The following are our answers to your April energy hedging questions.  If you're interested in reading our previous energy hedging questions and answers, they can be accessed via this link.

When is the appropriate environment and/or time frame for an oil and gas producer to hedge with costless collars?

As with all hedging strategies, it all depends on your hedging goals and objectives, your risk tolerance, credit availability, etc.  Having said that, generally speaking, costless collars are often best used in relatively high price environments.  The reason being, in a high price environment, the probability that the call option will expire "in-the-money" is lower than in a lower price environment.  However, before entering into a costless collar, you should examine the revenue and cash flow implications of both the call and the put, as well as the combination of the two, in various price environments.  Furthermore, while costless collars often appear to be attractive because they don't require an initial, out of pocket payment, many producers would be better served by hedging with selling futures or swaps or buying outright put options than hedging with costless collars as the risk vs. reward of a costless collar often isn't ideal for many oil and gas producers.

In terms of clearing requirements, what impact will Dodd-Frank have on large energy consumers?

As of this minute, it appears that energy consumers (as well as energy producers) will be exempt from the clearing requirements of Dodd-Frank but, until all of the regulations are finalized and implemented, it is still difficult to know how Dodd-Frank will ultimately impact energy consumers and producers. 

Energy Risk recently published a special report titled Weighing up Dodd-Frank which includes opinions from various market participants including Aces Power Marketing, CFTC, Shell, International Energy Credit Association, Edison Electric Institute, National Petrochemical & Refiners Association, GFI Group & Vitol.  The report is available on the Energy Risk website.

Where can we obtain indicative price quotes on natural gas basis swaps?

To obtain "real-time" quotes for natural gas basis swaps you will need to speak directly with a market maker such as a bank or natural gas trading company, an OTC natural gas or a independent, advisory firm like us.  If you would like to speak with us about hedging with natural gas basis swaps, give us a call or send us an email.

However, if you are simply needing rough indications, you can obtain settlement prices for the natural gas basis swaps cleared through NYMEX/CME on the CME Clearport website.

If you have a question that you’d like us to answer as part of next month’s energy hedging Q&A, please feel free to post it in the comments section below or contact us.  As always, anonymous questions are more than welcome.