Saudi Aramco Hedging Oil

Presented to : Prof. Alejandro Alcaraz

Group 1
Ashish Attal 18PGPIM14
Mokshit Gupta 18PGPIM26
Rajat Agarwal 18PGPIM36
Utkarsh Shrivastava 18PGPIM51
Abhishek Sharma 18PGPIM53
Sukamal Narang 18PGPIM59
 HISTORY
PRODUCTS PETROLEUM, NATURAL GAS AND
Industry Oil and gas OTHER PETROCHEMICALS
REVENUE US$478 BILLION
Founded 1933 (as California-Arabian OWNER SAUDI ARABIAN GOVERNMENT
Standard Oil Co.) (100%)
 Started production from the Karan Gas Field, with an output
1944 (as Aramco) of more than 400 million scf per day
1988 (as Saudi Aramco)
 Owns world's largest proven crude oil reserves at more than
261 billion barrels
Headquarters Dhahran, Saudi Arabia  Saudi Aramco operates the Ghawar Field, the world's largest
Area served onshore oil field and Safaniya Field, the world's largest
Worldwide
offshore oil
 Operates the world's largest single hydrocarbon
Saudi Aramco's origins trace to the oil shortages of World War I and the network, the Master Gas System.
exclusion of American companies from Mesopotamia by Great Britain and  Manages over 100 oil and gas fields in Saudi Arabia,
France under the San Remo Petroleum Agreement of 1920 including 288.4 trillion standard cubic feet (scf) of natural gas
reserves
On 31 January 1944, the company’s name was changed from California-  2015 Forbes report, Aramco is said to be the world's largest
Arabian Standard Oil Co. to Arabian American Oil Co. (or Aramco) oil and gas company.
 Key Facts Products

Location: Dharan, Saudi Arabia • Oil

Founded: In 1933 • Gas
Employees: 65,266 • Chemicals
Revenues: $ 335.9 Billion • Refined Products
CEO: State owned enterprise • Retail fuels

Operations Revenue

• Exploration (Since 1982) Year 2017 2018 2019

• Production (Planning to be major producer
of LNG) Revenue(*) 311.6 355.9 380.4^
• Refining and distribution
(Capacity 5.4 million barrels)
• Chemicals ( Acquire 50% in Royal Dutch Shell
to become global leader) *In $ billion
^ Projected
Global Oil Energy Consumption Pattern Industry Sectors

Region Oil energy Upstream

Consumption exploration, development,
production of crude oil
Europe and Asia 32%
Middle East 53%
Midstream
South and Central 44%
Gathering, Processing and
America
technological applications
Africa 41%
Downstream
Oil Consumption by Sector (2016) Transportation, storage, oil
tankers, retailers and
consumers
Pipeline
Marine, Service and
supply
Demand and Supply

USA uses 24% of global supply but

China shows the biggest year-to-year
increase in usage

84% of crude oil is refined into

Oil consumption per person
(darker reds indicate higher usage)
fuel, principally for cars and
planes
 In 2007, global consumption grew by 1.2
million barrels per day.

 OPEC and OECD nations can only raise

production by a further 2.5 million barrels
per day so a squeeze is on the cards
Oil Prices vs Production
$139 by June 2008

In 1956, Hubbert predicted that global oil

Oil prices have been steadily rising production would peak around the Year 2000 and
for several years and in June 2008 trigger an Energy Crisis with power blackouts and
stand at a record high of $139 per rising costs of energy and fuel
barrel
Volatile price
Situation last year : Prices rise to a 4 year high • Iranian Sanctions
• Promise by OPEC to
boost production
Factors affecting
price this year

Demand China’s economic health Global Recession

• OPEC and Goldman Sachs • Manufacturing slows down • Multiple sell offs in US
lowers prediction due to • GDP growth looks bleak stock market
Oversupply • US yield curve inverted

2020 Maritime Trade War Iranian Issue

Regulations
• Reduce sulfur content
in all marine fuels from
3.5% to 0.5%
• Countries that are
indulged in it make up
more than 30% of oil
demand
• Sanctions on Iran
• Uncertainty over
Waivers by US to
buyers of Iranian crude
oil
Technical Analysis
Hedge Graph
Profit
Cash Position

Commodity
Price

Short Futures
Loss
 Currency : USD

Contract Size : 1000 Barrels

Contract Tick Size : $ 0.01

Specifications
Tick Value : $ 10

Expiry Date : 25th September 2019

Rules of contract

* Rules as per NYMEX 200

Calculations
Key Prices: No Hedge:

Prices (in $) Current Estimated Price Change : - $2.71

Crude Oil 54.74 52.03 (5%) Volume : 612 Mn
Value loss (A) : 612Mn * (-$2.71) = $(1658.52) Mn
Crude Oil Futures 54.92 52.37

Trade Volume:
Hedge:
Barrels per day : 13.6 Million
Price Change : $2.55
No. of days : 45
Per Lot volume : 1000 Barrels
Total no. of barrels : 612 Million
No. of lots bought : 609,994
Value Gain (B) : $2.55*1000*609994 = $1555.48 Mn
Calculation of Hedge Ratio:

Total transaction loss : A+B = $ (103.04) Mn

Hedge Ratio = 612Mn*$54.74 Post the hedging there will be a loss of $ 103.04
1000*$54.92
Mn for Saudi Aramco which is feasible
Hedge Ratio = 609,994 (Round-off) considering the current fluctuations in Oil prices.
Sources:

• https://in.investing.com/currencies/wti-usd-candlestick
• https://www.cmegroup.com/trading/energy/crude-oil/light-sweet-crude_contract_specifications.html
• https://www.nytimes.com/2019/04/01/business/saudi-aramco-profit.html
Thank You