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Aiming to reduce volatility in the commodity markets

Situation

Eric and Henry, longtime clients of J.P. Morgan Private Bank, own an oil company in Oklahoma that Eric inherited from his parents. The pair have been concerned with the declining price of oil, as their wealth is primarily generated from selling oil in the physical market to suppliers across the state.

Our Approach

Eric and Henry reached out to their J.P. Morgan team member to discuss their concerns about commodity price risk. The team looped in the Cross Asset Solutions team which helped Eric and Henry put in place two different strategies to help protect the value of their oil production. They locked in a future price via an oil swap on part of their production and established a set minimum value by purchasing a put option on the other.

Outcome

With their oil production background, Eric and Henry were pleased that the swap could potentially provide more stable cash flows, aiding future planning amid commodity fluctuations. The strategy aimed to help reduce volatility in the pair’s portfolio by adding a degree of predictability to future cash flows.

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All case studies are shown for illustrative purposes only and should not be relied upon as advice or interpreted as a recommendation. They are based on current market conditions that constitute our judgment and are subject to change. Results shown are not meant to be representative of actual results or experience of other individuals. Past performance is no guarantee of future results.​

Investments in commodities may have greater volatility than investments in traditional securities. The value of commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates, or factors affecting a particular industry or commodity, such as drought, floods, weather, livestock disease, embargoes, tariffs and international economic, political and regulatory developments. Investing in commodities creates an opportunity for increased return but, at the same time, creates the possibility for greater loss.

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