Handbook of Multi-Commodity Markets and Products: Structuring, Trading and Risk Management

CHAPTER 1 Oil Markets and Products

Cristiano CampiFrancesco Galdenzi

1.1 INTRODUCTION

The price of crude oil and oil products, once discussed solely in industry and government circles, has taken centre stage in the past 15 years among the lead indicators of the state of the economy and is now always quoted when forecasting economic trends. This phenomenon has occurred in conjunction with the growing acceptance of commodities as a mainstream financial and investment asset class, with the resulting growth in the volume and variety of financial instruments linked to them and the widespread use of these financial instruments in hedging, risk management and investments products.

This chapter focuses on two important offshoots of this ‘coming of age’ of the energy markets: the implementation of financially settled risk management policies by corporations exposed to fluctuating oil and oil product prices and the growth of hedging activities for companies active in physical oil trading. Before going further, it is worth looking at some key elements that determine the economics in the oil and oil products value chain. The oil industry is based on two main types of processes:

1. Upstream. This part of the oil cycle is associated with the exploration and production of crude oil.
2. Downstream. This part encompasses the transportation, refining and marketing of refined oil products (gasoline, diesel, jet fuel, naphtha, etc.).

The production of crude represents the starting point of the oil ...