Question

1. Explain the requirements for, and discuss risk management strategies for, crude oil and petroleum products import finance.

Answer 1

Requirements of crude oil and petroleum products import finance.

Crude oil is a liquid fuel source located underground. It is extracted through drilling. Oil is used for transportation, petroleum products, and plastics. Crude oil is a base component of transport fuel, plastics, chemicals, and petroleum products Brent, West Texas Intermediate, and Dubai/Oman are the most important benchmarks of crude oil.

* Oil is especially important to businesses that heavily rely on fuel, such as airlines, plastic producers, and agricultural businesses. Being such an important source of energy, crude is a major import and export of numerous countries.

* The importance of this commodity creates a vast financial trading market for oil and oil derivatives such as futures, forwards, and options.

Petroleum by products makes tar, asphalt, paraffin wax, and lubricating oils. It is also used in chemicals, such as fertilizer, perfume, insecticides, soap, and vitamin capsules. Oil is the base for plastics used in everything from heart valves to plastic bags. It's used in carbon fiber in aircraft, PVC pipes, and cosmetics. For example, it takes about 16 gallons of crude oil to produce a sofa. Around 40% of textiles contain some.

* It has been used as fuel for our transport, a fuel to generate electricity to light our homes, run factories and machines, a raw material to produce fertilizer to increase food production and produce plastic which is used in a wide range of things we use in daily life.

* Petroleum products include transportation fuels, fuel oils for heating and electricity generation, asphalt and road oil, and feedstock’s for making the chemicals, plastics, and synthetic materials that are in nearly everything we use.

* Petrochemical products are used to produce the entire spectrum of daily use items across various industries, including automotive, agriculture, textiles, construction, electronics and electrical, household items, medical appliances, packaging and pharmaceutical.

Explain the risk management strategies for crude oil and petroleum products import finance.

Crude oil hedging and risk management policy include more steps and process to follow. The process varies from one company to the next; the general, initial process is as follows:

Identify, Analyze and Quantify Your Crude Oil Risk

Identify all crude oil related risks including market, liquidity, operational, credit and regulatory risks. Once all risks are identified, they can be analyzed, categorized and prioritized. Many risks can be rigorously analyzed via quantitative and statistical analysis, while some risks have to be evaluated through a qualitative approach. Risks that are not properly identified and analyzed cannot be effectively managed or mitigated.

  Determine Tolerance for Risk and Develop Crude Oil Hedging & Risk Management Policy

All risks should be addressed through a process that establishes risk management goals and objectives as well as risk tolerance. A hedging and risk management policy can then be developed to formalize the goals, objectives and risk tolerance, and to clearly define the decision-making process and determine who (individuals and/or committees) executes hedging, trading and related activities.

Develop Crude Oil Hedging Plans and Execution Strategies

All potential execution strategies should be approved and documented. While the hedging and risk management policy addresses the pre-approved boundaries for managing risk, hedging and execution strategies are the detailed steps for implementing the strategies and complying with hedging and risk management policy.

Implementation

Risk management policies need to be supported by controls and procedures that ensure hedging and trading activities receive an appropriate level of oversight, such as the execution and reporting of trades. Controls and formal procedures can provide transparency that show how risks are being managed, on both a macro and micro level. The controls and procedures can include everything from written procedures to separating front, mid and back office activities to utilizing an energy trading and risk management software system.

Execution of Crude Oil Hedging Strategies

Once the previous steps are in place, the execution of hedging and trading strategies can begin. For most companies, execution and management of hedges should be a dynamic process, as opposed to a static process. As such, hedges should be constantly analyzed and if fits within the company's goals and risk management policy, the positions should be optimized if and/or when market conditions allow.

Monitoring, Analyzing and Reporting Risk

All risks, regardless of whether they are market, liquidity, operational, credit or regulatory, that are being actively managed should be continuously monitored, measured and reported through the company's energy risk management structure. As the company's risk exposure changes, there should be a systematic process for reporting and determining if the hedging policies or strategies need to change or if the existing policy and strategies are correct.

Repeat

While we've only identified six formal steps in the process, the "last" step is the most important: repeating the entire process as often as is necessary, regardless of whether it's as frequent as once a month or as infrequent as annually.

Risk management Strategies and Measures in petroleum products

Petroleum enterprise should improve risk management, establish risk prevention mechanism m and risk processing system with their own actual situations to make the efficient use of funds and optimize the industrial structure of petroleum and natural gas. At present, risk analysis of international petroleum enterprise has grown from a simple risk analysis method to risk evaluation system or risk management.

Risk awareness & Sense of crisis Oil - construction workers must have a high risk of consciousness and a sense of crisis, and analysis the various risks faced, and take a proactive approach to resolve risk and control risk. Once all employees establish the strong sense of risk, the enterprise can take rapid action when it is facing major unexpected event, which can greatly reduce the possibility of loss.

Fine management Quality control system - Petroleum operations should establish a strict quality assurance system and quality responsibility system, to clarify their respective responsibilities and strictly control all aspects. Petroleum enterprise should focus on monitoring the safety program development, implementation of risk identification measures, and the labor discipline at the job site to make the safety management further specification.

Core Technology - Core technology is the best indicator of core competitiveness of enterprise. For petroleum operations, the first of all, they should carefully select research projects combined with development of the industry to concentrate on research; secondly, they should study the new operating equipment and techno logy combined with the need for specialized construction

Highly-qualified personnel- In the daily management of the enterprise, it should establish the distribution system with responsibility, power and benefits, and the incentive mechanism for talent under which talented people can be put to the best use and be prepared for both promotion and demotion to promote competition. Strategies for retaining talented staff Petroleum enterprise has a strong talent pool, so it should focus on staff training, retain company’s talents, play the ability of company’s talents, which is the most realistic talent strategy for petroleum enterprise