0 | Page ANALYSIS OF PRICE VOLATILITY IN ENERGY COMMODITIES A Dissertation Report Submitted in Partial Fulfillment of Requirements For BBA (Oil and Gas marketing) Batch 2010-2013 University of Petroleum and Energy Studies Dehradun SUBMITTED TO: Mr. Sunil Bharthwal Under guidance of Dr.H .Roy Assistant Professor College of Management Studies University of Petroleum and Energy Studies SUMITTED BY Vindyanchal Kumar (R170210052) Enrollment NO: R170210052 Sap ID: 500011944
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ANALYSIS OF PRICE VOLATILITY IN ENERGY COMMODITIES
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ANALYSIS OF PRICE VOLATILITY IN ENERGY
COMMODITIES
A Dissertation Report Submitted in Partial Fulfillment of
Requirements
For
BBA (Oil and Gas marketing)
Batch 2010-2013
University of Petroleum and Energy Studies
Dehradun
SUBMITTED TO:
Mr. Sunil Bharthwal
Under guidance of
Dr.H .Roy
Assistant Professor
College of Management Studies
University of Petroleum and Energy Studies
SUMITTED BY
Vindyanchal Kumar (R170210052)
Enrollment NO: R170210052
Sap ID: 500011944
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Acknowledgement
First and Foremost I wish to express my deep sense of gratitude and indebtedness to this
great institution of mine “University of Petroleum & Energy Studies” which has given me
privilege to imbibe ample technical and managerial knowledge.
I place on record my sincere sense of gratitude towards my mentor Dr. H. Roy, (Assistant
Professor, College Of Management Studies, UPES), BBA(Oil and Gas Marketing)and Faculty
of University of Petroleum & Energy Studies along with my colleagues for their cooperation
and most of all in making my post graduation a memorable experience.
Above all I would like to thank my parents and Family for giving me all the support.
Signature of Student
Vindyanchal Kumar
Place:
Date:
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Certificate of Originality
This is to certify that the project titled “Analysis of Price Volatility in Energy
Commodities” is an original work of the student and is being submitted in partial
fulfillment of Bachelor Degree in Business Administration (BBA Oil and Gas
marketing) of University of Petroleum and Energy Studies, Dehradun for the
fulfillment of requirement of the course of study. This report has not been
submitted earlier to any other university/institution for the requirement of a
course of study.
Signature of Student
Vindyanchal Kumar
Place:
Date:
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Bonafide Certificate
This is to certify that Mr. Vindyanchal Kumar, a student of „University of
Petroleum and Energy Studies, Dehradun, pursuing BBA (oil and gas
marketing), has successfully completed his dissertation report as a part of his
course curriculum. The project report entitled “Analysis of Price Volatility in
Energy Commodities”, submitted by the student to the undersigned is an
authentic record of his original work, which he carried out under my supervision
and guidance.
I wish him all the best.
Date:
Dr. H. Roy
Assistant Professor
University of Petroleum and Energy Studies
Dehradun, Uttrakhand
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Abstract
In the recent years, India’s energy consumption has been increasing at one of the fastest
rates in the world due to population growth and economic development. To meet the demand
of the energy which is increasing at the rate of 6% and India is importing 76% crude oil, 22.5%
natural gas and 14.8% of coal to meet its energy demand. These energy commodities are also
influence the growth and development of the country. The import is increasing which leads to
the country fiscal deficit.
In 20th century energy market has tremendous growth recent studies shows the
speculation activities become one of the reason behind increased volatility. The example is the
Dec. 2008 when prices shoot up and touch the $147 and suddenly dropped down to $34 within
few months and now it’s between $70-80. Due to this many small players who did not react
accordingly and secure its position, have to bear a huge losses.
Looking at the crude oil crisis 1998, 2001, 2005 and 2008 many companies make losses.
Due to the price fluctuation many small players got bankrupt and many end up with huge
losses. We need to identify what are the factors affecting price of the energy commodities and
develop various precaution to reduce the risk exposure, so that the future losses can be reduce.
