Karim Anchassi
Diego Bacci
Claudia Casiano
Karine Milhomens

• We are an Investment Management firm that focuses on the
Energy Sector
• We serve long-term investors with a moderate risk appetite.
Our executives embrace a hybrid strategy of long-term investments while having the capacity to take advantage of short-term opportunities
• Our analysts have analyzed the downward trend in the price of oil over the past six months and the more recent steep fall of crude oil prices
• Current position is short ~US$10mn in crude oil futures maturing March 2015 (CLH5), equivalent to 147 contracts.
Further discussion will follow
• Contract: 1,000 barrels currently @ US$67,580

• West Texas Intermediate (WTI) and North Sea Brent crude oil are the major benchmarks for the world’s oil
• The main futures exchanges are the New York Mercantile
Exchange (NYMEX) for WTI and Intercontinental Exchange
(ICE) for North Sea Brent; they trade “light-sweet” crude oil
• Crude oil options are the most widely traded energy derivative in the NYMEX and ICE
• The underlying of these options is not actually crude oil itself, but crude oil futures contracts
• Trading on these options ends three business days before the termination of trading in the underlying futures contract

• The Nymex WTI front-month dropped $8.70 or 9.3% over the month of October to average $84.34/b, its lowest value in more than two years.
• Expectations of tighter US monetary policy boosted the value of the dollar, with potential decreasing oil demand impacts for nondollar economies since oil is priced in USD on the world market
• Oil producers and market makers hedging in both the ICE and
NYMEX crude options markets have reinforced the price drop
• The Central Bank of China’s announcement to cut interest rates created a temporary rise in crude oil prices in the week of
November 21, 2014 by igniting hopes in oil demand
• On November 27, 2014 the OPEC decided to maintain current output levels, confirming that oil supply will remain high and pushing oil prices further down

CLH5 Price Performance To Date
Source: Bloomberg

• We expect the price of oil in the near future to continue to have a downward trend, with a limited downside
• As the graph on previous slide shows: during the past
6 months the price of oil has had a decreasing trend
• WTI is now down 37.8% from its June 2014 peak
• As mentioned in OPEC’s July 2014 Oil Market Report, production of non-OPEC countries in Latin America, the U.S. and Canada will continue to drive production of oil up without intervention from OPEC
• As inventories increased, the risk of shortages was reduced, which began to drive prices down

Historical World Oil Production vs. Consumption
100000
90000
80000
70000
60000
50000
40000
30000
20000
10000
-
Total World Oil Production Total World Oil Consumption
*Source: BP Statistical Review of World Energy 2014
• As seen on the graph above, historically, production levels and consumption levels have followed a very similar trend
• We believe that this trend will hold true in the future: even at higher supply levels, customers will eventually begin to consume more, which will ultimately help stabilize price

CHANGE TO HVG
Source: Bloomberg

*Source: BP Statistical Review of World Energy 2014
• Alternative sources of energy like natural gas
(production up 48.76% in the past 28 years) have increased and become more available
• The increased availability of energy alternatives will contribute to higher levels of volatility in oil prices

• Ongoing unrest in Libya, Ukraine, and the Middle
East produces fear of disruption in exports
• Given increasing volatility levels of approximately
820bp in the past 6 months, we expect volatility for
Oil prices to be high in the near future
• The market instability in OPEC countries like Iraq or
Venezuela have and will keep oil price volatility high
• LINK to Direction : Our view on direction is a downward trend, but given the volatility, we see potential fluctuations on both sides, although limited

• Position: We are short 147 crude oil futures maturing March 2015 (CLH5)
• We do not consider that the price of oil will decrease significantly from the current levels, given the recent steep decline
• However, we still perceive a potential small decline from the current March 2015 futures price. We can generate income from putting a cap to our position beyond certain prices

• Total exposure: -F US$10 million 
-147F
• We want only a 5% chance of losing more than a
US$500,000 loss limit  equivalent to a 1.65 standard deviations move up
•
0
F
.25
= US$67.56 (Source: CME; Dec 3 2014)
•
0
R
.25
= 0.2346% (3-month LIBOR rate)
• Volatility = 18.426%
Source: CLH5 HVG Vol Chart Dec 3 Bloomberg
• Risk Premium (RP) = 17.9747%
– Jul 1959 – Dec 2004 RP: 20.67%
– RPH Adjustment: 5.61%
• Based on Bloomberg CL 2004 – 2014 prices


