Crude Oil

SU B TIT L E

Economic Fundamentals
Crude Oil Falls into Energy Products Segment and is the most traded
commodity in the world
Basic Benchmark for Crude oil is Brent Crude and WTI Nymex Crude.
The crudes from different regions process like Dubai, Russia etc. are
linked to the prices from these
1 barrel of Crude oil=42 US Gallons=158.98 Litres
OPEC controls 40% of total world crude. Canada , Russia and US are
major non OPEC Producers
Shale Oil reserves and fracking processes have made US a major source
of oil producer and they have stopped becoming importer of crude oil
Crude oil prices depend on Growth in world economies and also on
weather currency fluctuations, speculation, and political tensions and
rivalries

Economic Fundamentals (Contd.)

India is 4th largest consumer of crude oil
Imports nearly 80% of its crude requirements
Saudi Arabia is the largest exporter of crude oil to India
Worldwide due to Shale oil boom and global slowdown there has been an
increase in supply versus lower increase in demand for crude products
As on 28th August the crude oil reserves stored in USA is the highest at 456.9
million barrels which is higher than any point of time in their last 5 years
Major OPEC producers are reluctant to cut supply as they seek to increase
market share
Iran nuclear deal and lifting of sanctions expected to increase 1 million
barrels of supply by December end

Economic Fundamentals (Contd.)

Slowdown in the biggest crude oil importer China is leading to
lowering of demand forecasts
Increased Volumes of Russian oil and lowering of hold of OPEC
nations on prices are impacting prices
Global Politically scenario is comparatively more stable with
reduction in tensions in Middle East lowering prices
Strengthening of Dollar against all currencies and falling of euro are
impacting Crude oil prices making them go lower
Fundamental Scenario of demand lowering and also cost
rationalisation in drilling have led to lower prices
India is benefitting from it as it lowers the import bill and CAD

Hedge Ratio
Consists of a high degree of correlation between spot
and futures prices (0.9998)
On the basis of data collected for 262 days (July 31,
2014 to August 7, 2015):
S = 1006.67
F = 1003.41

Consists of a high Hedge Ratio = 0.9998

Optimal Contracts
Based

on the Hedge Ratio, for hedging a contract of,

say, 2000 barrels
Without Tailing Adjustments

= = 19.9962 contracts 20 contracts

With Tailing Adjustments

= = 20.1661 contracts 20 contracts