Trading and Risk

Forward Curves, Part 2: Why Do Traders Need Forward Curves?

byYousuf Saghir

Energy trading companies need to know the current market price for all forward deals that were made on their trading desks so that they can properly evaluate every deal and generate a profit and loss (P&L) report and evaluate their risk exposure.

This current market price comes from the forward curve, which is normally owned and generated by the risk team, controlling or other middle office departments, and not by the front office, to prevent potential P&L manipulation by the traders.

In general, the forward curve is generated from the available forward prices.

On very liquid markets, like WTI or Brent crude oil, forwards are traded constantly for many months in the future. To build a forward curve for those products, one could simply extract the currently traded forward prices from a market screen.

But it’s not always that easy. In many markets, you don’t have the luxury of publicly available real-time data for the next 12 monthly forward prices that you would need to easily create a one-year forward curve.

This is where our product CurveBuilder comes into play.

These are some examples where a forward curve generation is more complicated and where we would need the help of math and formulas to generate a forward curve.

  • Trading for a certain product might be done OTC (“over the counter”) under bilateral agreements and not via a trading platform. Price data for those markets is provided by data providers, like Platts, who call market participants to get the latest price information of those markets. That data might have gaps or does not get published regularly.

In this case, one would need to work with interpolation to fill the gaps. And on days where the data was not published, the previous forward curve could be used.

  • A company has been trading crude oil futures on a market with much lower liquidity than the two major crude oil products Brent or WTI. This could be, for example, Nigerian crude oil. Most trading activity is happening on the first two forward months, but not beyond. How would we generate a forward curve for this market?

One solution could be to use a forward curve from a similar market (e.g. Brent) and extrapolate the forwards beyond the two available front months from the Nigerian crude oil market based on the shape of the Brent forward curve.

  • A company has a gas delivery contract that is priced based on a Rhine River oil price index, which is published monthly, but there is no forward market for those prices that could be used to create a forward curve.

In this specific case, the oil gets shipped down the Rhine River from Amsterdam, one would identify a strong price correlation between Amsterdam oil prices and the monthly Rhine River price index. A forward curve could be built by applying a mathematical correlation formula onto the existing Amsterdam oil forward curve to generate the forward curve for the Rhine River price index.

In our next blog on forward curves, we will discuss how CurveBuilder can manage these challenges.

Learn more about how Enverus’ CurveBuilder can revolutionize your forward curve management today.

Picture of Yousuf Saghir

Yousuf Saghir

Yousuf joined Enverus in 2021 and manages a portfolio of products. He brings more than 15 years of experience in trading, risk, regulatory and settlement, in both financial services and commodity industries. Yousuf works with a cross-functional team to enhance and grow our suite of market data and curve building applications to meet the challenging needs of our customers. Yousuf is responsible for the vision, strategy and roadmap of the DataManager and CurveBuilder applications.

Subscribe to the Enverus Blog

A weekly update on the latest “no-fluff” insight and analysis of the energy industry.

Related Content

Trading and Risk
ByChris Griggs

In the fast-paced world of energy commodity trading, staying ahead demands more than just raw data. Insightful, actionable intelligence allows you to forecast, plan and respond to global market shifts confidently.

Energy Transition
ByAshmal Dawoodani

This ETT covers EIRs recent report reviewing advanced nuclear technologies.

Trading and Risk
ByAl Salazar

Al Salazar of Enverus Intelligence® Research predicts rising crude oil and natural gas prices, driven by market dynamics, OPEC discipline, and seasonal demand. Learn more about the bullish outlook for Brent crude and Henry Hub natural gas prices.

Oilfield Services Operators
ByJose Neto

In the pursuit of capital efficiency, operators strive to continually improve drilling and completion performance, especially in the challenging landscapes of Canada's unconventional plays.

Energy Transition
BySmayan Sharma

The Inflation Reduction Act spurred a surge of project announcements and developments on the molecules side of the energy transition, creating numerous opportunities for capital deployment.

Enverus Blog - 6 reasons to attend Enverus’ 2023 EVOLVE Conference
Analyst Takes
ByAndrew Dittmar

In a significant move reshaping the U.S. shale landscape, ConocoPhillips has agreed to purchase Marathon Oil for $22.5 billion, marking a shift towards multi-basin operations and promising a robust future for shareholders with enhanced capital returns and increased operational scale.

ByMac Graham

The oil and gas industry is no stranger to uncertainty. Producers contend with a myriad of challenges – everything from supply chain uncertainty, geopolitical shocks, ROI demands from investors and an unpredictable policy environment – so it’s no wonder a...

Energy Transition
ByKevin Kang

The anticipated end of a two-year reprieve on solar panel tariffs from China coincided with unexpected tariffs on other energy transition-related sectors.

ByBryn Davies

Our twelve-member team embarked on the memorable Vltava Relay challenge, covering 360km in 35 hours, with 300 other competing teams.

Let’s get started!

We’ll follow up right away to show you a quick product tour.

Let’s get started!

We’ll follow up right away to show you a quick product tour.

Sign up for our Blog

Register Today

Sign Up

Power Your Insights

Connect with an Expert

Access Product Tour

Speak to an Expert