Using derivatives to forecast oil scenarios

Generating probability-weighted oil price scenarios from traded derivatives prices can help risk managers in the industry

Most energy companies have official oil-price scenarios for decision-making purposes, and every interested executive has their favourite methodology for generating possible patterns of future spot prices. 

These methodologies range from the qualitative, often outsourced, ‘expert assessments’ to semi-quantitative global oil market models and highly quantitative time series models; the latter extrapolating future price paths from past price behaviour and any number of non-price variables such as storage and macro indicators. Oil-price scenarios enable pro forma balance sheets and income statements, capital budgeting, project finance, bank oil loan evaluation, risk assessments, valuation, contract structuring and hedging decisions. 

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