Large Oil Producer Uses Trade Insights to Overcome Market Liquidity Challenges

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Large Oil Producer Uses Trade Insights to Overcome Market Liquidity Challenges

MARKETS: OIL AND GAS | COMMODITY: CRUDE OIL | CLIENT: OIL PRODUCER

Situation

Our customer asked for insight into whether their hedging tactics were appropriate for their order sizes, and if anything should change in the way they solicit bids from their counterparties, which were exclusively banks.

Like many oil producers, this company preferred to hedge when prices rose to a recent high, or at the top end of a previous range of prices.

Further, the customer sought to provide a fair opportunity to each bank to bid for the hedging trades.

Large Oil Producer Uses Trade Insights to Overcome Market Liquidity Challenges

Solution

AEGIS traders encouraged the customer to continue, but augment, their current practice of trading large, opportunistic hedges.

Why continue this practice, in part? AEGIS held proprietary data that showed the amount of slippage due to liquidity was smaller than the customer expected when the market was well bid – exactly the times when the customer sought to transact.

Further, AEGIS’s online, live Request-For-Quote system (Marketplace & Trade Launcher) could effectively benchmark banks’ prior performance and select a few high-quality and skilled banker/ traders for efficient and discreet transaction.

Yet, AEGIS did see room for improvement. The customer began offering smaller trades to generate benchmark data and measure counterparty effectiveness. Using AEGIS’s Trade Insights capability, the customer launched its own benchmarking system for a round-robin, head-to-head data set. Meanwhile, it began following AEGIS’s recommendations to conduct smaller trades with carefully selected counterparties (via Trade Insights), and conduct time-bound RFQs to encourage competition. 

Outcome

Several benefits emerged.

First, the customer was able to avoid some risk of bid-ask (or bid-mid) slippage by avoiding large trades on days when the market held lower liquidity.

Second, the customer generated data to show to banks who were not awarded trades why they were not selected. This data showed actual dollars of opportunity cost that the customer would have incurred had the inferior bid been selected.

Third, the customer was able to improve its initial strategy of using large trades, because it now could confidently select the best-performing counterparties for the situation.

Last, more counterparties were able to participate, because the less capable banks’ trading desks could participate in smaller trades (with low cost to the customer), while the top-performing banks were much less likely to be omitted from a deal. 

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This case study is not indicative of future performance or success. Commodity interest trading involves risk and, therefore, is not appropriate for all persons; failure to manage commercial risk by engaging in some form of hedging also involves risk. Past performance is not necessarily indicative of future results. There is no guarantee that hedge program objectives will be achieved. Neither this trading advisor nor any of its trading principals offer a trading program to clients, nor do they propose guiding or directing a commodity interest account for any client based on any such trading program. Hedge advisory services are performed by the registered commodity trading advisor AEGIS-CTA, LLC, a wholly-owned subsidiary of AEGIS Hedging Solutions, LLC. This case study is not required to be and has not been, filed with the Commodity Futures Trading Commission ("CFTC"). The CFTC does not pass upon the adequacy or accuracy of this commodity trading advisor disclosure. Consequently, the CFTC has not reviewed or approved this case study.