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.

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

energy-transition
Energy Transition
ByCarson Kearl

In a world where energy value can make up a small portion of the revenue stream from emerging business models, what else is at play? Enverus Intelligence Research® views effective energy transition business as taking advantage of two key additive...

field-representative
Intelligence Oilfield Services
ByErin Faulkner

Permitting information for oil and gas wells is one of the most readily available and least lagged pieces of data on industry activity, but it is often seen as a poor indicator of future drilling activity.

Enverus Press Release - Exploring falling rigs and rising production
Energy Analytics Minerals
ByEnverus

While horizontal drilling and hydraulic fracturing significantly enhance well productivity, they have had the opposite effect on the land department.

operators
Intelligence
ByJoseph Gyure, Editor, Enverus Intelligence

All seven regions covered by the Enverus Day Rate Survey saw rates rise sequentially for the second time in three months in January as confidence started to strengthen among U.S. land drilling contractors.

accurate-grid-forecastin
Energy Transition Intelligence
ByJoseph Gyure, Editor, Enverus Intelligence

Ørsted took a blade to its project pipeline, reducing its ambition to 35-38 GW of installed capacity by 2030 from the previous 50 GW.

ofs-blog
Intelligence
ByJoseph Gyure, Editor, Enverus Intelligence

SLB has reaffirmed its 2024 financial guidance, part of an effort by international oilfield services companies to reassure investors after the Saudi Ministry of Energy called off plans to increase its maximum sustainable capacity by 1 MMbo/d to 13 MMbo/d...

EV-parent-image-4
Analyst Takes Energy Transition
ByEnverus

Despite the relatively scant incentives for buying an EV in the U.S. compared to other countries, the U.S. Environmental Protection Agency (EPA) presented its plan in 2023 to tighten tailpipe emissions regulations.

Enverus Blog - Increase visibility and efficiency with OpenTicket Mobile digital field ticketing software
Trading and Risk
ByEnverus

Amid significant volatility in global energy markets, U.S. President Joe Biden’s decision to temporarily halt approvals for pending liquefied natural gas (LNG) projects seems to defy conventional trading wisdom. This audacious move has given rise to a variety of viewpoints...

Enverus Blog
Intelligence Trading and Risk
ByEnverus

In the ever-changing energy landscape, understanding market fluctuations, weather conditions and system resilience is paramount when factoring ideas for trading opportunities.

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

Get Energy Transition Research updates straight to your inbox by filling out the form below.

Sign Up

Power Your Insights

Connect with an Expert

Access Product Tour

Speak to an Expert