What effect will the refinery breakdown have on the price

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Reference no: EM132055829

There is a well-established and very large futures market for crude oil on the New York Mercantile Exchange (NYMEX, which is now part of CME). There is also a large NYMEX futures market for gasoline.

The delivery point for the crude oil contract is in Cushing, OK and the delivery point for the gasoline contract is New York Harbor, but suppose (for the purposes of this question) that these both accurately reflect the prices that would occur for trade on the U.S. Gulf Coast (i.e. Texas) as well.

a. If a giant refinery in Texas is forced to shut down temporarily in mid-February 2015 due to breakdown in the machinery (and is likely to be out of service for several weeks), what is likely to happen to the price of the front month (i.e. nearest to delivery, in this case March) futures contract for gasoline? What is likely to happen to the price of the front month futures contract for crude oil?

b. What effect will the refinery breakdown have on the price of the two-year-out futures contract for gasoline (for delivery in March 2017)? What effect will it have on the two-year-out futures contract for crude oil? Explain why this is either similar or different to your answer from part a.

c. Imagine that the NYMEX is now considering opening a futures market for jet fuel. What factors will affect whether this futures market for jet fuel will attract sufficient buyers and sellers to justify its continued operation.

Reference no: EM132055829

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