Essay About Prices Of Commodities And Saudi Arabia Chevron

Commodity Risk
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Commodity RiskCommodity risk is the risk that a business’s financial performance or position will be adversely affected by fluctuations in the prices of commodities. Producers of commodities, for example energy sectors, are primarily exposed to price falls, which mean they will receive less revenue for the commodities they produce. Our company will confront with such issue. Recently, the oil market is suffering from enormous plunge, nearly 20% this month. Continuous high volume output from the Middle East area and lately breakthrough in Iran issue have been trigger of the oil slump. The American energy revolution, meanwhile, has created a massive supply glut and the tepid global economy is depressing demand growth for oil. Chevron, as a producer of energy, will decrease sales revenue with falling price, thereby potentially decreasing the value of the company, leading to change in business strategy. However, we can use financial market instruments to manage commodity risk.Futures contracts   We can employ a short hedge to lock in a future selling price for an ongoing production of crude oil that is only ready for sale sometime in the future. Nowadays, Saudi Arabia Chevron has just entered into a contract to sell 200,000 barrels of crude oil, to be delivered in 3 months time. The sale price is agreed by both parties to be based on the market price of crude oil on the day of delivery. By the end of 07/28/2015, the Crude Oil Brent is 53.01/barrel. The price of crude oil futures for delivery in 3 months time is USD 53.86/barrel. We want to lock the selling price of 53.86/barrel so that our company get a short position in Brent Crude Oil FuturesCurrent Price53.01/barrelContract NameBrent Crude Oil FuturesContract Unit1,000 barrelsDeliver Price53.86/barrelActionSellQuantity200Scenario #1Drop 15%Future Price45.06Sale Amount200,000 Net sales9,011,700 Short Profit1,760,300 Total Gain10,772,000 Scenario #2Rise 15%Future Price60.96Sale Amount200,000 Net sales12,192,300 Short Profit-1,420,300 Total Gain10,772,000 Pros & ConsPros: The futures contracts are standard and can hedge risk without needing physical settlement. There is no counterparty risk as futures are settled through clearing house.