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Describe the Oil and Gas Industry by Addressing the Following Points

Autor:   •  February 9, 2014  •  Essay  •  255 Words (2 Pages)  •  694 Views

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1. Describe the Oil and Gas Industry by addressing the following points

a. What were price movements from 1988-1990 a result of?

Prices during this time period were under heavy regulation, this was the case ever since the Natural Gas Act of 1938 was enacted. During 1988 and 1990, it was clear that this regulation would have to diminish. Rising prices during this time resulted in some of the demand to drop off. This caused an excess in supply of Natural Gas, and customers sought to purchase their gas from producers and not from directly from the pipelines.

b. What were price movements from 1990-1994 a result of?

Price movements during this time were a result of the deregulation of the Oil and Gas industry that came about with the passing of the Natural Gas Decontrol Act of 1989. This included the complete deregulation of wellhead prices.

c. What are contango and backwardation?

Contango is when the price of futures is above the expected future spot price. This implies that futures prices are falling as information comes to the knowledge of the investor. Backwardation is the opposite, when the price of futures are below the expected price. Normal Backwardation is when the price of futures are increasing.

http://www.investopedia.com/articles/07/contango_backwardation.asp

2. Describe a Stack-and-Roll Hedge

a. In detail provide a description of a stack-and-roll hedge, an example may be useful

A manage will choose to hedge their exposure in an upcoming contract. As the upcoming contract approaches maturity, the manager “rolls” the hedge by closing the contract and reestablishing the hedge under a new contract in the next period.

b. When are they commonly

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