Question about hedging a cargo
I'm trying to completely understand the mechanics of oil and gas hedging, and am somewhat caught up on the reason to hedge and how hedges are actually made. I'll start with an example.
Let's say a merchant trader buys 2 million barrels of crude from a producer FOB. Now that you are long physical barrels, is the typical hedging strategy to sell WTI/Brent futures contracts in the month of expected delivery? A few other questions:
- Why can't/doesn't the trader lock in a price with a buyer before moving the cargo to its destination? Do contracts generally specify that the buyer will pay the cash price of crude at the time of delivery?
- If the buyer is paying the cash price for the barrels, what happens if there's a change in cash prices at the place of delivery that doesn't correlate with the futures contract you've shorted?
- What percent of the time are barrels bought without a destination being known?
If I'm totally off on my thinking of hedging strategies, please let me know.
Hi asdfgfdewsdcdewsx, any of these topics helpful:
Hope that helps.
marcellus_wallace Tupac I've seen you guys answer a hedging related question before, I'd love to hear your perspective on this
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