Predicting the direction of future oil price movements is not an easy path. What does it take to manage financial risks for parties affected by volatile oil price movements? Ever since the 1980s, when the first petroleum financial derivatives started being traded on NYMEX and the International Petroleum Exchange (renamed ICE Futures in 2005),the set of petroleum product offerings available on these exchanges has been growing every year. The expanse and complexity of oil product derivatives available is overwhelming –some factors considered in each include futures and options for different shipping points, types of products, differentials between product groups and regions, data providers, and more. As an example of this complexity, just look at some of the derivative names currently traded on ICE:

  • Fuel Oil Crack-Fuel Oil 3.5% FOB Rotterdam Barges vs. Brent 1st Line future
  • Fuel Oil Diff-Fuel Oil 1% FOB NWE Cargoes vs. 3.5% FOB Rotterdam Barges Balmo future
  • Gasoil Diff-Gasoil 0.1% FOB Rotterdam Barges vs. Low Sulphur Gasoil 1st Line Balmo future
  • Platts Refined Diff-NYH Heating Oil 2:30 PM ET Settlement vs. Platts 3:15 PM ET 2nd Month Spread futures assessment

Somewhat intimidating, right? Just reading specifications is not going to help; you actually need an instruction manual to figure out what each derivative is about. Just think about it: this all started with one Brent crude futures contract. Over a 30-year period, oil futures trading has turned into a science of its own.

One way to begin evaluating future oil price movements is to stay attuned to geopolitical and technological trends. For example, in the last several weeks there have been interesting reports from oil exploration companies about their 2013 results. Some of these businesses experienced not-so-wonderful outcomes from their exploration efforts. Statoil and Shell admittedly faced a difficult year in exploring some areas of Alaska, Texas, and Africa. Regulatory delays, rebel armies, and remote, expensive, and hostile Arctic waters brought more pain than benefits for these organizations. Fears remain that these difficulties will be sustained throughout 2014. As a result, some oil exploration companies intend to curb exploration investments in frontier regions.

At the same time, oil drilling and production branches have been good for oil businesses’ bottom line. Improvements and enhancements to drilling and production technologies keep increasing oil production rates and suppressing costs. Similar to natural gas, the U.S. shale boom has had a large impact on the petroleum industry. Really, why would an energy company go through the difficulties involved in oil exploration when they can blast water through their backyard underground easily? Still, some concerns are already being expressed in regard to shale oil production costs…but this is a story for another time.

To read more about current oil market trends, view the full version of this article in the February issue of ZE DataWatch, ZE’s magazine for energy and commodity market participants.

ZEMA, ZE’s data management solution for oil market participants, helps market participants keep track of volatile oil futures price movements and manage risk. ZEMA already collects and stores over 650 reports on a daily basis relating to petroleum and other liquids. ZEMA also possesses a detailed library of analytical formulas to transform oil futures data into relevant analyses, including forward curves.  For more information, visit http://www.ze.com/the-zema-solutions/.