Hedging Jordanian oil purchases' price risk and costs using oil futures contracts during 1998-2007

Abstract EN

This study aims to investigate whether using futures contracts will reduce the Jordanian imported petroleum price risk and decrease the Jordanian petroleum purchases invoice.

To achieve the objectives of this study, ten years-hedge simulation conducted on the real imported quantities to generate assumed comparable cases for the unhedged and hedged costs of the Jordanian monthly purchases.

The study sample consisted of Jordanian monthly imported quantities of crude oil during the 1998-2007 period.

Weekly spot prices of Saudi Arabian Light Crude and the daily futures prices of NYMEX Cushing Crude Oil Futures Contracts 1 (one month) and 4 (4 months) were also used.

Constant cross hedge strategy conducted for hedging the Jordanian imported petroleum needs.

The NYMEX Cushing Crude Oil Futures Contracts 1 and 4 employed to hedge the Saudi Arabian light crude oil over the study period as a proxy for the Jordanian petroleum purchases.

The results demonstrate that the constant cross hedge strategy with the NYMEX oil futures contract 4 proved to be successful in hedging the price risk of the Jordanian imported petroleum and decreases the purchases invoice.

While that of NYMEX oil futures contract 1 increases the price risk of the Jordanian imported petroleum, but at the same time decreased the purchases invoice.

The researchers recommend the energy policymakers in Jordan to assess the merits of futures contracts in the oil futures for managing risks related with the petroleum price risk.

The researchers also recommend studying the effect of other derivatives tools such as option futures on managing the Jordanian oil price risk or employing other different futures contracts maturities like six, nine months and one year in different oil markets such as Dubai Mercantile Exchange.