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Table of Content:
Acknowledgement
Certificate of Originality
Bonafide Certificate
Abstract
List of Table
Chapter-1
1.1 Introduction
1.2Need for Research
1.3Objective of the study
1.4 Research Methodology
1.5 Literature Review
1.6 Scope for study
1.7 Limitations of the study
Chapter-2 Crude
2.1 Introduction to crude
2.2 Price volatility in crude oil
2.3 Price Trend analysis
2.4 Critical Price drivers of Crude Oil
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Chapter -3 Coal
3.1 Introduction of Coal
3.2 Price Volatility in Coal
3.3 Supply Demand Fundamentals
Chapter -4 Natural Gas
4.1 Introduction to Natural Gas
4.2 Price volatility of Natural Gas
4.3 Relationship between oil and natural Gas Price
4.4 Price driving factors of natural Gas
4.5 Trend in natural gas price
Chapter – 5 Conclusion
Bibliography
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Chapter - 1
1.1 Introduction
Crude oil, Coal and Natural Gas are the major source of energy for world economy since the last
century. These commodities had played a vital role in industrial development and growth of world
economy. The global economy is highly affected by the fluctuations in prices of these energy
commodities. There are several factors which affect the price of energy commodities, thus affecting
the world economy directly. The analysis shows that infrastructure; weather data, geopolitical
problem in Middle East countries, dollar index, unemployment rate etc. are the major fundamental
factors that affect the prices of energy commodities. For example. Analysis done on the crude oil
prices show that the price of crude oil shows high volatility in reference to change in Dollar value. It
shows an upward or downward trend depending on decrease or increase in Dollar value similarly the
Middle East countries also impacts the crude oil prices.
Some of the fundamental factors affecting the Natural Gas prices are weather condition such as
Katrina, Rita, and coming Richard in Gulf of Mexico affect the supply side of natural gas prices.
Also the seasonal demand shows that US consumes 1.5 times more in winters than other months
which leads to increase in price. There is a correlation between the price of natural gas and other
energy commodity such as crude oil and coal.
Demand of natural is increasing due to newly developed gas base power plant and economic
development of the countries and also concern toward the global warming. That is why the
consumption of natural gas increased.
Coal demand is highly dependent on energy demand, as the majority of power generation in several
countries (such as China, India and South Africa) comes from coal generation so the prices of coal
are correlated with price of electricity. Due to the weather condition and floods in Australia from
Richards Bay port not able to transport the coal leads to decrease in the supply to other nations as 1.8
million tonnes to 1.1 million tonnes. In India consumption is higher than production will leads to
price hike in near future. Due to the Global Warming problems in future some restrictions may take
place by the government agencies or environment protection agency. It will be macro-economic
factors such as GDP, trade deficit, national debt, inflation, interest rates that can indirectly influence
the price of coal.
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The recent geo-political issues with producer and consumer countries are adversely affecting the
prices of energy commodities and Crude, Coal and Natural Gas prices showing upward trend.
Libyan rebel and the earthquake in Japan lead to huge volatility in the energy commodities, The
prices of crude oil is touching $115 from $80-$90.
1.2 Need for the Research:
To suggest relevant strategies to Producers, Consumers and Investors to protect from loss.
Effect of price volatility on GDP of countries
To know relationship between coal price and natural gas price
To find market force and factors driving the commodity price
Due to the price volatility in the commodity market producers, consumers, investors and the
government have to bear huge losses. To mitigate the price risk the derivative market provide the
platform to various players to indulge in the various contract but selection of the strategies become
irrelevant when you don‟t know the market direction where the market is going, is it following the
uptrend or downtrend within the given timeframe. So there is a need to find out the market force and
factors driving the commodity price that can be done by fundamental and technical analysis
sometimes known as techno-fundamental analysis. The fundamental analysis in simple term is
analysis of what is going on in the business environment and how it is affecting the basic demand
and supply factors of the physical energy market because the gap between the demand and supply
has direct relationship with price of the energy commodity. As a Simple statement of the head of
Saudi Arabian crude oil company that in case of price rise he will increase the production of oil leads
to decrease in the crude oil spot price from $88 to $79. Because single news in the market can leads
to heavy price fluctuation in the commodity market so we need to identify those factors and analyze
the intensity or magnitude of those factors.
In Technical analysis we follow the assumption that history repeats itself so by analysing the
historical databases. we will try to identify the trend of market for particular commodity, at the same
time try to find out the market direction or market forces, who is influencing the market is that
buyers or sellers who is controlling and driving the market who actually define the market price of
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the particular commodity. For analysing the Volatility we can use ATR (Average True Range) which
tell us what might be the volatility or movement in a particular energy commodity in a particular day.
