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NYMEX CALENDAR WTI CRUDE OIL

Producer Three Way

Description:

A NYMEX calendar WTI crude oil three way is the combination of buying a crude oil put option and selling a crude oil call option and a further out of the money put option. The premium required for buying a three way will depend on the strike prices for each of the options and the related forward market prices for crude oil. In the money three ways are automatically exercised and generally settle in U.S. dollars 5 days after the calendar month ends. However, both the premium and the option settlements may be deferred 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 Calendar Month Average of the prompt contract daily settles for the NYMEX Light Sweet Crude Oil Contract (the “CMA”). The producer wants their crude oil revenue from this volume for the next 12 months to be at least $550,000 per month and in exchange will be satisfied to receive no more than $700,000 per month. The producer is also willing to give up some of their downside protection if prices drop below $50/barrel. As a result they enter into a three way with ATB. Each month they have the right, but not the obligation, to receive a fixed price of $55/barrel and pay the CMA multiplied by 10, 000 barrels. In exchange for this option they give ATB the options to receive the CMA and to pay the fixed price of $70/barrel or to receive $ 50/barrel and pay the CMA multiplied by 10,000 barrels.

Risk Management Strategy

Graph: Distribution of Potential Revenue for the Next 12 Months

A three way is an effective risk management strategy when you want to reduce the potential for a decline in revenue due to falling prices and in exchange are willing to both forgo the potential upside if prices increase beyond a certain amount and reduce the downside protection if prices fall below a certain amount. Using the same example as a above, the following table and graph illustrate the impact of a three way 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 100% of Volume	$5.4M (10,000 barrels x $40 x 12mo. + net option value* (10,000 barrels x $5.00 x 12mo.))	$7.2M (10,000 barrels x $60 x 12mo. + net option value* (10,000 barrels x $0 x 12mo.))	$8.4M (10,000 barrels x $85 x 12mo. + net option value* (10,000 barrels x ($15) x 12mo.))

* Net option value is the expected value of the option bought less the expected value of the options sold. The impact of the option is illustrative only.

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