Research On Oil Prices Volatility And Price Risk Management In Oil And Gas Industry In China

Oil is essential energy and raw materials to modern economy and society. With China's economic growing, it is rapid growth in oil demand. Because of the relative scarcity of domestic resources, China has to depend on international markets. However, current international oil markets have been at sharp fluctuations. This is because oil as strategic materials is inherently scarce, also is the result of speculation. For oil resources are extremely unbalanced and the produce and markets are separated, price volatility be caused. Oil prices often deviated from its value for speculation, realizing the price discovery function of futures market and increasing volatility meanwhile.The oil industry, with its long connected industrial chain is the foundation of economy. So the volatility of oil prices inevitably weakens the economic stability. All countries try to protect its oil security by measures such as implementing energy conservation, establishing reserves, etc. Multinational oil companies manage oil price volatility actively in operating, not only do hedging but also reap speculative gains by following the oil prices accurately.In China's oil and gas industry, the price risks management is an occurring problem. To protect oil security, China's enterprises began international operation, how to estimate the volatility and manage price risks become new problems. Domestically, the futures market pricing system has not been established and there are many disadvantages being in current system, thus, time lag exists in the volatility of refined oil prices home to international markets. Further market-oriented reforms were carried out in pricing in Dec 2008, how to manage refined oil price risks to reduce the shocks is also an urgent problem.In this paper, qualitative and quantitative methodology was adopted. First, we reviewed previous studies, then described the running of international oil markets, including the participants, futures pricing, market running and oil companies'hedging and speculation, following we did research on China's oil market and industry, some analysis was made about the three national oil companies. Second, we measured price risks by GARCH model in the data of WTI and Brent markets. Third, we did research on the problem of refined oil pricing and price risks management based on the portfolio idea under current refined oil pricing system. We proposed China's refined oil exponential weighted pricing of risk minimization model and test the results by Monte Carlo simulation. The analysis also formed price risk management analysis framework in China's oil and gas industry.Follow the views. The price of oil is the result brought by endowments interplaying with international political and economic forces. International oil prices are at fluctuations, showing properties on material and finance. Although interrelation and similarities exist, each market has its own characteristic. We can effectively describe the volatility and estimate VaR of WTI and Brent oil markets by GARCH model at the assumption the disturbances were subjected to conditional normal and GED distribution, while Student's t distribution was overly conservative. As China's oil dependence growing, refined oil pricing has been based on weighted prices of crude oil in Brent, Dubai and Minas markets. In the exponential weighted model mentioned above, China should set the pricing weight ratio of 0.2389: 0.5759: 0.1852, at that moment the price volatility of refined oil reaches the minimum.