agreement, not on OTC basis. Natural gas shall trade in futures convention that is fungible and is associated with the presence of minimal counter party risks and the derivative cash-flow could be realized immediately at any time. Our derivatives market shall comprise of the on a daily basis dealings of the purchasers and manufacturers. Market development Product design In the development of a market for our derived product; Natural gas, we are guided by the assumption that it is like “throwing spaghetti at the wall and seeing what sticks” which is the main characteristic of the approach towards the development of a derivative product market in the global derivatives exchanges. For the start up approach on exchange, basing on the fact that or product; natural gas is not a purely new product and has been used and successfully tested elsewhere, the index futures and the options together with the debt and product futures appear to have the maximum success rate. The equity derivatives of natural gas are closely followed economic instruments on majority of our product markets. These shall be the principal entrants for our derivative’s contracts’ towards settlement of quick transactions. Futures of stock indexes are by trend the most popular and the equity derivatives that are said to be most successful. Our derived product future being properly designed index future on the benchmark index has the potential of succeeding due to the fact that the overall market is active and there lacks an existing local contract on the same derived product. The designing of our product index and the calculation of the index upon expiry are likely to result to significant implications towards the contract success. Our derived product contract shall be a type that is able to minimize the marketplace manipulation prospective. Adoption of the “Multiplier” is critical for our product because the underlying index value is critically supposed to be high enough for it to be able to attract majority of consumers and organizations. The multipliers in our derivative are referred to when calculating the value of the underlying contract. As an example; the multiplier for natural gas futures at the CME is $256 per point. This means that when the natural gas stands at 1000, one futures contract shall be equal to $250,000.Furthermore, everyone point change is equal to $250 either profit or loss. Mathematically; the Natural gas multiplier for the futures at CME is $250 per point When natural gas stands at 1000, the futures contract shall thus be equal to; 1000*250= $ 250,000. Based on the sense that our investor on 30th September opened with $1million AUD, out futures contract shall be worth; 1,000, 000* 250 = $250,000,000, with a profit or loss of $250. This means that the amount needed to open a position can be as much as $250 million or more. Index arbitrage for natural gas There is likeliness of trading the natural gas basis of futures contract; for instance the difference between the underlying index values and as well as the value of the index futures contract. Theoretically the natural gas figures difference should be equivalent to the carrying or the interest cost of the securities folder between the sealing of the contract and its expiry. Ata times the variation might get distorted and the natural gas index arbitrage is set to offset any product distortion through the trading of index with underlying. Based on the fact that our derivative is a commodity, the derivative contract of a commodity is the most practical approach to the creation of futures and options. Our derivative advantage is that most countries have local stations assembling natural gas which makes it important to the local population. This makes it possible for natural gas to attract the trading interest. Natural gas is set to be a successful commodity that eventually will be used as a benchmark for setting the spot prices and futures prices. This will be a creation of a very important role for exchange. Natural gas promotion This is the methodologies to be applied discussion towards familiarization of our derivative product of crude oil; natural gas. Marketing will be a vital element in the quest to make sales out of our derived product. This is a vital element and has been underestimated for the creation of any new derivative environment. For natural gas, we assume that without realistic marketing, the product is likely not to achieve success. Our derived product marketing shall be targeted to; Intermediaries; these encompass the brokers and other financial services providers. It shall be a need to make them believe that the derivative; natural gas will help their commerce. Investors; the effort shall be geared towards making them now that natural gas will help them to and by what means develop their investment goals. General public; this shall be an effort to familiarize the non-investor on how or derivative; natural gas works. The effort shall be to inform the general public of the related facts and studies that have been able to show the beneficial effects of natural gas as a derivative product of crude oil in other respective markets. For instance it shall be efforts to show the natural gas tendency to reduce volatility, probability of financial catastrophes’, increase the underlying markets liquidity and the ability to assist the manufactures and users in the management of business planning and financial forecasting to help offset uncertainty. The effort will help us depict to the public the how the derivative will help financiers manage economic risks. For our derivative, the determination of the viability entails the scrutinizing of legal and regulations scope, the intermediaries and the underlying instruments as well as the methods of funding. Natural gas as a derivative product will need product development, legal issues amicable handling, and marketing and edification efforts. Natural gas timeline and legal issues costs will depend on the already in place legal and regulatory infrastructure and their friendliness to derivatives. In addition how long it will take to become a reality will depend on product complexity and the readiness of the current market and product environment to incorporate the new market. It will be essential to have the respective technology, support and commitment and regulatory approval for the derivative launch. It is anticipated that for a new derivative the realization of trading volumes will take time. The reward of natural gas is that it shall and does enable the investor to manage risk. The instilled confidence is the ultimate guarantor of the liquidity and integrity in any market of natural gas as a derivative of crude oil. Reference Bern, G.(2011). Investing in Energy: A Primer on the Economics of the Energy Industry. NY: Bloomberg. IMF. (2002). Global financial stability: Market Development and issues; the role of Financial Derivatives in emerging Markets. Retrieved on 4th November from . Read More