The Crude Oil Market. Risks and Opportunities

Seminar paper from the year 2017 in the subject Business economics - Miscellaneous, grade: 84,0 %, Dublin Business School, language: English, abstract: Companies that deal in future markets of commodities like the Crude Oil market are confronted with divers problems, which will be described and analysed in the following pages. There are many numerous factors that must be taken into consideration like the ¿cost of carry¿, the basis risk, the importance of Contango and Backwardation and the costs and benefits associated with the utilization of options in general. In this concrete case an important client of our major consultancy firm has asked for an assessment of their current risk management policies, because they are primarily concerned with their exposure to rising energy cost including unexpected costs in managing their futures and forwards hedges in the Crude Oil market in the past two to three years. My task in the following paragraphs is to describe the problems and risks of futures, especially in the Crude Oil market, but also mention the chances implied with this market and the way to deal with it. At best, it will be possible for me to help our client to understand their past decisions and what was wrong with them, and to give them a recommendation for the future how they may improve their overall hedging strategy. Nevertheless, there does not exist any market that is safely predictable, thus there will not be a 100 percent safe prediction that guarantees profit, caused through for instance environmental disasters, political crises, or many more. This is another point I will show an interest in later by analysing the futures price, how it is developed, and the potential risks are included.