Petroleum Products
Price Hedging.

Vacuum resid is the heaviest distillation cut and a key input for the construction industry — yet it sits entirely outside the reach of conventional energy risk management.

• No hedging market exists. Unlike benchmark crude or major refined products, vacuum resid is not exchange-traded. Buyers have full price exposure with no futures market, no listed options, and no standardised risk transfer mechanism available.
• Standard derivatives pricing frameworks don't apply. Conventional models assume liquid, observable underlying markets. Resid price is driven by crude dynamics, refinery utilisation decisions, seasonal construction demand, and exchange rate movements — each requiring separate treatment that off-the-shelf tools don't accommodate.
• Cross-border procurement adds currency risk on top. For buyers transacting across currency boundaries, exchange rate movements compound the commodity price exposure, creating a multi-dimensional risk that a simple price hedge would leave partially uncovered.

We designed and priced a bespoke OTC insurance agreement for vacuum resid — structured as insurance rather than a derivative, and built around a multi-dimensional decomposition of the total price risk.

• Decomposed total exposure into three dimensions: market risk (crude and refinery spread dynamics), intrinsic price risk (resid's idiosyncratic behaviour relative to benchmarks), and exchange rate risk — each modelled and priced separately before being combined into a single contract.
• Structured the contract as an insurance agreement rather than a derivative, making placement easier under existing regulatory frameworks and allowing terms to be matched to the buyer's actual procurement volumes and timing.
• Stress-tested pricing across crude price environments, exchange rate trajectories, and refinery utilisation scenarios, giving the protection seller a clear picture of how exposure shifts under different market conditions.

The project delivered a first-of-its-kind risk transfer solution for a commodity sector that had previously operated without one.

• New risk transfer market: A legally and actuarially structured OTC agreement where no hedging product previously existed, opening a commercially viable risk transfer channel for vacuum resid buyers.
• Improved capital efficiency: Multi-dimensional risk decomposition allowed each risk layer to be understood and managed independently, supporting more precise reserving and capital allocation.
• Systematic mispricing prevented: Exchange rate risk modelling identified a material exposure component that would have been invisible in a single-factor crude-linked model, avoiding underpricing of a significant risk layer.
• Scalable product template: The framework is directly replicable for other illiquid petroleum cuts, giving the client a methodology for entering adjacent markets without rebuilding the analysis from scratch.