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NYMEX CALENDAR WTI CRUDE OIL

Fixed-Float Index Swap

Description:

The seller of a NYMEX calendar WTI crude oil fixed-float index swap receives a negotiated fixed price based on current forward NYMEX light sweet crude oil contract prices from the buyer, and in return agrees to pay the future Calendar Month Average of the prompt contract daily settles for the NYMEX Light Sweet Crude Oil Contract (the “CMA”) to the buyer. The swap generally settles in U.S. dollars 5 days after the calendar month ends, but the settlement day can be negotiated to match the cash flow from the physical sale of the crude oil.

Example

A crude oil producer has a contract to sell 10,000 barrels each month at the CMA. The producer wishes to guarantee their crude oil revenue from this volume for the next 12 months will be $600,000 per month. As a result, they enter into a NYMEX calendar WTI crude oil fixed-float index swap with ATB whereby each month they receive a negotiated fixed price of $60/barrel multiplied by 10,000 barrels from ATB. In return, they agree to pay ATB the CMA multiplied by 10, 000 barrels.

Risk Management Strategy

Graph: Distribution of Potential Revenue for the Next 12 Months

Entering into a fixed-float index swap is an effective risk management strategy when you want to bring a higher level of certainty to future revenue. In exchange for this certainty and eliminating the potential downside, you forfeit the potential upside. Using the same example as above, the following table and graph illustrate the impact of a fixed-float index swap hedging strategy on potential revenue for the next 12 months. In this example, we assume that the average forward price for NYMEX for next year is currently $60/barrel. In addition, we have determined based on historical volatility and the current forward curve that the 5% worst case for next year is that actual prices average $40/barrel and the 5% best case is that actual prices average $85/barrel. In other words, there is a 90% probability that the average forward price for NYMEX for next year will be between $40/barrel and $85/barrel.

Impact of Hedging Strategies on Potential Revenue for the Next 12 months

Hedging Strategy	5% Worst Case Revenue	Expected Revenue	5% Best Case Revenue
No Hedges	$4.8M (10,000 Barrels x $40 x 12mo.)	$7.2M (10,000 Barrels x $60 x 12mo.)	$10.2M (10,000 Barrels x $85 x 12mo.)
Hedge 50% of Volume	$6M (5,000 barrels x $40 x 12 months +5,000 barrels x $60 x 12 months)	$7.2M (10,000 barrels x $60 x 12 months	$8.7M (5,000 barrels x $85 x 12 months +5,000 barrels x $60 x 12 months)
Hedge 100% of Volume	$7.2M (10,000 Barrels x $60 x 12mo.)	$7.2M (10,000 Barrels x $60 x 12mo.)	$7.2M (10,000 Barrels x $11.50 x 12mo.)

Commonly used terms

(PDF - 472K)

To speak to our local traders directly, please contact:
	Rob Laird, Director	Rob Van Horne, Managing Director
	403-974-3582	403-974-3582
	403-815-1911	403-519-3950

	Deborah Polny, Assistant General Counsel	Rimas Siulys, Managing Director Market Risk
	780-408-7320	780-408-1960

	Derivative Settlements
	780-408-6456