Mastering the Commodities Markets

Hedging and Risk Management

Oil markets have become increasingly volatile, meaning that nearly everyone at some stage needs to employ some risk management and hedging strategies. All trading companies, most refiners and even some producers work in a very sophisticated and largely integrated fashion.

The oil markets are typically traded as a series of curves across the various crudes and products linked by differentials to each other. Taking Brent crude as an example, the flat price would be defined as the outright price of the ‘front contract’, i.e. the most prompt current futures month. The relationship between the front month and the subsequent months would then be defined by a series of ‘spreads’. So, for instance, say the front month is ‘April’ ...