Important Facts About the Oil and Gas Industry

The oil and gas industry is one of the considerably changing and most important global industries all over the world. Oil and gas both are obtained from under the surface of earth. These energy sources are considered as the most useful natural resources.

The industry has touched every sphere of human life. With the arrival of technological development and explorations, the demand of gas and oil industry is increasing at a rapid pace. Around 60 to 70 percent global economic growth depends on this industry. Oil and gas are expected to remain the leading energy resources for decades to come.

The industry uses the following processes:

· Exploration process is involved in the formation of oil and gas

· Entire production and development of crude oil or natural gas

· Transportation

· Retailing and end users

Every industry has its unique challenges, terminology and methodologies. This industry includes both offshore and onshore energy sectors located in various parts of the globe.

Oil and gas industry typical applications

· Distribution of the fuel

· Wellhead control on Sub-sea

· Research on renewable resource

· Proper management of asset

· Conversion of Advanced protocol

· Downhole submersible pump monitoring and pressure temperature gauges

· Flow metering on Multi-phase (gas, oil, sand, water)

The oil and gas industry establishes the course to explore the oil well at the right locations and dig out gas and oil effectively. These sources are found deep inside the earth and proper procedure must be carried out at the specific location. The entire process involves a lot of money which is the major reason for the price hike in this industry. The prices of the oil and gas can be controlled somewhat by lowering production cost.

There are some major companies which are dealing in this industry such as Shell, BP, ConocoPhillips, Chevron, Total S A and ExxonMobil. Russia, USA, Iran, China, Russia are the major producers of oil all over the world.

There are several numbers of companies which are spending billions of dollars to maintain and increase the production and development of oil & gas. Maintaining the exploration process in an apt manner is very important for the growth of oil & gas industry.

These days, this industry is setting up some new policies and technologies to meet the upcoming demands and deal with the environmental issues. Production and exploration companies especially focus on finding hydrocarbon reservoirs, gas wells and drilling oil and selling and producing these materials. This entire process comes under the category of upstream gas and oil activity.

How to Trade Bonds and Bank Bills

Bank Bill Rates and Government Bonds

As well as stock trading, it can be useful to consider trading fixed income securities such as bank bills, government notes and government bonds (e.g. US Treasury notes and bonds). The difference is that bank bills have a maturity of less than one year, government notes are between one and ten years, and government bonds are greater than ten years. The definitions of each can be found externally, but when trading a futures contract over them, their coupons etc become less relevant.

Bank Bill Rate

The first important thing is why the price that you see in your trading screen is what it is. Bank bills are quoted as 0.95 (or 9550), and this is because the expected interest rate when that futures contract expires is 5% (one minus the price quoted in the screen equals that expected rate). So if rates are currently 4%, and the futures expiring next month are priced at 0.9575, traders expect interest rates to rise to 4.25% upon the next announcement (rates are normally increased or decreased 0.25% at a time). An overview of bank bill futures may look like this:

Expiry month

Price

Implied rate

Explanation

February

0.961

3.9%

Slight chance of cut from 4% to 3.75% in Feb

March

0.965

3.5%

Two rate cuts expected by March

June

0.96

4%

Rates to be back to 4% by June

September

0.958

4.2%

Good chance of rate rise to 4.25% by September

December

0.955

4.5%

Two rate rises by December

Government Bonds

Government notes and bonds are also traded through futures contracts, and their price is dependent on their current yield to maturity (rather than current interest rates). To some extent, the yield reflects the average interest rate over the life of the bond. The futures contracts still expire periodically, but these can be rolled over (replaced with a new contract), unlike bank bills where the price does not change in between the interest rate announcement and the expiry of the contract later that month. With the bank bill, you would simply purchase a new contract expiring in a future month, and trade based on how you think interest rate expectations will change in between now and the next announcement.

The prices of all of these contracts rise when interest rate expectations fall, i.e. during recessions with low inflation, and the prices fall when expectations rise, i.e. during periods of strong economic growth and higher inflation. This inverse relationship between prices and yields is the most important thing to remember when trading them. Additionally, the longer the note/bond has until maturity (e.g. 20 or 30 year bond), the greater the change in interest rate expectations will change the price. This means that 30 year bonds change the most when economic data changes rate views, and one year notes change the least. This is known as duration, which is a topic that can be explored in-depth at another time.

Trading these interest rate securities can be based on whether interest rates will be held/cut/raised, economic data will be good/bad or whether a sudden surge of demand will force prices to increase. They offer, as their name suggests, far better exposure to rate changes and expectations that stocks do, and should therefore be considered in most trading portfolios.

Hedging Your Floating Rate Mortgage

Can you hedge your mortgage rate?

So you've gone for the floating mortgage rate. Seems cheaper at the time, right? In Australia, floating mortgage rates are around 6.6% and 7.6% for a fixed mortgage rate. Over in the US, the mortgage rates are more like 2.6% for a floating mortgage rate and 3.6% for a fixed mortgage rate. Firstly, yes us Australians appear to get a raw deal, and should move overseas. Everything about the cost of living in America has convinced me of that. But secondly, it doesn't take long (potentially just a few months) for your new floating mortgage rate to be equal to the fixed mortgage rate when you originally signed up.

There is no foolproof way of hedging your floating rate, and ensuring that your lower, starting rate is locked in for life. If there was, it wouldn't be offered to you. However, there are a couple of things that you can do in order to help to protect yourself from any future rate rises that are decided upon by those that already claim your taxes and jobs (for those public servants). They both involve trading products, and an element of risk, but can significantly cancel out rate rises if the maths is done correctly. Note that you would be trading futures over these products, meaning there are no coupons etc, just a capital gain or loss each day.

Mortgage Rate Hedging Strategies

1. Short sell government bonds with the same maturity as your mortgage. The price of fixed income securities, such as bonds, decreases as the interest rate associated with them rises, and the interest rate should track your floating mortgage rate, just always be a certain percentage lower. Your job is to calculate how much more your repayments will be if mortgage rates rise 0.25%. This is the amount that you want to 'profit' when the bond price falls as interest rates increase - the higher mortgage rate repayments should be offset by the profit made by shorting bonds, and if rates don't change, neither should the bond price. For those who are unsure, short selling means selling something first and buying it back later, hopefully at a lower price, therefore profiting from the fall in price.

2. Short sell bank bills around the time of the interest rate announcement (e.g. first Tuesday of every month in Australia). As with the bond example, you will profit if rates rise, and lose money (which will be offset by lower mortgage repayments) if rates fall. Rather than continuously holding a short government bond position, the price of which may fluctuate in between interest rate decisions (whereas your mortgage repayment won't), this method requires you to place a trade close to each interest rate decision, and exit the trade soon after. The other downside is that these are short-term securities (the futures may expire the month of the decision, unlike the bonds), so if there is no interest rate change, the price will change to that which reflects the ending rate (not any prediction of future rates). This may cause your profit and loss to change when your mortgage repayments do not, and so this must be factored into your calculations, and makes them more of an approximate hedge.

Neither method is a perfect hedge, but you should be able to offset the majority of interest rate fluctuations over the life of the mortgage, and most importantly keep the rate below that of the original fixed rate. In the US there are ETFs (such as PRIME ETFs) that track the government bond rate, but trading the bond itself is the easiest way of executing the trade. Always educate yourself in the trading products (feel free to ask questions here), and consider the risks before trading. Especially the wife's reaction when you explain that not only have you taken out a mortgage, but that you are using financial derivative products to help. Do not quote my name!