Forecasting the Prices of Crude-Oil, Natural-Gas and Refined Products

Introduction

This Training Course is concerned with one of the most important activities in the development of oil and gas business-forecasting the oil prices, as the basis for planning and investment. As we have learned that oil prices are depending on many factors and those price simulations need to be much more stringent in order to determine the actual risk that our investment is facing. A critical component of decision-making in the energy industry deals with the aspect of “Whither oil prices?”  Where do we expect prices to move in the near- and distant-terms?  Participants in the Energy Industry are constantly confronted with a wide range of information regarding current and prospective prices in their industry.  Broadly, this data comes from analyses of supply-and-demand changes, geopolitical events, and the financial markets, including the commodity markets.

The oil projects require a lot of investment, and it takes years for the oilfield to start producing profit, therefore adequate forecasts are essential for companies to understand when and how their returns on investment will appear and how valuable will they be.

While providing the requisite background on the economics of financial commodity markets, as well as the statistical tools required to understand them, this Training Course demonstrates how the financial and commodity markets provide useful information for the generation of “expected prices”, or forecast prices, in the critical areas of oil, natural gas, and refined products.  In so doing, the training course will also demonstrate the important distinction between valuation and risk/return analyses.

Objectives

By the end of the course, participants will be able to:

• Use financial models to analyze and forecast energy prices; extrapolate forward prices beyond the liquidity tenor
• Understand the risk of and return from futures and options contracts on energy commodities
• Manage and optimize their corporations’ energy risk exposure
• Estimate expected returns and calculate volatility in energy prices
• Obtain a comprehensive understanding of the financial-economics techniques used to forecast prices
• Apply option valuation techniques to the energy markets
• Utilize real options theory to value energy assets; use information from futures/option prices to make optimal production decisions: Optimal timing for extraction, the optimal rate at which to extract oil (gas) from a field; value oil fields, pipelines and storage facilities, power plants

Training Methodology

This is an interactive course. There will be open question and answer sessions, regular group exercises and activities, videos, case studies, and presentations on best practices. Participants will have the opportunity to share with the facilitator and other participants on what works well and not so well for them, as well as work on issues from their own organizations. The online course is conducted online using MS-Teams/ClickMeeting.

Who Should Attend?

This training course is suitable for a wide range of professionals but will greatly benefit individuals working in financial analysis, valuation, trading, risk management, or quantitative analysis positions with oil and gas exploration companies; investment and commercial banking, consulting, and financial services firms in the energy sector; production and distribution companies; energy trading firms; and corporations outside the energy industry with a significant cost exposure to energy prices.

In terms of job titles, these individuals include:

• Financial Analysts
• Quantitative Analysts or Researchers
• Energy Traders
• Risk Managers
• Commercial and Investment Bankers dealing with commodities
• Consultants in the commodity arena
• Government and Regulatory Officials with responsibilities for the energy sector

Course Outline

Day 1:  The Current State of the Equity and Commodity Markets

• Measuring Nervousness / Uncertainty of Equity and Commodity Markets

• The Crude-Oil Markets: The Paradox of World Crude Oil Prices

• Complexity and Interdependence in the Oil Market

• Upstream Petroleum Fiscal Valuation and Modelling

• The Refining Spread and Retail Gasoline Prices

• Refined oil products-refining capacity and throughput

• Natural  gas

  • Physical characteristics and supply

  • Reserves and production

  • Demand determinants

  • Trade

  • Pricing

A Primer on the Interest-Rate Markets

• Time and Time Value of Money-Modeling Commercial Behavior with the Economic Limit Test

• The Brent Contract and IPE Brent Market

• Financial Markets’ Message from Markets: Interpret Bond-market Moves in Conjunction with those in Equity Markets

• Floating Rate Securities

• Understanding the Fundamentals of Bond Valuation and Excel Functions for Bond Pricing

• Bond risks, Interest-Rate Volatility and Interest Rate Risk as the Key Bond Risk

• Duration and Convexity: Hedging Interest Rate Exposure

• Forecasting Future Interest Rates Using

  • A financial-economics Approach

  • Practitioners' Approaches

Day 2:  Overview of Statistical Concepts, Forwards and Futures

• Basic Statistical Concepts: Average and Volatility; Stationarity of Time Variables

• Regression Analysis

• Using Solver to Solve Constrained Optimization Problems

• Amortization and Depreciation

• Fundamentals of Forwards and Futures Contracts: Definition, Payoff Diagram, Pricing by Arbitrage

• Forward / Futures Prices and Forecast Prices

Swap Contracts and Options in Energy Markets

• Commodity Swaps

• Payoffs and Put-Call Parity

• Black-Scholes Formula

• Option Sensitivities (the “Greeks”): Delta and Gamma

• The Binomial Model and the Valuation of American-Style Options

Day 3:  Forecasting the Prices of Oil, Natural-Gas and Refined Products

• The Market Price of Risk: Estimating a Risk Premium in Finance, and Applying it to Energy Prices

• How Can Use Regression Analysis to Fortify Our Understanding of Financial Markets’ Perspective on Forecast Prices?

• Where Can We Observe Forecast Prices?

• What is the Difference between Futures Prices and Forecast Prices?

• What is the Capital Asset Pricing Model (CAPM) and How Can We Use it to Forecast Oil Prices?

• Applying a Jump-Diffusion Model to Oil Futures Options

• Using the Market Price of Risk to Implement Risk-Management from a Corporate Perspective

The Statistics of the Price Processes in Energy Markets 

• Historical Volatility; The Term Structure of Volatility (TSOV)

• Estimating Volatility from Market Prices of Options in Energy Markets

• Historical or Implied Vols?

• Estimating a Mean-Reverting Process

• Characterizing the Volatility “Surface” Across Time and Strike

Day 4: The Extrapolation in Energy Finance

• Jump-Diffusion Process

• Valuation of Long-Dated Real Assets and Financial Structured Products

• Extrapolating Crude-Oil Prices

• Extrapolating Natural-Gas Prices

• Extrapolating the Term Structure of Volatilities (TSOV)

• Extrapolating Correlations

Energy Derivative Products:  Structuring and Valuation 

• Commercial Structured Products

• Categorizing Derivative Products: Option Collars, Average Options, Spread Options, Swing Options, Weather Derivatives, Commodity-linked Bonds; “Swing” Options; Weather Derivatives

• Structuring and Valuing Option Collars

• Structuring and Valuing Average (Asian) Options

Day 5: Energy Derivative Products:  Calibration and Hedging in Profitable Market-Making

• Example of Calibration: Using Vanilla Options to Determine the Value of Volatility for Valuation of Average Options

• Non-Commercial Structured Products

• Exotic Instruments: Constant Maturity Contracts, Compound Options, Quanto Contracts

Geopolitical and Economic Events and Crude Oil Prices

• Inventories, Oil Prices, and Production

• Difficulty in Planning for the Oil Safety Stock

• API Reports

• Oil Market Rebalancing

• Cost Break-even Oil Prices

• Role of Shale Oil

• Diversification in the GCC

• How different countries deal with the oil price changes?