Agenda. Petroleum Management

Transcription

1 Petroleum Management 1 Agenda Energy Advantage Background - Petroleum Fuels Market Petroleum Procurement Services Background - Hedging/Risk Management Canadian Petroleum Market Correlation and basis differential between NYMEX RBOB and Toronto Rack Price Correlation and basis differential NYMEX heating oil and Toronto LSD Rack Price Benefits/Risks to Hedging Factors to Consider when Hedging Recommendations

2 Energy Advantage All you need to know Provides total energy and environmental management services 1. Independent Consultant & Agent acting in enduser clients best interests 2. Outsourced energy department Independent/unbiased & objective 3 Background - Petroleum Fuels Market Major Factors: Product cost volatility ($32/bbl - $147/bbl) is expected to continue The aging condition of North American refineries and capacity bottlenecks are expected to continue to trigger sporadic shortages and product cost spikes when demand recovers AND IT WILL. Contraction of credit and tight supply has both narrowed list of available suppliers and pushed pricing higher relative to posted rack Wide distillate refining margins vs. gasoline makes large credit worthy diesel buyers attractive customers for refiners/wholesalers Dated and inflexible tender requirements have reduced competition for municipal business which highlights need for more active and responsive procurement strategy Introduction of alternative fuels has complicated the procurement process as few suppliers are willing to provide a bundled supply package

3 Petroleum Procurement Services Petroleum Procurement Review/Analysis Review/analysis of current petroleum procurement Supplier RFQ/Bid Review Expertise Improved participation Bid/Response analysis Energy Market Intelligence Petroleum product cost forecasts budgeting Inventory Management Direction Reduced fuel cost Petroleum Product Hedging Strategy Development/Recommendations Cost certainty 5 Background - Hedging/Risk Management The 3 prevalent types of hedges are: Price Swap - whereby the variable spot price is exchanged for a fixed price. A Collar - whereby the price paid will fluctuate within a certain band. A Call Option - which gives the end user the right, but not the obligation, of purchasing the underlying commodity at a predetermine price.

4 1/1/07 2/1/07 3/1/07 4/1/07 5/1/07 6/1/07 7/1/07 8/1/07 9/1/07 10/1/07 11/1/07 12/1/07 1/1/08 Canadian /Litre 7/20/04 9/20/04 11/20/04 1/20/05 3/20/05 5/20/05 7/20/05 9/20/05 11/20/05 1/20/06 3/20/06 5/20/06 7/20/06 9/20/06 11/20/06 1/20/07 3/20/07 5/20/07 7/20/07 9/20/07 11/20/07 1/20/08 Canadian /Litre Canadian Petroleum Market The graph below shows a high correlation between Toronto rack prices and NYMEX gasoline futures prices. R 2 of 93% Nymex Gas Price Toronto Rack 7 Basis Differential between NYMEX RBOB and Toronto Rack Price The graph below shows an average basis of approx. 3.3 /Litre Basis (Nymex vs Toronto Rack) Average Basis (2.00) (4.00)

5 1/5/07 2/5/07 3/5/07 4/5/07 5/5/07 6/5/07 7/5/07 8/5/07 9/5/07 10/5/07 11/5/07 12/5/07 1/5/08 2/5/08 3/5/08 4/5/08 5/5/08 6/5/08 7/5/08 8/5/08 9/5/08 10/5/08 11/5/08 Canadian /Litre 1/5/07 2/5/07 3/5/07 4/5/07 5/5/07 6/5/07 7/5/07 8/5/07 9/5/07 10/5/07 11/5/07 12/5/07 1/5/08 2/5/08 3/5/08 4/5/08 5/5/08 6/5/08 7/5/08 8/5/08 9/5/08 10/5/08 11/5/08 Canadian /Litre Correlation between NYMEX heating oil and Toronto LSD Rack Price The graph below shows a high correlation between Toronto rack prices and NYMEX heating oil futures prices. R 2 of 98% NYMEX Heating Oil Toronto Rack Prices 9 Basis Differential between NYMEX heating oil and Toronto LSD Rack Price The graph below shows an average basis of approx. 8 /Litre Basis (NYMEX vs Toronto Rack)) Average Basis

6 Benefits/Risks to Hedging Benefits Budget-ability and price certainty. Minimize exposure to volatility and price spikes. Price transparency, when tendered Risks Hedge price higher than the market price = opportunity cost. Default of the hedge counterparty. Hedging Options End user can either hedge with: Physical Supplier(s)of petroleum products Financial institutions such as banks (TD, RBC, Scotia) Energy Marketers (Shell, British Petroleum) End user can have various hedge counter-parties and call tenders to obtain the best price. End user can have various hedges in place, at the same time, with a number of different counter parties. 12

