Platts 3rd Annual European Crude Oil Markets Keynote by Eldon Klaassen

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Risk ManagementCommodity TradingPhysical LogisticsRegulatory Compliance

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Optimizing market data to manage risk in crude oil markets

Eldon KlaassenCEO

04/10/2023


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Allegro Development Corporation

Petroleum

Power

Coal

Natural Gas

» 2009 Energy Risk “Software House of the Year Award”

» 2008 Energy Business Awards “Gold Award for Excellence in Energy Technology”

» Serving more than 100 global customers for over 26 years

» Office locations in London, Zurich, Singapore, Calgary, Houston, & Dallas

Allegro delivers the industry’s leading multi-

commodity trading and risk management software.

04/10/2023


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Optimizing market data

Efficient capture and validation of data

Forward curves, volatility, and correlations

Market metrics and attribution

Market, basis, credit, and liquidity risk

04/10/2023


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Market data sources

04/10/2023

External Data Sources» Spot prices» Exchange prices» Broker quotes» Currency exchange» Interest rates» Credit ratings» Tariffs» Freight

Trading & Risk Management System

Internal Data Sources» Trader observations» Production costs» Refinery spreads» Credit history


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Automated data validation

Validation rules» Omission» Source variance» Time horizon variance» Basis variance

Correction procedures» Notifications» Manual corrections» Automated corrections

04/10/2023

4-Jan-10

6-Jan-10

8-Jan-10

10-Jan-10

12-Jan-10

14-Jan-10

16-Jan-10

18-Jan-10

20-Jan-10

22-Jan-10

24-Jan-10

26-Jan-10

28-Jan-10

30-Jan-10

1-Feb-10

3-Feb-10

5-Feb-10

7-Feb-10

9-Feb-10

11-Feb-10

13-Feb-10

15-Feb-10

17-Feb-10

19-Feb-10

21-Feb-10

23-Feb-10

25-Feb-10

65.00

70.00

75.00

80.00

85.00

90.00

Plt Dated Brent Plt Dubai 1st Mth Plt Ekofisk 1st MthPlt Forties 1st Mth Plt Gippsland 1st Mth Plt Minas 1st MthPlt Oman Blend 1st Mth Plt Oseberg 1st Mth Plt Tapis Blend 1st Mth


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Forward curves

Forward curve creation» Current prices for future delivery» Basis differentials-net back/net forward» Interpolation/extrapolation» Historical simulation» Mean reversion rates

Multiple forward curve analysis» Linear, non-linear, step functions» Scope of historical price behavior» Deviation of forward curve assumptions

04/10/2023

1-Apr-1

0

1-Jul-1

0

1-Oct-

10

1-Jan-11

1-Apr-1

1

1-Jul-1

1

1-Oct-

11

1-Jan-12

1-Apr-1

2

1-Jul-1

2

1-Oct-

12

1-Jan-13

1-Apr-1

3

1-Jul-1

3

1-Oct-

13

1-Jan-14

1-Apr-1

4

1-Jul-1

4

1-Oct-

14

1-Jan-15

1-Apr-1

5

1-Jul-1

5

1-Oct-

15 75.00

77.00

79.00

81.00

83.00

85.00

87.00

89.00

ICE Brent CrudeDME Oman CrudeNYMEX WTI Cushing


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Volatility and correlationVolatility

» Volatility indexes—logical groupings» Historical volatility, implied volatility» Volatility smiles, skew

Correlations» Historical correlation» Seasonal effects» Liquidity effects


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Market metrics

Linear positions» Simple market valuation and mark to market

Non-linear positions: What is an option worth?» Option models

• Differential equation approach (Black-Scholes) • Stochastic calculus approach

» Option valuation methodology• Single model for all instruments• Model values complex physical options with all of the

necessary constraints

Option valuation» Time value, intrinsic value

Sensitivities» Delta, gamma, theta, vega, rho


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Option Valuation: Financial OptionsExchange traded options

» NYMEX, ICE, DME

OTC Financial options» Market price options» Spread options» Multiple asset options» Strips of options» Lookback options» Calendar spreads» Compound options


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Option Valuation: Physical OptionsPricing

» Floors and caps» Price triggers

Logistics» Vessel loading tolerance» Take or pay contracts» Time charters

Inventory and storage» Crude oil injection and withdrawal


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Option Valuation: Exercise & ConstraintsPhysical options tend to have complex exercise

» Frequency of exercise» Number of exercises» Quantity of exercise

Physical options tend to have constraints» Physical limitations» Minimum and maximum operational quantities» Contractual limits


