Oil Swaps

Discussion in 'Economics' started by Hook N. Sinker, May 15, 2011.

  1. Oil Swaps

    I'm not familiar with oil swaps. Other readers might not be familiar with oil swaps either. I do not find any results when I search elitetrader.com for oil swaps. I'm curious about oil swaps. This is what I find:


    "both in the regulated futures market and on the larger unregulated over-the-counter swaps market, where private bets about the movement of oil prices take place.

    review of two decades of data compiled by the CFTC documents the boom in speculative trading amid rising prices. Until the 1990s, the ratio of speculative trades to trades made by commercial users of oil was tilted heavily toward users of crude. But from 1991 forward, the big financial players such as Goldman Sachs and J.P. Morgan Chase won exemptions that freed them from limits on how much they could speculate in futures markets.

    They became classified as commercial traders, as if they were an airline hedging price risks in jet fuel. The big banks needed to invest in futures contracts to hedge bets they made in the unregulated swaps market. And the government, in the tenth year of Reagan Republicanism, was happy to reduce regulations on markets. Oil "swaps" increased from $13 billion in the 1990s to more than $313 billion in July 2008 at oil's peak price, Greenberger said."

    OK so what are oil swaps?


    There are different kinds of oil swaps.

    "A swap enables oil end users to fix the purchase price of future oil consumption and thus minimize any exposure to rising prices."

    Basically, suppose the price of oil is $ 100 / barrel. A consumer of oil might buy a contract (a swap ) for the delivery of 100,000 barrels of oil per month at the fixed price of $ 100 / barrel. The other party to the contract buys oil perhaps at the market price - could be greater or less than $ 100 / barrel - and sells oil to the consumer. If oil price values decrease then the seller wins, if oil price values increase then the consumer wins.

    There are also participation swaps, spread swaps, extendable swaps, double-up swap, range swaps, cross-commodity indexed swaps.


    I wonder if the big wall street companies sold swap contracts to oil consumer companies about two years ago. Then oil price values increased. The big wall street companies were contracted to deliver at a fixed price, so they were losing money. To hedge the loss the big wall street companies bought oil futures contracts. If CFTC does not allow big wall street companies to take such large positions in oil futures contracts then what happens? Do they buy physical crude oil? Do they buy options? Perhaps they exit the swaps. What if they can't exit the swaps? What if there is a loss associated with closing the contracts? How big is the loss? Is the loss big enough to be a big problem? How big are these swap deals today? Is there a problem associated with these swaps?
  2. rosy2


    swaps are basically otc futures and spreads (basis)