RE:RE:The Big Picture 1970Craig - Take a look at this LINK This article is the first in a series where we explore the most common strategies utilzed by oil and gas producers to hedge their exposure to crude oil, natural gas and NGL prices.
In the energy markets there are six primary energy futures contracts, four of which are traded on the New York Mercantile Exchange (NYMEX): WTI crude oil, Henry Hub natural gas, NY Harbor ultra-low sulfur diesel (formerly heating oil) and RBOB gasoline and two of which are traded on the IntercontinentalExchange (ICE): Brent crude oil and gasoil.
A futures contract gives the buyer of the contract, the right and obligation, to buy the underlying commodity at the price at which he buys the futures contract. Conversely, a futures contract gives the seller of the contract, the right and obligation, to sell the underlying commodity at the price at which he sells the futures contract. However, in practice, very few commodity futures contracts actually result in delivery, most are utilized for hedging and are sold or bought back prior to expiration.
So how can an oil and gas producer utilize futures contracts to hedge their exposure to volatile oil and gas prices? As an example, let's assume that you are a crude oil producer who wants to hedge the price of your future crude oil production. For sake of simplicity, let's assume that you are looking to hedge (by "fixing" or "locking" in the price) your July crude oil production. To hedge this production with futures, you could sell (short) a September ICE Brent crude oil futures contract. We are using ICE Brent futures in this example as ICE Brent is the global benchmark for crude oil but, most producers in the Americas would be likely be inclined to utilized NYMEX WTI futures rather than ICE Brent futures.
Etc....