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Basket Prices

04/10/2023

• Brent • Forties• Oseberg• Ekofisk

BFOE

• Mars• Poseidon• Southern Green

Canyon• Thunder Horse

ACM

• Minas• Tapis• Gippsland• Dubai• Oman

ICP


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Option Analytics: Basket Options

Variants of basket options

» Simple or weighted average» Average price over time period (Asian)» Spread options

Modeling distribution of sum of lognormal random variables

» Black Scholes assumes lognormal distribution» Sum of lognormal variables does not follow lognormal distribution

Moment matching

» Basket treated as a single underlying commodity

dB(t) = (r – qB) B(t)dt + sB B(t)dzB

» Moment matching approach to determination of basket volatility» Estimation of correlation coefficients

04/10/2023


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Option Analytics: Differential Swaptions

Options on swaps for differential

» Crude differential» Location differential» Calendar differential

Valuation challenge

» Simple spread assumes available volatility and correlation to delivery date» Differential swaption volatility is a function to expiration date» Spread is not log normally distributed

Tree transformation

» Transformation of variables from underlying to variables with no correlation» Construct two independent trees in these new variables» Use the inverse transformation for a three-dimensional tree for the swaps

forward

04/10/2023


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Profit and Loss Attribution

04/10/2023

Trans Quan Price Delta Gamma Theta Vega Rho Profit(Loss)

Brent

(206,605) (64,751)

(615,821)

(248,441)

(125,981)

(49,443)

(217,826)

(1,883)

(1,530,750)

Dubai

392,237

31,758

568,518

210,678

91,398

16,848

180,858

(1,297)

1,491,000

Ekofisk

126,705

70,102

577,882

239,362

126,522

55,997

211,152

2,779

1,410,500

Forties

(254,283) (79,693)

(757,933)

(305,773)

(155,053)

(60,853)

(268,093)

(2,317)

(1,884,000)

Gippsland

(82,424)

(94,949)

(701,009)

(296,969)

(162,289)

(78,114)

(263,299)

(4,444)

(1,683,500)

Minas

57,411

130,748

913,928

391,808

217,768

108,993

348,298

6,548

2,175,500

Oman

(362,301) (38,405)

(584,885)

(220,565)

(99,125)

(23,225)

(190,205)

713

(1,518,000)

Oseberg

118,723

79,067

629,633

262,589

140,241

63,774

232,002

3,319

1,529,350

Tapis

36,363

102,951

711,531

305,811

170,571

86,046

272,001

5,224

1,690,500

WTI

91,466

59,740

477,340

198,940

106,140

48,140

175,740

2,494

1,160,000

Totals (82,708)

196,568

1,219,184

537,440

310,192

168,162

480,628

11,135

2,840,600


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Profit and Loss Attribution

04/10/2023

Brent

Dubai

Ekofisk

Forti

es

Gippsland

MinasOman

Oseberg Ta

pisW

TI (2,500,000)

(2,000,000)

(1,500,000)

(1,000,000)

(500,000)

-

500,000

1,000,000

1,500,000

2,000,000

2,500,000

Trans Quan Price Delta Gamma Theta Vega Rho


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Market and basis risk

Exposure disaggregation

Mark to market

Value at risk

04/10/2023

Jan-10

Feb-10

Mar-10

Apr-10

May-10

Jun-10Jul-1

0

Aug-10

Sep-10

Oct-10

Nov-10

Dec-10

-

5.000

10.000

15.000

20.000

25.000

WTITapisOsebergOmanMinasGippslandFortiesEkofiskDubaiBrent


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Liquidity risk

Cash flow disaggregation

Margin requirements

Cash flow at risk

04/10/2023

Jan-10

Feb-10

Mar-10

Apr-10

May-10

Jun-10Jul-1

0

Aug-10

Sep-10

Oct-10

Nov-10

Dec-10

(200.0)

(150.0)

(100.0)

(50.0)

-

50.0

100.0

150.0

200.0

Margin disbursementsMargin receiptsCash disbursementsCash receipts


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Simulation

What if market variables change?» Quantity» Price» Basis» Volatility» Correlation» Currency» Transactions

How will they change?» Linear shift» Parallel/rotational shift» Absolute/relative shift» Stochastic shift


www.allegrodev.com

Optimizing market data

04/10/2023

Efficient capture and validation of data

Forward curves, volatility, and correlations

Market metrics and attribution

Market, basis, credit, and liquidity risk


www.allegrodev.com

Risk ManagementCommodity TradingPhysical LogisticsRegulatory Compliance

www.allegrodev.com

Optimizing market data to manage risk in crude oil markets

Eldon KlaassenCEO

04/10/2023

Platts 3rd Annual European Crude Oil Markets Keynote by Eldon Klaassen

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