1.3 Objective of study:
1. To study Price Volatility
2. To analyse Fundamental factors influencing Price of Energy Commodities.
3. To analyse price volatility using technical tools.
4. To suggest relevant strategies to Producers, Consumers and Investors.
5. To identify time periods at which we will definitely see the price volatility in the market.
6. To determine the price trend of crude oil in relationship with prices of alternative fuels.
7. To know the consequences and there possible remedies .
1.4 Research Methodology
Type of research: Descriptive
Sampling technique:
Non probabilistic method of convenience sampling will be used. The data will be collected from
easily available and cost effective sources.
Data Source:
Secondary Data will be collected by visiting various Internet sites such as Bloomberg, Reuters,
and Ticker Plant, Website of Commodity Exchanges e.g. Nymex, MCX, ICE, Ministry of Petroleum
and Natural Gas; various global futures exchange websites, Platts, IMF, EIA, and MCX etc.
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Data Analysis:
Data collected from different sources will be tabulated and analyzed using different analytical tools
as:
Average True Range
Standardeviation
1.5 Literature Review
There is adequate literature available for the reference for the project. Extensive usage has been
made of all the available literature for the information. The books on derivatives and risk
management have been of great help for the understanding of the concept of derivatives. Oil Trading
Manual by David Long, Energy Price Risk by Tom James, Energy hedging in Asia by PETER C.
FUSARO, technical analysis of financial market by john j. Murphy needs special mention as these
books has been extensively used.
Also for the understanding of the concept many research papers both international as well as
national will be studied. These research papers are very helpful as these bring the clarity about the
subject of the topics. They help in showing the correct direction for the project work and how one
shall proceed with it. Over the study of different research papers, it has been found that every paper
has different aspect to work out, as the papers are written on problems faced by importers, refiners,
producers due to price volatility.
Research paper
1. Coal Price Projection
Author-
Date-oct 2011
Place-EU,CHINA, RUSSIA,COLUMBIA
No pages-42
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This paper set out key consideration used by DECC in creating price assumption for the coal market
over the next 20 years.
It is done by external agencies like EIA, IEA.
It uses mainly demand, supply, and analysis of long run marginal costs models.
Results
a) It is find that price of coal largely depend on china.
b) Price of coal directly depends on price of gas.
c) Demand of coal will decrease n 2050 because coal eliminates double carbon than the gas, so
company have to paid more tax.
2. OIL in charge
Author- ABE COFNAS
1. This research paper is about effect of price volatility in oil exporting and importing countries.
2. Effect of price volatility on developing and developed countries.
3. Analysis of “Impact of high oil price on the global economy “in may 2004.
Finding
a) Economy of developing countries like Asia, Africa is affected because their economy depend
more on imported oil.
b) Oil importing countries uses more than twice petroleum product to produce one unit of output than
developed countries.
c) US economy less effected by price hike because one and another way there dollar return to them.
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3. Natural gas
Analysis of change in market price
Author –GAO
Date – Dec 2002
No .of page- 97
Why did GAO do this survey?
During the winter of 2000-2001, the wholesale price of natural gas peaked at a level four times
greater than its usual level.
Responding to the congressional interest and concern caused by these high prices,
GAO undertook a study to
1) Factors that influence natural gas price volatility and the high prices of 2000-2001;
2) Federal government‟s role in ensuring that natural gas prices are determined in a competitive,
informed market place .
.
3) Choices available to gas utility companies that want to mitigate the effects of price spikes on their
residential customers.
What GAO found;
a) Price spikes occur periodically in natural gas markets because supplies cannot quickly adjust to
demand changes.
b) While market forces make natural gas prices susceptible to price volatility, investigations are
underway to determine if natural gas prices were manipulated in the Western United States during
the winter of 2000-2001
4. Oil price volatility and U.S macroeconomic Activity
Author- Hui GUA and Kevin L. Kliesen
Place- St. Lousis
No of pages-16
This research paper distinguishes two most important channel through which change in oil price
affect aggregate economic activities.
