RESOURCES.

All about differentials

Tracking, explaining and managing oil and gas basis risk

A basis spread, or differential, is simply the difference between the actual price paid or received for oil or gas of a specific quality grade or at a specific delivery location, compared to the benchmark oil or gas price. Differences between prices give us clues about relative abundance or scarcity in different markets, and allow markets to find an equilibrium by redistributing supplies or incentivizing alternatives in response to those price spreads. For energy products with a high and consistent degree of correlation to a benchmark, producers and consumers don’t necessarily have to worry too much about basis risk. Where basis risk becomes more important — to be aware of, and to try to manage — is when correlation to the benchmark is low or erratic.

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All about hedging

Managing price risk all along the supply chain

It goes without saying that producers and consumers of energy face a lot of price uncertainty. For both corporate and sovereign energy producers and consumers, that price uncertainty can make it difficult to make rationale and strategic decisions about the future. Just as each point along the supply chain affects price formation, so too can price risk at each point on the supply chain be managed (see below). Hedging with derivatives is one tool available to help mitigate — although not eliminate — price risk.

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Coming soon…

Stay tuned for more reference materials on essential energy topics.