FACTBOX-Ways of looking at the oil price 25 Feb 2010 13:41

Feb 25 (Reuters) - Investment bankers, oil executives, 
analysts and officials kick off from Thursday discussions on 
factors affecting oil prices, at a two-day workshop in Tokyo 
organised by the International Energy Agency (IEA) and several 
Japanese agencies. 
    The global economic recovery and the winding down of 
government stimulus programmes are among the biggest tests for 
the oil market, which experts will weigh at the meeting. 
    The debate over how speculation and fundamentals affect oil 
prices continues to rumble, although it is less intense now that 
crude <CLc1> has largely traded in a $70-$80 range since October, 
versus the record high near $150 a barrel in July 2008. 
[ID:nSGE61N012] 
    One reason for oil keeping its strength -- after falling 
towards $30 in December 2008 -- has been a decision by the 
Organization of the Petroleum Exporting Countries to keep its cut 
of 4.2 million barrels per day (bpd) in production since 
September 2008. 
    However, OPEC's compliance with the target has fallen from 
historic highs of around 80 percent to around 60 percent now as 
the oil price has steadied. OPEC next meets in Vienna on March 17 
to reconsider policy. 
     
    MARGINAL COST 
    The marginal cost is how much producers have to pay to 
extract more difficult oil, such as from the oil sands in Canada. 
    In line with the Saudi assessment of the marginal cost, 
Iran's OPEC governor Mohammad Ali Khatibi said some high-cost oil 
projects cost $70-$80 a barrel and if the price of oil continued 
to fall, investors would withdraw from them. 
    Many projects have already been postponed. 
    London-based analysts Bernstein also put the marginal cost at 
around $75-$80 a barrel for oil. 
    Increasingly, the cost of producing biofuels and nuclear 
energy has also been taken into consideration. 
    A study by the Nuclear Energy Agency and the International 
Energy Agency published in 2005 found nuclear energy was 
competitive when oil cost $40-$45 a barrel. 
    Since then oil prices and electricity costs have risen 
strongly and analysts estimated nuclear power was competitive 
when oil was at $70 a barrel. 
     
    OPERATING COST 
    The cost of operating fields once they are already onstream 
has been estimated to be around $50 a barrel. 
     
    BUDGET ASSUMPTIONS 
    Oil-producing nations have historically assumed very 
conservative prices for a barrel of oil when setting budgets, 
allowing for some slack in their spending should prices fall. 
    The price of oil averaged nearly $100 in 2008 and averaged 
around $62 in 2009. 
    Data from Washington-based PFC Energy last year showed Saudi 
Arabia needing oil prices to average $51 a barrel to break even, 
compared with $43 a barrel in 2008. 
     
    OIL COMPANY ASSUMPTIONS 
    Like oil-producing countries, international oil companies 
also make price assumptions that underpin their production 
sharing contracts with governments around the world and are used 
when assessing projects. 
    Total <TOTF.PA> has said it based its projects on oil at $80 
a barrel. BP'S <BP.L> oil price assumption is between $60 and $90 
a barrel. 
     
    FAIR VALUE 
    Fair value is a notional price taking into account only 
supply and demand, cutting out any speculative element. 
    It ignores factors such as the danger of conflict in 
oil-producing nations, currency effects and fund flows in and out 
of oil. 
    Estimates of what is the fair value of oil abound, but some 
players have said a fair price would be closer to $75 a barrel. 
    OPEC ministers in the past repeatedly said prices were 
inflated by speculation and that the price slide from a record 
hit in July 2008 in part reflected the departure of speculators. 
     
    INFLATION-ADJUSTED 
    In inflation-adjusted terms, the July 2008's record price was 
well above the previous record high of $105.95 set in April 1980, 
after the Iranian Revolution in 1979. 
    That level was first breached in March 2008, according to the 
International Energy Agency (IEA). It bases its calculation on 
monthly prompt U.S. crude and U.S. consumer price data as U.S. 
futures trade did not exist in 1980. 
     