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I. The change in the dollar price of crude oil
II. The change in the uncertainty about future price.
Result:
a) Oil price volatility has negative and significant effect on future GDP growth.
b) This volatility effect becomes more significant after we control oil price change.
c) Both the oil price change and its volatility lose their significance after we control non linear oil
shock measure
5. Price volatility ,hedging and variable risk premium in the crude oil market
Author –Ahmad R. Jalali-Naini and Maryam Kazemi Manesh
No of pages-17
Date –Jan 2006
Place-New York, Texas
In this research paper author compare OHR (optimal hedge ratio) for the crude oil. This research is
done in New York and Texas.
It is done by using different model like GARCH and ARCH model. It also tested the variable
existing risk premium in the crude oil market
Finding
Research finds that there is zero risk premium with helping GARCH model.
6. NEW evidence on the asymmetry in gasoline price: volatility versus margin?
Author: Salah Abosedra and Stanislav Radchenko
Place-Beirut, USA
Date – Sept 2006
No of pages-27
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This paper examine recent evidence on the role that gasoline margins and volatility play in the
asymmetric response of gasoline prices to change in oil price to change in oil price at different stages
of distribution process.
This research paper has used regression model with margin
Finding
a) Margin is statistically significant in explaining asymmetry between crude oil and spot gasoline
prices,
b) Spot gasoline prices and wholesale gasoline price etc and it has same finding in volatility of price.
7. Volatility Relationship between Crude Oil and Petroleum Products
Author-Thomas K. Lee & John Zyren
No pages-17
Date -17 Jan 2007
This paper utilizes calculated historical volatility and GARCH models to compare the historical price
volatility behavior of crude oil, motor gasoline and heating oil in U.S. markets since 1990. We
incorporate a shift variable in the GARCH/TARCH models to capture the response of price volatility
to a change in OPEC‟s pricing behavior.
Finding
a) There was an increase in volatility as a result of a structural shift to higher crude oil prices after
April 1999.
b) Volatility shocks from current news are not important since GARCH effects dominate ARCH
effects in the variance equation.
c) Persistence of volatility in all commodity markets is quite transitory, with half-lives normally
being a few weeks.
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Reports and Journals
“Methodology and Specifications Guide” published by Platt‟s
The crude specifications mentioned in this guide contain the primary specifications and
methodologies for Platt‟s crude oil cargo and pipeline assessments throughout the world. These
methodologies are used by oil producers, traders, refiners and final consumers for pricing of crude
oil throughout the world. The Platt‟s prices are considered benchmark for crude oil pricing. So this
report helps in finding out the factors which affect the price of crude oil.
Ahuja N.L. (2005): “Commodity Derivatives Market in India: Development, Regulation and
Future Prospects” published in „„International Research Journal of Finance and Economics‟‟
This paper analyzes the evolution of Indian commodity market and how did India pull it off in
such a short time since 2002? Is this progress sustainable and what are the obstacles that need urgent
attention if the market is to realize its full potential? Why are commodity derivatives important and
what could other emerging economies learn from the Indian mistakes and experience?
Shah Ash Narayan: “Price Discovery in Cash and Futures Market: The Case of Nymex Crude
and Heating Oil” published in Contemporary Issues in Energy Sector, 1st Edition, 2009.
This paper analyzes the role of futures exchanges in price discovery of crude oil and heating oil
using monthly data of prices at Nymex. It uses co-integration and error correction model for analysis
of prices. The findings of study prove that there exists a long term relationship between spot and
future prices of crude oil and heating oil. Further, error correction model establishes a feedback
relation between spot and future prices of crude and heating oil. This relationship study will help in
determining the role of spot markets in price discovery of crude oil.
Dr. Diwan Parag: “Energycopia”, First Edition, 2008
This book covers crude oil trading and natural gas trading. It examines the principal issues
concerning energy sector. These contemporary issues include concepts of energy economics, the
regulation and policy framework, the conservation issues, the global energy trade and finally the idea
of achieving energy security. The book will help in finding out current scenario of energy sector and
understanding the trading mechanism of crude oil and natural gas.
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Murphy, john j. “technical analysis of financial market” prentice hall direct, 1999
This book covers Technical analysis tools which are widely used by the traders to trade in the
exchanges. It briefly explains the various tools, how to use them and the importance of those tools.
