Wednesday, August 2, 2017

Put and call in the oil market

Producers are locking in production quotas for 2018 at prices a few dollars less than the current spot.  

Now, are they hedging or just prepping for production?  2018 is only six months away, they gotta prep.  They are not hedging, they are setting prices, it is the spot market that was hedged. Anyway, futures prices dropped a bit and volatility in future prices increased.  The spot market has to requantize a bit, production is supposed to estimate supply needs.

Increasing volatility means actually moving sips, oil equipment and crew around a bit to meet contract.
Demand for put options that producers use to lock in prices has jumped over the last two weeks. An indicator known as the skew that compares put option and call option prices has shot up for December 2018 Brent and WTI contracts, indicating that producers are guaranteeing sales for next year. There was also a 32 percent increase in the number of West Texas Intermediate contracts for June 2018 last month, PVM Oil Associates analyst Stephen Brennock wrote in an emailed report Wednesday.Several large trades were reported to U.S. regulators last week that were also typical of producer hedging, according to data compiled by Bloomberg. Among those, one saw 4 million barrels of supply locked in at $45 a barrel.

How does sandbox do it?

Dunno, these are tim based contracts  so there should be little contango effects along the way as bunching occurs on expiration. Just came up as an issue, needs thinking....

OK, first thoughts.  The spot market is a two color with a delivery schedule as the third color.  Contracts to deliver by producers are like a reverse flow ledger service, the producers accept delivery contracts to enforce the no-contango principal. So the ledger, in this case, tracks all gendered oil workers and their equipment, the real stuff that makes the spot market flow.  The producers operate in smart contract land and make contract bets on the spot market in pure cash. 

They are dealing with the 'fails to deliver' calculation. Without a third color producer stream, the bit error would  be way to volatile to make the market.

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