Given our analysis of the loss associated to the critical price of US$77.43, for the underlying risk, we should hedge our position by buying ~66% forward futures and leave a maximum of 34% unhedged to meet out risk management guidelines
• Current position of -147F
• Hedge: US$6.6 million @
US$67.56k/contract; BUY ~98 contracts
• Given Keep Ratio of 34% (~49 contracts short)

• Position: -147F  short 147 contracts; @67,560/contract
• Name: Short Forward
• View: Down, Sure
• Purpose: Trading (T)

• The team has explored the following options as it considers there is potential for small fluctuations
• Not hedging may result in losses if prices up or forgone opportunity for profits if prices do not change a lot
More OTM
OTM
ATM
ITM
More ITM
Call Put
Strike Price Premium Strike Price Premium
$69.50
$2.9369
$65.00
$2.7966
$68.50
$67.50
$66.00
$65.00
$3.3879
$3.8891
$4.7411
$5.3525
$66.00
$67.50
$68.50
$69.50
$3.1774
$3.8390
$4.3301
$4.8814
Premiums reported in Future Value
Source: Daily Information Bulletin PDF CME Group 3 Dec 2014

• Position: -147F +294C -147C otm
• View: vol trade, < straddle
-147P otm
• Purpose: Trading (T), Income (Y), Insure (I)
• Maximum Loss: -US$282.9K
✔
Complies with our Risk Management parameters
• Upside: US$75.7K if prices down; US$2.2K if prices up

View: vol view, small fluctuations
Syn Long
Strangle
Short
Butterfly
Syn Long
Straddle
Syn Long Put
View: limited downside potential, unsure
Synthetic
Bear (Put)
Spread

• Position: -130F + 130C
We had to cut to -130F to comply with Risk Mgmt
• View: Down, Unsure
• Purpose: Trade (T), Insure (I)
• Maximum Loss: -US$497.8K
✔
Complies with our Risk Management parameters
• Upside: positive if prices down

• Position: -87F + 87C itm
+ 87C
• View: vol trade, < straddle otm
We had to cut to -87F to comply with Risk Mgmt
• Purpose: Trade (T), Insure (I)
• Maximum Loss: -US$498.5K
✔
Complies with our Risk Management parameters
• Upside: positive both if price very down or up

• Position: -65F +130C
We had to cut to -65F to comply with Risk Mgmt
• View: vol trade, neutral on direction
• Purpose: Trade (T), Insure (I)
• Maximum Loss: -US$497.8K
✔
Complies with our Risk Management parameters
• Upside: positive both if price down or up

• Position: -147F +147C otm
-147P
• View: limited down, worry big up otm
• Purpose: Trade (T), Income (Y), Insure (I)
• Maximum Loss: -US$305.8K, with prices up
✔
Complies with our Risk Management parameters
• Maximum Upside: US$355.7K, with prices down

Position
Syn Short Butterfly*
Syn Long Put
Syn Long Strangle
Syn Long Straddle
Syn Bear (Put) Spread
Maximum Loss
-US$282.9K
Upside
US$75.7K if prices down
US$2.2K if prices up
Positive if prices down -US$497.8K
-US$498.5K
Positive both if price very down or up
-US$497.8K
Positive both if price down or up
-US$305.8K
US$355.7K, with prices down
• All of the alternative hedging positions meet the risk management parameter of a loss limit of -US$500K
• It coincides that the position that best fits our view also has the smallest downside

• Despite the Short Butterfly does not exactly fit a view of down unsure, it enables us to benefit from small changes around the current levels. As stated before, we consider it is more likely that the price will decrease slightly, but we still see potential for fluctuations on both sides
• The Short Butterfly fits our view of a low likelihood for large fluctuations. Since we consider that the price will not go beyond certain levels, we can profit by putting a cap through an out-of-the-money put and call on both sides of the position
• Given our recommended position, we consider that the expected direction and volatility increase the likelihood that the expected future price will be ITM significantly
• The maximum loss on this position (-US$282.9K) is within our loss limit of -US$500K