ArbitrageA trading strategy based on the simultaneous purchase and sale of the same commodity in two different markets in order to profit from location, product, timing, or price discrepancies. See also “Spread”. Arbitrage at Wikipedia.
Ask PriceThe price at which a dealer is willing to sell foreign exchange, securities or commodities. Also called the“offer price”. Ask price at Wikipedia. Bear MarketMarket where prices are declining. Market trends at Wikipedia.
Bull MarketMarket where prices are increasing. Market trends at Wikipedia.
Bid and AskPrices offered to buy and sell respectively, on spot market deals. An interested party can sell at the bid price and buy at the asked price. Spot prices are not reported as a straight number, but rather, in terms of bid and ask. Price mechanism at Wikipedia. Bunker hedgingForward agreement to purchase or sell bunker oil at a predetermined price. The initiation of an opposite futures position to protect a cash market position from an adverse price movement. See also “Hedge”. Hedge at Wikipedia.
Call optionA right, but not an obligation, to buy an underlying instrument at a predetermined price. Call option at Wikipedia.
CapsRisk management strategy that involves the purchase of a call option, which offers protection against rising fuel prices, but retain the possibility to gain a profit when prices fall. Caps are offered against payment of an upfront premium. See our example of Caps.
Cash settlementThe settlement of futures or options through payment of a cash difference, rather than taking/making physical delivery.
CentistokeUnit of measurement for viscosity. Viscosity at Wikipedia.
CollarA combination of selling a put option and buying a call option (or opposite), where you eliminate an unfavourable direction in prices, but at the same time limit the opportunity to gain a profit when prices develop favourable. Collar at Wikipedia.
Crack SpreadA spread that traders implement to play the price relationship between crude and refined products. Crack spread at wikipedia.
Crude OilDark oil consisting mainly of hydrocarbons. Crude oil is the mixture of petroleum liquids and gases (together with associated impurities) pumped out of the ground by oil wells. Petroleum at Wikipedia.
Forward ContractAn agreement to exchange the currencies, securities or commodities at a specific future date and a predetermined forward rate. Forward contract at Wikipedia.
Forward PriceThe basic forward price of a commodity is determined by the following equation: Forward price = Spot Price + Cost of Carry – Convenience Yield.
Fixed Price AgreementA forward agreement to purchase or sell a commodity at a predetermined rate. See our example of a Fixed price Agreement.
FuturesA standardized contract for the future purchase or sale of a commodity on a formalized exchange. In other words, an agreement to make or take delivery of a commodity at a fixed date or strip of dates in the future, at a price agreed upon at the time of dealing. Futures contract at Wikipedia.
GallonGenerally accepted across the oil industry to refer to a US gallon. There are 42 US gallons in a barrel. There are 3.78541 litres in a gallon. There are 1.2 US gallons to the British imperial gallon. Gallon at Wikipedia.
Gas oilAn oil formed through distillation of petroleum of intermediate boiling range and viscosity. An intermediate distillate product used for diesel fuel, heating fuel and sometimes as feedstock. Fuel oil at Wikipedia.
HedgeThe purchase of a contract or tangible good that will rise in value and offset a drop in value of another contract or tangible good. Hedges are undertaken to reduce risk by protecting the owner from loss. Buyers and sellers can hedge. Hedge at Wikipedia.
ICE (IntercontinentalExchange)American financial company that operates Internet-based marketplaces which trade futures and over-the-counter (OTC) energy and commodity contracts, as well as derivative financial products. ICE at Wikipedia. ICE website.
Initial marginThe returnable collateral required to establish a hedge position. Margin at Wikipedia.
MarginA deposit made as security for a financial transaction otherwise financed on credit. Margin at Wikipedia. Oil BargeVessel carrying oil with a capacity of up to around 10.000 tonnes. In the US, barges can be up to, and occasionally over, 15.000 tonnes in capacity.
Oil BarrelA volumetric unit of measure for crude oil and petroleum products. One barrel is 42 US gallons, 35 imperial gallons or 159 litres. There are roughly 7.33 bbl of crude oil to a tonne, but the precise conversion obviously depends on the specific gravity of the oil. Oil barrel at Wikipedia.
OPECOrganization of Petroleum Exporting Countries. A cartel of thirteen nations, headquartered in Vienna, Austria, (producing 45 percent of the free world’s crude production) acting in collusion to restrict crude production levels in the interest of higher oil prices. OPEC at Wikipedia. Opec website.
OptionA contract giving the buyer the right, but not the obligation, to buy or sell a given amount of an underlying asset at a fixed price per unit for a specified time period. A European option can only be exercised on the day on which it expires, whereas an American option can be exercised at any time up to, and including, the expiration date. Option at Wikipedia.
OTCOver the counter market (OTC). Opposite to trading over an exchange, the counterparties individually agree on the terms when trading OTC.OTC at Wikipedia.
PHAPaper Hedge Agreement. Financial tools for risk management with cash settlement. See our Hedging tools.
Physical ContractContract where buyer and seller agree to settle through physical delivery of the underlying asset following expiration.
PlattsPlatts, the world’s largest energy information provider, provides information and services to companies and individuals active in the fields of electricity, natural gas, oil, oil shipping, coal, nuclear energy and petrochemicals. Customers receive Platts news and market information services in real time. Platts price information is used as a price reference in swap agreements. Platts at Wikipedia. Platts website.
Put optionA right, but not an obligation, to sell the underlying instrument at the predetermined strike price. Put option at Wikipedia.
Risk ManagementRisk Management means having in place a corporate and systematic process for evaluating and addressing the impact of risks in a cost-effective way - along with the appropriately-skilled staff to identify and assess the potential for risk to arise. Risk management at Wikipedia. ShortThe act of selling a futures contract or holding an obligation to deliver a physical product. Traders are said to be “short” when they have contracted to sell more than they have contracted to buy. Short at Wikipedia.
Spot priceThe current value of a product. Spot price at Wikipedia.
SpreadThe difference between the bid (buying) quote and the ask (selling) quote, or the simultaneous purchase and sale of two futures contracts to capitalize on the anticipated fluctuations in the price differential between the contracts. See also arbitrage. Bid/offer spread at Wikipedia.
Strike priceThe agreed price where the buyer of an option holds the right to buy or sell the underlying asset at expiry. Strike price at Wikipedia.
SwapAn arrangement to exchange cash-flow between a fixed price and the average of a floating price on a predetermined commodity. The buyer of a swap secures himself against rising prices. See our example of Swaps.
Swap settlementThe cash settlement of the difference between the agreed fixed price and the average of the floating price for the predetermined commodity and period. See our example of Swaps.
TonneThe standard Platts abbreviation is mt. A tonne, or metric ton, is sometimes tautologically referred to as a metric tonne, and is defined as the weight of one cubic meter of water. Rough-and-ready barrel-tonne conversion factor is 7.33 barrels of crude to one tonne, but obviously depends on the specific gravity of the crude. Tonne at Wikipedia.
Value-at-Risk (VaR)A statistical measure of the maximum loss on the company’s positions within a given period with a given probability. VaR at Wikipedia.
ViscosityMeasure of a liquid’s resistance to flow. There are a number of viscosity scales in current use. Viscosity at Wikipedia.
Zero cost collarIn a zero cost collar, the call and put option levels are calculated to result in no premium payment. In other words the premium paid for the bought option is counterbalanced by the premium received on the sold option. See our example of Zero Cost Collars.
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