Oil Derivative Instruments and Their Price Risk Management
石油衍生产品及其价格风险管理

The oil is the "blood" of modern industry and the important strategic material.Everyone involved in the industry is exposed to the risk of very large changes in the value of any oil that they are producing,transporting,refining or purchasing.Since the late 1970's,Oil price risk has traditionally been at the heart of the oil business for its dramatic fluctuations.On 1990's,The derivative instruments were introduced into the oil market for its unique superiority to suit the petroleum price risk management extremely,which transformed the structure and operation of the oil market over the past decades.Oil trading has evolved from a primarily physical activity into a sophisticated financial market.So,oil futures markets and its OTC markets grow rapidly.World oil derivative markets,including the New York Mercantile Exchange,London International Petroleum Exchange,Singapore Exchange,have developed enormously and become the important parts of the international oil market.At present,the oil derivative markets have developed around two complementary axes: hedging the oil price exposure of large companies,and the financing operations of the oil industry.Both of these have generated rapid growth for the OTC and exchange-traded oil derivatives industry.Oil price risk management instruments,such as oil forwards,oil futures,oil options,oil swaps are all playing the respective role in the price risk management.Especially,some unique oil derivative instruments,such as the crack spread contracts,the crack spread options,the calendar spread options,the volumetric production payment contracts,were innovated for the need of oil industry,giving companies much more control over prices and bringing new participants into the market.The most important change to the oil market has been the gradual extension of trading horizons further and further into the future.Before the introduction of forward and futures contracts,oil companies had no effective means setting prices for future delivery.Price risk management tools such as derivative instruments are used to manage price volatility in order to protect company revenues and profits.Participants of the oil market use the different risk management strategies through oil derivative products.A survey shows that the majority of foreign oil companies take the initiative in using futures markets,hedging to lower oil price risks.There are oil producer,petroleum refiners,storage operators,large consumers(local distribution companies,airlines and shippers),who transacts for the purpose of hedging.All available evidence indicates that the oil industry has successfully used derivatives to manage risk.