    BENCHMARK 
    The price of U.S. light sweet crude is a benchmark used for 
pricing other crudes. North Sea Brent futures <LCOc1> are the 
other main international marker. 
    The most expensive crudes in the world, notably Nigeria's 
Pennington or Malaysian Tapis, command a premium to the 
benchmarks as they have low sulphur content, making them easy to 
refine to produce high yields of gasoline and other light fuels. 
    At the other end of the scale, heavy Iranian crudes Soroush 
and Norouz are sold at steep discounts to Brent crude. 
    To see a TABLE on the oil price OPEC members need please 
click on [ID:nLDE5BG18P] 
 (Compiled by Barbara Lewis, Simon Webb and Tokyo Energy Desk; 
Editing by Ramthan Hussain) 
 ((barbara.lewis@reuters.com +44 20 7542 2637; Reuters Messaging: 
barbara.lewis.reuters.com@reuters.net)) 
  
 

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FACTBOX-The top 10 country holders of gold reserves 18 Feb 2010 14:54

 SINGAPORE, Feb 18 (Reuters) - The International Monetary Fund 
on Wednesday said it would shortly begin selling 191.3 tonnes of 
gold in the open market under a program approved last year to 
boost its resources for lending. [ID:nSGE61H00R] 
    The open-market sales are a part of a programme launched last 
year and, until now, gold has been made available to central 
banks on a first-come-first-serve basis.  
    So far, India -- the world's biggest consumer of gold -- 
Mauritius and Sri Lanka have purchased a total of 212 tonnes of 
gold from the IMF. 
    The IMF announced last year it would sell 403.3 tonnes of 
gold, about one-eighth of its total stock, to diversify its 
sources of income and increase low-cost lending to poor.     
    For a graphic of gold as a percentage of total reserves for 
the top holders by country, see: 
   http://graphics.thomsonreuters.com/0210/GLD_TPHLD0210.gif 
    The 10 countries with the highest levels of gold holdings by 
December 2009 (in tonnes): 
     
               Dec 2009    March 2009      % of reserves 
All countries   26,780.0      26,349.4         10.2 
United States    8,133.5       8,133.5         68.7 
Germany          3,407.6       3,412.6         64.6 
Italy            2,451.8       2,451.8         63.4 
France           2,435.4       2,487.1         64.2 
China            1,054.0       1,054.0          1.5 
Switzerland      1,040.1       1,040.1         28.8 
Japan              765.2         765.2          2.4 
Netherlands        612.5         612.5         51.7 
Russia             607.7         523.7          4.7 
India              557.7         357.7          6.4 
     
 The percentage of reserves is as calculated by the World Gold 
Council. The value of gold holdings is calculated using the 
end-October gold price of $1,040 per troy ounce. 

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FACTBOX-Hedging instruments used by AsiaPac airlines 10 Feb 2010 18:00

Feb 10 (Reuters) - Asia's largest airlines that fly 
international routes, such as Singapore Airlines <SIAL.SI>, 
Cathay Pacific <0293.HK> and Qantas <QAN.AX>, hedge their fuel 
requirements, but most still do not. 
    Those who do have rigid safeguards, such as limiting the 
volumes hedged each time and maintaining a tight deadline for 
risk managers to do so, mainly to protect against unauthorised 
speculation. 
    SIA, for example, has a policy of requiring risk managers to 
put in place a hedge position within five days, sources said. 
    Airlines use a variety of instruments to hedge their 
exposures, such as Over-The-Counter Swaps, Futures and Options, 
on jet fuel, gas oil (diesel) or crude oil swaps and futures. 
    For related analysis click on: [ID:nSGE60I04Q] 
    For related factbox on JAL's hedging losses, click on: 
    [ID:nSGE60U01U] 
     
