Surviving Energy Prices PDF
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SURVIVING ENERGY PRICES SURVIVING ENERGY PRICES Peter C. Beutel DISCLAIMER While this book discusses the use of futures, options, caps, and swaps, it is in no way to be considered an offer to buy or sell these or other instruments. These instruments involve substantial financial risk and should be used with the greatest caution and with the supervision of a trained professional. Neither the author nor the publisher is willing to assume any liability for losses that may be incurred through the use of any financial instruments. All the information in this book is believed to be reliable, but neither the author nor publisher can guarantee its accuracy. The availability of new and potentially better instruments may change our view on the efficacy of strategies outlined in the most recent copy of this book. Copyright ©2005 PennWell Corporation 1421 South Sheridan Road Tulsa, Oklahoma 74112 1-800-752-9764 [email protected] www.pennwell.com www.pennwell-store.com Managing Editor: Marla Patterson Production Manager: Julie Shank Book Designer: Wes Rowell Cover Designer: Ken Wood Library of Congress Cataloging-in-Publication Data Beutel, Peter C. Surviving energy prices / Peter C. Beutel. p. cm. Includes index. ISBN 1-59370-042-3 ISBN 978-1-59370-042-3 1. Petroleum products--Prices. 2. Hedging (Finance) I. Title. HD9560.4.B46 2005 332.64’4228--dc22 2004024888 All rights reserved. No part of this book may be reproduced, stored in a retrieval system, or transcribed in any form or by any means, electronic or mechanical, including photo- copying or recording, without the prior permission of the publisher. Printed in the United States of America 2 3 4 5 6 12 11 10 09 08 Beutel_iv.indd 1 9/19/08 2:24:18 PM DEDICATION My special thanks to Grant M. Holroyd for his painstaking work in editing and formatting this work. All my love and thanks to my mother and father. C ONTENTS PREFACE......................................................................................................ix INTRODUCTION............................................................................................. x S I–T P ECTION HE ROBLEMS 1 The New Volatility................................................................................................3 2 Understanding Hedging..................................................................................9 Example of Hedging......................................................................................13 3 Different Kinds of Risk....................................................................................19 Price or Directional Risk ................................................................................19 Basis or Differential Risk...............................................................................21 Availability or Supply Risk..............................................................................25 Volume Risk................................................................................................29 S II–T S : ECTION HE OLUTIONS D M H IFFERENT ETHODS OF EDGING 4 Wet Barrel Programs.......................................................................................33 Why These Points Are So Important.................................................................36 When to Use Wet Barrel Programs...................................................................38 5 Understanding Futures and Options...................................................45 Futures Contracts.........................................................................................48 Options on Futures Contracts..........................................................................62 Using an Exchange for Physical (EFP)...............................................................77 6 When to Use Futures and Options.......................................................81 Choosing Between Futures, Options, Caps, and Fixed-Price Programs.......................82 Ch00FM.ind 7 2/16/05, 9:56 AM Surviving Energy Prices 7 Bank Swaps and Inventory Financing...............................................89 8 Timing..........................................................................................................................91 Deciding Why and When................................................................................92 Different Types of Markets.............................................................................95 9 Fundamental Analysis.....................................................................................99 Which Fundamentals Are Important?..............................................................101 Weekly “Commitments of Traders” Reports......................................................106 10 Technical Analysis............................................................................................109 Technical vs. Fundamental Analysis................................................................109 Types of Charts..........................................................................................111 How Prices Are Made..................................................................................113 The Trend.................................................................................................114 Market Phases...........................................................................................118 Support and Resistance...............................................................................121 Tops and Bottoms.......................................................................................123 Patterns...................................................................................................126 Contrarian Indicators...................................................................................135 Relative Strength Index (RSI).......................................................................137 Open Interest and Volume............................................................................139 “Commitments of Traders” Reports................................................................140 11 Seasonal Tendencies and Market Psychology...........................143 Heating Oil...............................................................................................143 Trading Strategy........................................................................................144 Gasoline...................................................................................................150 Crude Oil..................................................................................................152 Psychological Markets.................................................................................153 12 Trading Adages, Good and Bad.........................................................159 Glossary...........................................................................................................................175 Index...................................................................................................................................185 viii ix Ch00FM.ind 8 2/16/05, 9:56 AM PREFACE Energy prices move constantly and often dramatically. As I am fin- ishing this book, gasoline and crude oil prices have reached their highest prices ever. The economy is growing today. But, ultimately, an improv- ing economy could push the prices for energy so high that they cripple or maim the growth that caused them in the first place. Since the 1970s, energy prices have had a very direct impact on the American economy. That is expected to be the case, at least to some degree, in future years. I have written this book in the hope that it can help educate a new generation of business people who have discovered, to their great hor- ror, that changing energy costs can have a gargantuan effect upon their company’s bottom-line. Even if one never intends to hedge, one should be aware of the elements that can affect the bottom-line. My company, Cameron Hanover, publishes a daily report on changing energy market conditions. Those who would like to learn more may call me directly at (203) 801-0771, or visit our Web site at www.cameronhanover.com. ix
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