This book will help in finding the strategies with tools to trade and manage price risk by telling when
to enter the market and when to exit or say when to buy and when to sell.
1.6 Scope of Study
My research will cover whole world and can be used both individually or group.
It will be used by managers of oil companies to forecast future price.
My research will be helpful for the oil company like HPCL, BPCL, and IOCL etc.
It will be also helpful for the company whose work somehow related with petroleum product.
1.7 Limitations of the Study
1. Data is collected from secondary sources so there are chances of error.
2. The strategies have to be implemented in real market conditions to find out their efficacy.
3. Availability of time and budget constraints.
4. Technical analysis will be used to forecast crude oil prices but sometimes it may not yield
effective results.
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Chapter-2
2.1 Introduction of crude oil
Crude oil is a mixture of about 5oo organic chemicals, predominantly hydrocarbons (molecules
made of carbon and hydrogen). It is recovered from underground reservoirs, normally 1000 - 5000
meters down the earth. Crude oil can be of wide variety and characteristics. It could be very fluid,
very viscous or semisolid. The colour could be black, dark brown, amber or light brown. It is also
called Petroleum.
Classification of Crude Oil
Various crude oils are often referred by their API Gravity. API Gravity is expressed as (141.5/
Sp. Gravity - 131.5). As specific gravity is in the denominator, API Gravity is higher for lighter
crude and lower for heavier crude. A comparative idea of this gravity unit can be obtained by
comparison with water: Water: 10 API Typical API Gravity figures for crude oil are
Mumbai High Crude: 40 API - Light Crude
Arabian Crude: 34 API - Medium Crude
Venezuelan Crude: 15 API - Heavy Crude
There could be sub-categorization as Medium Heavy or Light Medium. Another common
classification is based on Characterization Factor, which depends on API Gravity and Boiling Point.
Types of Crude oil
Light crude has low density making it easier to transport and refine. Most refiners prefer the
light sweet crude oil because it contains low sulfur content. Light crude is chemically "closer" to
many desired finished products such as gasoline and diesel fuel and usually it requires less refining
and processing and therefore is typically more valuable and more expensive than "heavy" oil.
Heavy crude has high density, making it more difficult to transport and refine. Heavy crude is
cheaper to buy and usually cheaper to extract though heavy crude produced from tar sands can cost
twice as much as conventional drilling.
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Crude oil Bench marks
Brent Crude Oil
Brent Crude oil is used as a bench mark for deciding the price of crude oil. It is light and sweet
crude oil but not as much sweet as WTI. The API gravity of the Brent crude oil is near about the
38.o6 and the specific gravity is near about the 0.835. Sulfur content in the Brent crude oil is
approximately the O.37%. Mostly it is use for the distillation of gasoline and middle distillate
product.
Future and option contracts of the Brent crude oil are traded on the ICE (Inter Continental
Exchange), NYMEX (New York Mercantile Exchange). The symbol of the Brent crude oil is CL4 in
the commodity trading market. Earlier the Brent crude oil was traded on the open outcry on the IPE
but now it is to be traded electronically on the ICE. One contract of the Brent crude oil is 1000 barrel
of crude oil. The contract price of the Brent crude oil is to be quoted in the dollar per barrel.
West Texas Intermediate (WTI) crude oil is of very high quality and is excellent for the Refining.
Its API gravity is 39.6 degrees and it contains only about 0.24 percent of sulfur. Most WTI crude oil
gets refined in the Midwest region of the country, with some more refined with in the Gulf Coast
region. Although the production of WTI crude oil is on the decline, it still is the major benchmark of
crude oil in the America.
Tapis
Tapis is a Malaysian crude oil used as pricing marker crude in Singapore. It is not only traded on
market like Brent and WTI, it is often used as oil marker for Asia.
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Dubai and Oman
Dubai crude is a light sour crude oil. It is used as benchmark in Middle East.
• It has API gravity of 31 and sulphur content of 2%
• It is considerably more heavy and viscous and sourer, making sweet crude marker is an
inadequate tool with which to manage sour crude price risk.
Hence introduction to exchange traded Middle East sour crude facilitates risk management of sour
crude in Middle East, Asia and beyond also.
Dubai Oman crude uses by the Middle Eastern Countries for determining the price of their crude oil.