    * OPTIONS 
    - One of the most commonly used instruments is the Option, 
which gives users the right, but not the obligation, to buy fuel 
at a pre-determined future price. It provids protection against 
prices rising to unmanageable levels, at a relatively low cost. 
    Most airlines, who are natural buyers of options, do so at a 
pre-determined price, known as a Call option, at a cost called a 
premium, which is a fraction of the actual contract price. 
    The reverse, that is to sell a contract at a pre-determined 
price, is called a Put Option. 
    If prices hit or cross the pre-determined level, airlines 
will activate the option to buy fuel at that price, regardless of 
how much higher prices rise. The counterparty, normally a bank, 
will pay the difference between the strike price and the market 
price at the time. 
    - SIA said it has hedged 22 percent of its fuel consumption, 
or about 3.5 million barrels of jet fuel, at an average of $100 a 
barrel versus current prompt jet swap price of $75.00-$85.00. 
    - Some airlines prefer the more sophisticated "Zero-Cost" 
option, in which they need not pay the Option premium as long as 
the contract stays within a pre-determined price range. 
    In this case, the airline buys a Call Option at a certain 
premium and sell a Put option at the same premium value. 
    As long as prices stay within range of their Put and Call, 
they do not incur any cost on the Option, making it an attractive 
hedging tool. 
    If prices rise above the Call, the buyer is "in-the-money" 
and makes the price difference and the price of the premium from 
the counterparty.  
    If prices for below the put, the reverse is true, that is, 
the buyer will have to pay the premium and make up the difference 
in price to the bank. 
    - However, most banks impose a "Knock-in, Knock-out" clause, 
where they pre-determine a certain loss ceiling and after which 
they can exit the contract. 
    But the same does not apply to the airlines and they would 
have to either ride a money-losing contract till expiry or sell 
it at a loss. 
    "The Zero-Cost option looks attractive but, in reality, it 
provides only limited insurance and has unlimited risk," said 
Clarence Chu, a trader with Hudson Capital. 
    - When the market was volatile in second-half 2008, most 
airlines lost money on physical jet fuel cargoes versus the 
relatively thin volumes that they hedged when crude benchmarks 
were on the way up to above $140. 
    When prices dived to below $40, they were unprotected on 
downside of their Zero-Cost Options. 
    Worse, some kept doubling their exposures down by buying more 
Zero-Cost options at lower price ranges, hoping to mitigate 
earlier losses, as prices spiral downwards.  
    But they end up incurring more losses as crude continue its 
freefall all the way to below $40.. 
    "There is no such thing as free money and the banks are not 
there to make money for you," an industry source said. 
     
    * SWAPS/FUTURES 
    - The other option for airlines is to hedge by buying 
Outright forward crude, or jet fuel swaps or futures.  
    This locks in their fuel exposures at a fixed price, in which 
they usually take the contract to expiry and settling the 
difference between the contract price and the month-average cash 
levels as at the expiry date. 
    - However, the settlement typically involves larger sums of 
upfront cash and liquidity in the jet fuel market can sometimes 
be quite thin. 
    "The main drawback on hedging directly on swaps is that it 
requires more upfront capital because you are dealing with the 
entire outright price of the contract, unlike options where you 
are dealing with a premium cost," another trader said. 
    "For an airline with large volumes, the amount of capital 
required would be huge and quite undesirable." 
    - Some airlines, particularly more sophisticated Western 
carriers, conduct their own hedging with the open market on both 
swaps and options. 
    None in Asia currently do so on the perception that they 
could be speculating. Other hindrances are cost and logistics 
constraints such as building credit ties with counterparties 
other than banks, such as physical traders, and incurring 
exchange fees and maintaining trading margins. 
 (Reporting by Yaw Yan Chong; Editing by Ramthan Hussain) 
 ((yanchong.yaw@thomsonreuters.com; +65 6870 3851; Reuters 
Messaging: yanchong.yaw.reuters.com@reuters.net)) 
 ((If you have a query or comment on this story, send an email to 
news.feedback.asia@thomsonreuters.com)) 
Keywords: AIRLINES HEDGING/ASIA TOO

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