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Articles tagged with: Crude Oil

23 March 2023

Continuous Contracts for Physical Commodity Traders

RiskAPI has historically provided multiple methods for accessing continuous, back-adjusted futures contract data. These include multiple notations for creating complete time series composed of mathematically combined, discrete contract data sets. Users have had the option to back-adjust this data using arithmetic or proportional roll-date price differences.

Continuous futures contracts combine all intra-year individual contract time series data into a single, uninterrupted set of data, allowing users to perform analysis on long term histories that do not exist due to a lack of trading data for individual monthly contracts. Data from each individual contract is mathematically combined, with each series being combined at a "roll-date" preceding the expiration date of the contract.

For most speculators, these notations work well since they rarely hold a physical commodity contract to expiration. Doing so would result in either a) accepting delivery of the underlying physical commodity (long position) or b) facilitating the delivery of the underlying physical commodity (short position). However, for physical traders and real hedgers, holding a contract to expiration is desirable and is done explicitly to take advantage of the delivery features of a physical commodity contract. Typically, periods just prior to and up-to physical commodity futures expiration contain higher volatility due to the price and liquidity dynamics involved in the expiration/delivery process. Risk managers of physical commodity trades therefore wish to capture this additional volatility in their analysis.

RiskAPI now includes two additional futures contract symbol notations allowing users to employ continuous contract data with discrete contracts joined (or "rolled") at each contract expiration date. The resulting continuous data set, therefore, also incorporates the unique price dynamics inherent to delivery and expiration.

Continuous contracts rolled at expiration can be accessed by a simple combination of an "E1-E20" suffix or "P1-P20" suffix. For example, the symbol "CLE3" represents the 3rd continuous CME WTI Crude Oil contract, with individual monthly contract data joined and rolled at each respective contract expiration date. To avoid introducing artificial volatility due to price differences at the roll dates, data is back adjusted using arithmetic differences between each contract at the roll dates. Using the format "CLP3" instead will produce an analogous data set, with the back-adjustment using proportional (i.e. percent) differences between the contracts at each roll date.

29 November 2022

Current Nat Gas & WTI Intra-Curve Correlations

With winter in the northern hemisphere approaching, temperatures are cooling and those looking to hedge exposure to the energy markets keenly observe the behavior of both the Henry Hub Natural Gas and WTI Crude Oil curves

Using the RiskAPI Add-In, a one-year, daily correlation matrix is generated on the NG curve, starting at the current front month and going out a full calendar year:

 

 

Similarly, a daily correlation matrix for the WTI curve is also generated:

 

 

Note that values shaded in green show larger correlation and values shaded in red show smaller correlation.

06 March 2020

Market Risk Effects from Coronovirus II

The recent spread of covid19 has also seen rapid changes in asset/sector correlations:

This is a matrix representing the return correlation across multiple assets (Gold, WTI Oil, US 10-Year Rates, US Equity Markets and multiple market sectors; healthcare, utilities, banks, and energy) through Feb 20.

Here is the same matrix through March 5th. Note the higher correlations across all assets other than Gold.

To emphasize the point, the above shows a rolling average matrix cross correlation, showing the average pairwise correlation increasing since the covid19 epidemic hit Western Europe.

All calculations are as of 3/5/2020, executed on daily data since 12/31/2019.

The results above were calculated using The RiskAPI Add-In, our unique software client which allows fund managers to access a whole spectrum of on-demand portfolio risk analysis calculations.

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