In early days the Middle Eastern Countries decide their price on the basis of Brent crude but Brent
crude oil is light sweet crude oil while the Middle Eastern countries crude oil contains high sulfur
content and the API gravity near about the 15 to 17 API. So the price is not determined on the base
of a Brent crude oil. Dubai Oman crude traded on the Dubai Mercantile Exchange. In July 2007
DME launched the future contract of the Dubai Oman Crude oil.
Introduction to Global Crude oil market
Over the last three decades oil has become the biggest commodity market in the world. During this
period, oil trading has evolved from a primarily physical activity into a sophisticated financial
market. It has attracted the interest of a wide range of participants including banks, governments,
financial institutions, fund managers as well as the airlines, traditional oil majors, independents and
physical oil traders.
Prior to 1970s, oil trading was a marginal activity for most companies who only used the market to
resolve any imbalances in supply and demand that might emerge. The industry was dominated by
large integrated oil companies and as a result trading volumes were typically small and usually spot
and the prices were much less transparent than they are today.
As the nationalization of oil companies took place in 1970 in the Middle East and elsewhere, the
major oil companies were forced to buy huge amount of crude oils from their former host
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governments and trading eventually became an integral part of any oil company‟s supply and
marketing operations. With more oil being traded, external market began to set the price for internal
transfers as well as third‐party sales, fuelling the growth of the market.
The driving force behind the rapid growth in oil trading is the huge variability in the price of oil. The
daily price movements of $2/barrel are not uncommon and prices frequently change by up to 50
cents/barrel. Since there is no obvious upper or lower bound to oil prices, the value of a barrel of oil
can double or halve within the space of a few months.
As a result, everyone involved in the industry is exposed to the risk of very large changes in the
value of any oil that they are producing, transporting, refining or purchasing, and a range of new
markets have evolved in order to provide effective hedging instruments against the elaborate
combination of absolute and relative price risks that characterize the oil business.
Trading Horizons
The most important change to the oil market has been the gradual extension of trading horizons.
Before the introduction of forward and futures contracts, oil companies had no effective means
setting prices for future delivery. As a result, the spot market was forced to bear the brunt of trading
decisions that might relate to time periods ranging anywhere from a day to a year ahead, which could
only have added to price volatility.
However, the time horizon of the oil market has been extended much further forward as can be seen.
The most active futures contracts, such as NYMEX WTI, now trade for delivery up to nine years
ahead and the industry has acquired a new set of trading instruments that enable participants to
establish prices even further into the future. Instead of being limited to a time horizon of only a few
months, prices can now be reliably obtained for periods from one to ten years ahead. This has been
made possible by the introduction of financial instruments such as OTC options, which have created
a liquid market that enables companies to trade the price of oil over a time frame that is appropriate
for producers investing in new oil fields or for consumers building new power stations. And for
physical traders who frequently use financial instruments to fix price independently of delivery.
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2.2 Price Volatility in Crude oil:-
The price volatility in the crude oil can be because of two factors one is the investor‟s sentiments
and the other is known as fundamentals of crude oil. The first factor is investors sentiments is the
price when the investor like to invest or exit from the market. These investor‟s sentiments can be
predicted by using the technical and statistical analysis. One of the tools is ATR (Average True
Range).
ATR(Average True Range)
The average true range (ATR) determines Commodities volatility over a given period. That is,
the tendency of a commodity to move, in either direction.
More specifically, the average true range is the average of the true range for a given period. The true
range is the greatest of the following:
The difference between the current high and the current low
The difference between the current high and the previous close
The difference between the current low and the previous close
The ATR is mainly used to have stop loss or to exit from the trade while trading. Because they
expect that the commodity price will not move more than this level in a particular day.
Other statistical method we can use is by finding the Standard deviation from the expected price
of the commodity.
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Standard Deviation:-
Standard deviation is a widely used measurement of variability or diversity used in statistics and
probability theory. It shows how much variation there is from the average. A low standard deviation
indicates that the data points tend to be very close to the mean, whereas high standard deviation
indicates that the data are spread out over a large range of values.
