Oil prices have been notoriously volatile in recent years and 2005 has seen a continuation of this recent trend, whilst prices have established new all-time highs in most energy markets. In fundamental terms, continuing very high oil demand from Asia's powerhouse economies of China and India in particular have squeezed the supply/demand equation. Even as OPEC has pumped out additional oil to alleviate the global supply-demand squeeze, sweet crude benchmark prices in particular have recently soared to approach $60/bbl, with some analysts even anticipating a 'super-spike' to $100/bbl or more. Speculative funds do not yet appeared to have relinquished their interest in energy markets, which adds another strand to the price equation, given the weight of money that such funds can deploy, especially when natural sellers within the oil industry may be holding back. Nervous sentiment continues amongst global traders and end-users as the difficulty of trying to hedge energy prices at such high levels has been compounded by the fear of not doing so, should the direst warnings on price be substantiated.

Even as OPEC has pumped out additional oil to alleviate the global supply-demand squeeze, sweet crude benchmark prices in particular have recently soared to approach $60/bbl, with some analysts even anticipating a 'super-spike' to $100/bbl or more.

Meanwhile for upstream producers and refiners, these high prices have presented a different kind of dilemma in hedging terms; whether to sell such apparently high prices in forward markets whilst they are available, and which may not be able to be achieved indefinitely, or to adjust their expectations to a 'new paradigm' of permanently high oil prices. The condition and capacity of global refining and pipeline infrastructure may have to wait for funds released by collateral sales of forward energy before the necessary refinements and capacity can be undertaken and thus have any effect in adjusting supply better to continuing high demand.

At Platts first Oil Price Risk Hedging seminar to be held in India, leading industry speakers will talk on these and other issues that result in this extreme price volatility and explain how you can find new hedging solutions via the derivatives markets. In particular, the world-renowned Leo Drollas of the Centre for Global Energy Studies will speak on the global supply/demand equation and the consequences for all exposed to oil prices or markets as we move through 2005.

Moving to local conditions, Indian oil-related entities are in a period of rapid change as one large household name in particular has substantially de-regulated and as others gear up to join it in being able to deploy a wider array of instruments in order to control and adjust exposure to energy markets that are at generally high price levels and amidst volatility that has tested many seasoned global participants in global energy markets. Local entities who wish to participate in such markets, as they become available, will need to adjust both to the speed of change and market cultures associated with them. Platts seminar will, in addition to globally renowed figures such as Dr Drollas, feature local practitioners and experts. These speakers have practical experience of India-specific elements in this crucial adaptation to the most relevant elements of international best practice in the field of hedging and risk management from both large trading entities, relevant official bodies, and accounting/derivatives control specialists.

Local entities who wish to participate in such markets, as they become available, will need to adjust both to the speed of change and market cultures associated with them.

With very few local hedging tools available, even the few participants equipped to make use of them legally and operationally have had to use derivative markets in Singapore or elsewhere as the primary location for relevant derivative benchmarks, Over-the-counter or OTC especially, in terms of 'basis'. The existence of the dominant Asian OTC swaps hub in Singapore also means that they need to also take account of the freight element which places prices in India at variance to the levels that would apply in Singapore itself. Fortunately, liquidity and availability of FFAs or Forward Freight Agreements, especially between the Arab Gulf and Singapore/Japan has been rising in recent years, making this a more practical option than previously. Platts’ seminar will also explore the availability and use of such forward freight derivatives to reduce or eliminate geographical basis risk whilst primarily relying on Singapore-based derivatives markets.

For Indian-based entities, opportunities for controlling price exposure for locally-relevant energy markets should expand as the degree of state or central control asserted by government and regulatory authorities is relaxed. Previously, the fear of the negative effects that can be brought about by the gearing effects from derivatives that caused such apparent damage in Asia-based examples such as Barings and China Aviation Oil prompted suspicion towards derivatives usage. For those who wish to go carefully about a transition to more open access and availability of derivative markets and more extensive hedging, high-quality independent information, and an understanding of global best practice in these areas is crucial.

Created: Apr 20, 2005

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