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NYMEX CALENDAR WTI CRUDE OIL

Sell Call Option

Description:

The seller of a NYMEX calendar WTI crude oil call option gives the buyer the right, but not the obligation, to receive the future Calendar Month Average of the prompt contract daily settles for the NYMEX Light Sweet Crude Oil Contract (the “CMA”) from the seller and to pay them a negotiated fixed price. In return, the seller of the call option receives a premium from the buyer immediately. In the money call options are automatically exercised and generally settle in the U.S. dollars 5 days after the CMA is published. However, both the premium and the option settlement 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 CMA. The producer wishes to receive an immediate cash payment of $50,000 each month for the next 12 months and in exchange is satisfied to receive no more than $700,000 per month in future revenue. As a result, they sell a call option to ATB, whereby each month they give ATB the right, but not the obligation, to receive the CMA and to pay a fixed price of $70/barrel multiplied by 10,000 barrels. In return, the producer receives a premium a $5/barrel multiplied by 10,000 barrels from ATB.

Risk Management Strategy

Graph: Distribution of Potential Revenue for the Next 12 Months

Selling a call option is an effective strategy when you want to receive an immediate cash payment and in exchange forgo the potential upside if prices increase beyond a certain negotiated amount. Using the same example as above, the following table and graph illustrate the impact of selling call options 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.))	$9M (10,000 barrels x $85 x 12mo. + net option value* (10,000 barrels x ($10) x 12mo.))

* Net option value is the expected value of the option less the original premium. 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	Corey (C.J.) Hilling, Associate Director
	403-974-3582	403-974-3582
	403-815-1911	403-804-9519

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

	Derivative Settlements
	780-408-6456