PROGRAM DETAILS

Introduction

A critical component of decision-making in the energy industry deals with the aspect of “Whither oil prices?”:  Where do we expect prices to move in the near- and distant-terms?  Participants in the Energy Industry are constantly confronted with a wide range of information regarding current and prospective prices in their industry.  Broadly, this data comes from analyses of supply-and-demand changes, geopolitical events and the financial markets, including the commodity markets.

While providing the requisite background on the economics of financial commodity markets, as well as the statistical tools required to understand them, this training demonstrates how the financial and commodity markets provide useful information for the generation of “expected prices,” or forecast prices, in the critical areas of oil, natural-gas and refined products.  In doing so, this  course will demonstrate the important distinction between valuation and risk/return analyses.

 Learning Objectives

 Participants attending the programme will:

• Use financial models to analyze and forecast energy prices; extrapolate forward prices beyond the liquidity tenor
• Understand the risk of and return from futures and options contracts on energy commodities
• Manage and optimize their corporations’ energy risk exposure
• Estimate expected returns and calculate volatility in energy prices
• Obtain a comprehensive understanding of the financial-economics techniques used to forecast prices
• Apply option valuation techniques to the energy markets
• Utilize real options theory to value energy assets; use information from futures/option prices to make optimal production decisions: Optimal timing for extraction, optimal rate at which to extract oil (gas) from a field; value oil fields, pipelines and storage facilities, power plants

Target Audience

This training course is suitable to a wide range of professionals but will greatly benefit: 

• Financial analysts
• Quantitative analysts or researchers
• Energy traders
• Risk Managers
• Commercial and investment bankers dealing with commodities
• Government and regulatory officials with responsibilities for the energy sector

 Training Methodology

The programme will be interactive and practical. There will be work in groups exercises and everyone will get an opportunity to discuss subjects and raise questions.

A highly interactive combination of lecture/slide presentations, discussion, and short videos sessions will be managed by the trainer. He will try to maximize the amount and quality of information by knowledge and hands-on experience transfer.

The participants will also be encouraged to raise more of their own questions and to share developing the right solutions using their own analysis, observations and experience.

There will be a pre-test to know the participants awareness on subject and accordingly the trainer will shape/tune the programme to suit them best.  A post-test will be conducted after the completion of training to evaluate effectiveness of learning.

Program Content

 Day 1: The Current State of the Equity & Commodity Markets 

• Measuring Nervousness/Uncertainty of Equity and Commodity Markets
• The Crude-Oil Markets: Level and Slope of Crude-Oil Futures Markets; Impact of Economic, Financial and Geopolitical Events on Implied Volatilities in the Crude-Oil Market
• Impact of Seasonality on Global NatGas Markets
• Future Inflation Rates
• The Refining Spread and Retail Gasoline Prices
• The Domestic NatGas Market: The Impact of Seasonality

 Day 2: A Primer on the Interest-Rate Markets 

• Financial Markets’ “Message from Markets”; Interpret bond-market moves in conjunction with those in equity markets
• Empirical Regularities of Global Fixed Income Markets
• Understanding the fundamentals of bond valuation
• Eurodollar Futures and Interest Rate Swaps
• Duration and Convexity; Hedging interest rate exposure
• Interest-Rate Volatility
• Forecasting future interest rates using
  • A financial-economics approach
  • Practitioners’ approaches

Overview of Statistical Concepts 

• Basic Statistical Concepts: Average and Volatility; Stationarity of Time Variables
• Regression Analysis
• Using Solver to Solve Constrained Optimization Problems

Day 3: Forward, Futures and Swap Contracts in Energy Markets

• Fundamentals of Forwards and Futures Contracts: Definition, Payoff Diagram, Pricing by Arbitrage
• Forward/Futures Prices and Forecast Prices
• Commodity Swaps
• The Key Difference between Real-Asset Valuation and Expected Value

Option Pricing 

• Payoffs and Put-Call Parity
• Black-Scholes Formula
• Option “Sensitivities” (the “Greeks”); Delta and Gamma
• The Binomial Model and the Valuation of American-Style Options
• Real Options in Energy Markets: Power Plants as a Strip of Spark Spread Options; Oil Fields as the Valuation of an Extraction Option

Day 4:  The Statistics of the Price Processes in Energy Markets

• Historical Volatility; The Term Structure of Volatility (TSOV)

• Estimating Volatility from Market Prices of Options in Energy Markets
• Historical or Implied Vols?
• Estimating a Mean-Reverting Process
• Characterizing the Volatility “Surface” Across Time and Strike
• Jump-Diffusion Process
• The Need to Extrapolate in Energy Finance: Valuation of Long-Dated Real Assets and Financial Structured Products; Extrapolating Crude-Oil Prices; Extrapolating Natural-Gas Prices; Extrapolating the Term Structure of Volatilities (TSOV); Extrapolating Correlations

Day 5: Forecasting the Prices of Oil, Natural-Gas and Refined Products 

• The “Market Price of Risk”: Estimating a Risk Premium in Finance, and Applying it to Energy Prices

• How Can Use Regression Analysis to Fortify Our Understanding of Financial Markets’ Perspective on Forecast Prices?
• Where Can We Observe Forecast Prices?
• What is the Difference between Futures Prices and Forecast Prices?
• What is the Capital Asset Pricing Model (CAPM) and How Can We Use it to Forecast Oil Prices?
• Applying a Jump-Diffusion Model to Oil Futures Options
• Using the Market Price of Risk to Implement Risk-Management from a Corporate Perspective