7 Factors to Consider when Hedging Financial Institution or Marketer The end user has to execute an ISDA contract with a financial institution or Energy Marketer. A credit limit would be assigned to the end user - which hopefully will be high enough to avoid margin calls. The end user would execute a financial hedge based on the NYMEX heating oil contract, as diesel fuel does not trade on NYMEX or RBOB in the case on gasoline Difference between the price transacted and the NYMEX monthly closing prices would be settled (debit or credit) 5 business days after month end. Factors to Consider when Hedging Financial Institution or Marketer The minimum monthly quantity would be 1 contract, which represents 1,000 barrels, or 159,000 liters. NYMEX prices are available for terms of up to 60 months The Basis Differential risk, between the NYMEX price and the price of the product in Toronto, is borne by the end user. The currency risk can be hedged at the same time as NYMEX hedge transaction is executed. 14

8 Factors to Consider when Hedging Physical Supplier Some physical suppliers offer hedging/fixed price programs: Suncor Petro-Canada Shell Suppliers typically quote a price in CDN $/L at the local rack. Suppliers build in a margin to cover the basis risk. Minimum monthly quantity is 1 contract or 159,000 litres. Maximum term of approximately 12 months. 15 Recommendations With the current decline in petroleum product cost, future hedging prices have become more attractive. End users need to have contracts and strategies in place in order to capitalize on market opportunities. End users should have a variety of hedging alternatives available to them to ensure that they are in a position to take advantage of the lowest cost alternative. Depending on the end user s risk tolerance, a hedging strategy with time and price targets can be developed.

9 Ontario Market Overview Gasoline - Ontario Gasoline demand, although decreasing due to economic factors, continues to outstrip production - Shortfall is covered by imports from Quebec Ultramar and PetroCanada - This supply/demand balance provides stability, and any price fluctuations tend to be caused by changes in Nymex pricing of product/crude

10 Ontario Market Overview Diesel Diesel production in Ontario exceeds demand, excess is exported Demand is shrinking due to economic downturn Micro and Macro economic factors would both appear to place downward pressure on Diesel pricing, but more weighted impact on pricing is Nymex activity Demand Growth Sales growth of Refined Petroleum Products (%) 8.00% 6.00% 4.00% 2.00% Ontario Québec Canada 0.00% % -4.00% Sales growth of Diesel (%) Sales growth of Gasoline (%) 10.00% 10.00% 8.00% 8.00% 6.00% 4.00% 6.00% 2.00% 0.00% Ontario Québec 4.00% Ontario Québec % 2.00% -4.00% 0.00% -6.00% % -2.00% Source: Statistics Canada

11 Pricing Model Monthly pricing is not offered Daily or weekly pricing are the most common across commercial & wholesale markets Exposure to cost/price fluctuations is great and often not recoverable Alternate pricing strategy for Municipalities: - purchase of Futures contracts Pricing Monthly Avg. Monthly Avg. Weekly OBG. Monthly Avg. Monthly Avg. Weekly OBG. Daily Rack Weekly OBG. vs Daily Rack Daily Rack Weekly OBG. vs Daily Rack Regular Gas Regular Gas Regular Gas ULSD ULSD ULSD Avg. 01/ Avg. 02/ Avg. 03/ Avg. 04/ Avg. 05/ Avg. 06/ Avg. 07/ Avg. 08/ Avg. 09/ Avg. 10/ Avg. 11/ Avg. 12/ Avg

12 Futures Program ( Hedging) Based on Nymex Heating Oil #2 upgraded to ULSDB & FOB Toronto One contract equals 1000 bbls ,000 litres Must be used in the same calendar month as specified by contract No transaction fees, no other added costs Hedging Daily Price Notification Sent daily after market close (16h00)

13 Hedging (cont d) If you would like to place an order: Reply to the stating Number of contracts wanted Delivery month Highest price you are willing to pay for each month Hedging Contact is Bao Trinh in Montreal Office, or Hedging (cont d) example:

14 Hedging (cont d) When contracts are secured by our traders we will confirm with an official document signed by both customer and Ultramar Customer s price is not changed for purposes of invoicing At end of contract month, a calculation is made to determine what average price customer paid. This is compared to the hedged price, and a credit or debit is applied to account for hedged volume. Buying Strategies An increasingly competitive market results in small incremental difference in volume discounts Combining large volume transit operations with smaller volume public works etc. spreads the benefit of volume discounts to groups that would not qualify