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NYMEX CALENDAR WTI CRUDE OIL

Buy Put Option

Description:

The buyer of a NYMEX calendar WTI crude oil put option has the right, but not the obligation, to receive a negotiated fixed price from the seller and to pay them the future Calendar Month Average of the prompt contract daily settles for the NYMX Light Sweet Crude Oil Contract (the “CMA”). In return, the buyer of the put option pays a premium to the seller immediately. In the money put options are automatically exercised and generally settle in U.S. dollars 5 days after the CMA is published. However, both the premium and the option settlement may be deferred to match the cash flow from the physical sale of the crude oil.

Example

A crude oil producer has a contract to sell 10,000 barrels each month at the CMA. The producer wishes to guarantee their crude oil revenue from this volume for the next 12 months will be at least $475,000 per month. As a result, they purchase a put option from ATB, whereby each month they have the right, but not the obligation, to receive a fixed price of $52.50/barrel and pay the CMA multiplied by 10,000 barrels. In return, they agree to pay ATB a premium of $5/barrel multiplied by 10,000 barrels.

Risk Management Strategy

Graph: Distribution of Potential Revenue for the Next 12 Months

Purchasing a put option is an effective risk management strategy when you want to eliminate the potential for a decline in revenue due to falling prices, but still retain most of the upside if prices increase. In exchange for eliminating the potential downside, you pay a premium to the seller of the option. Using the same example as above, the following table and graph illustrate the impact of a put option hedging strategy on potential revenue for the next 12 months. In this example, we assume that the average forward price for NYMEX for next year is currently $60/barrel. In addition, we have detemined based on historical volatility and the current forward curve that the 5% worst case for next year is that actual prices average $40/barrel and the 5% best case is that actual prices average $85/barrel. In other words, there is a 90% probability that the average forward price for NYMEX for next year will be between $40/barrel and $85/barrel.

Impact of Hedging Strategies on Potential Revenue for the Next 12 months

Hedging Strategy	5% Worst Case Revenue	Expected Revenue	5% Best Case Revenue
No Hedges	$4.8M (10,000 Barrels x $40 x 12mo.)	$7.2M (10,000 Barrels x $60 x 12mo.)	$10.2M (10,000 Barrels x $85 x 12mo.)
Hedge 100% of Volume	$5.7M (10,000 barrels x $40 x 12mo. + net option value* (10,000 barrels x $7.50 x 12mo.))	$7.2M (10,000 barrels x $60 x 12mo. + net option value* (10,000 barrels x $0 x 12mo.))	$9.6M (10,000 barrels x $85 x 12mo. + net option value* (10,000 barrels x ($5) x 12mo.))

* Net option value is the expected value of the option less the original premium. The impact of the option is illustrative only.

Commonly used terms

(PDF - 472K)

To speak to our local traders directly, please contact:
	Rob Laird, Director	Rob Van Horne, Managing Director
	403-974-3582	403-974-3582
	403-815-1911	403-519-3950

	Deborah Polny, Assistant General Counsel	Rimas Siulys, Managing Director Market Risk
	780-408-7320	780-408-1960

	Derivative Settlements
	780-408-6456