EOG Energy is a Texas-based oil company. It has agreed to sell 100,000 barrels of crude oil
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Question:
EOG Energy is a Texas-based oil company. It has agreed to sell 100,000 barrels of crude oil to a local refinery. The crude oil will be delivered on 23 May 2018. Both parties have agreed to use the WTI Cushing Price published by Platts on the delivery date to settle this transaction.
Assume that the current WTI Cushing price published by Argus is $60.50/barrel.
i) From EOG Energy's point of view, identify the price risk resulting from the proposed sale of crude oil in May 2018.
ii) Discuss how to use the WTI Futures and Put Options traded on the NYMEX to hedge the price risk identified in part a) of this question, noting the limitations of each as a hedging instrument.
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