The second major factor is fundamentals of crude oil. The market react according to the news is
coming in to the market. The market players are sensitive about market news. Whenever there is a
news in a market, the market participants try to grab that opportunities and react accordingly but at
the same time there are some big players who tried to trap the other players and move the market in a
opposite direction and make their stop loss triggered and the others end up with the losses. So we
have to very careful while trading and finally market always moves in the way it should move. So we
have to analyse at what time and which side the market will move and accordingly we can trade. For
that purposes we can actually see the market past news when they come how the market move in
shorter duration and in the longer duration.
ATR calculation of the Crude oil
Calculation
The Average True Range (ATR) is based on 14 periods and can be calculated on an daily, weekly
or monthly basis. For this example, the ATR will be based on daily data. Because there must be a
beginning, the first TR value is simply the High minus the Low, and the first 14-day ATR is the
average of the daily TR values for the last 14 days.
ATR value from NYMEX
Given
Long term ATR for the Coal is = $ 0.8023385
The 14 days ATR is = $ 3.74951683
The 5 days ATR is = $3.8286829
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The 5 days ATR and 14 days ATR is commonly used ATR for trading activities. It is considered
that the price in a particular day might move to this range and then will stop moving. But we cannot
assure that the price will not move more than that because the price is unpredictable and it can move
further but chances of moving not more than this is very less.
The all time ATR or say ATR from 1983 to 2013 says that the average movement in a particular
day is $0.8023385. The crude oil price will not move more than this but the observation is related to
the long term and in the initial days the prices are not much volatile and now a days the market is
much more volatile than ever. The conditions are changing and the market is becoming more
dynamic.
If we analyse the past prices then we will find that market is not moving more than is value when
the market conditions are normal or say the investors are not in panic. But if there is adverse news
then in that case the market may move more than this value so in this case we can take more 5 days
ATR or 14 days ATR to know the volatility in short term or can say current volatility in the market.
In this report there is 14 days ATR and we find that the max. Value of the ATR is $ 3.74951683.
Means in the time duration of the 14 days the average movement of the crude was $ 3.74 and the
average value is somewhere around the $ 3.5 so we can say that according to the current market the
price will generally move $3.5 and in the adverse condition the value can be move by $ 3.74.
In 5 days ATR we find that the max Value is $3.8286829. in this case we can also take the 5 days
ATR because it tells the current market volatility and if the volatility according to the 14 days and 5
days are approx. Same in this case we can say that the market might move near to the ATR value but
if both the ATR is not equal then we can say that the market will move the higher value of the ATR.
After doing the calculation of the ATR we found that the 5 days and the 14days ATR are
showing the nearly same values in this case we can consider the both the ATR‟s. And then we can
take the position in the market.
The analysis shows that the average value of the ATR of the crude oil is $ 3.74 to $3.82. so in the
general market condition when there is no opposite news in the market or small news in the market
the market will not move more than $ 3 in a trading day so if the market already moves this much in
a particular trading day we can trade considering the market will go side wave or will show the
retracement.
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Standard Deviation:-
Month Standard
Deviation
January
February
March
April
May
June
July
August
September
October
November
December
January
February
March
2.69695
4.437884
1.819859
1.969535
2.127439
0.463244
1.532626
3.559421
2.116307
2.190369
4.726454
1.358177
1.138042
2.795458
3.452517
Interpretation:-
The analysis of the Standard Deviation says that in a particular year in a particular month the
volatility is on an average is $ 2.45. It means the deviation in a month from the mean value is near
about $2.5, in a particular trading day the commodity moves not more than this level so according to
the analysis we can say that the volatility of the crude oil is $2.5. Further in a particular month the
maximum volatility is $4.7 this shows that the movement in the prices of the commodity. The prices
are not moved too much in this time duration also not big news in the market which can take the
prices of the crude at a very high level.
On the bases of the analysis by ATR and Standard deviation we can say that in a particular
trading day commodity did not move more than $ 2.5-$ 3.5. And if we want to see the volatility in
crude in a particular day than we can calculate % day ATR, 14 day ATR and Standard Deviation and
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we will get the value which will tell us that in that day what is the rage of the commodity and how
much it may move.
2.3 Price Trend Analysis of Crude Oil:-
Period: Dec 1996 – Dec 1998
Price range (% Change): 26.80 - 10.35 (-61.38)
Factors: -
Rise in inventories 300 – 325 million barrels
Oct-96 – Jun‟97
Fall in Natural gas prices 4.71 – 1.8 USD/MMBTU, 1.04 USD/MMBTU