Hedging Against Rising Kerosene Prices using Kerosene Futures

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Hedging against bunker price fluctuations using petroleum futures .

Hedging against bunker price fluctuations using petroleum futures .

Applied Economics, 2004, 36, 1337–1353

Hedging against bunker price fluctuations using petroleum futures contracts: constant versus time-varying hedge ratios A M I R H . A L I Z A D E H , M A N O L I S G . K A V U S S A N O S *z and D A V I D A . M E NA C HO F Cass Business School, 106 Bunhill Row, London EC1Y 8TZ, UK and zAthens University of Economics and Business, 76 Patission St, Athens, TK 104 34, Greece

The effectiveness of hedging marine bunker price fluctuations in Rotterdam, Singapore and Houston is examined using different crude oil and petroleum future contracts traded at the New York Mercantile Exchange (NYMEX) and the International Petroleum Exchange (IPE) in London. Using both constant and dynamic hedge ratios, it is found that in and out-of-sample hedging effectiveness is different across regional bunker markets. The most effective futures instruments for out of sample hedging of spot bunker prices in Rotterdam and Singapore are the IPE crude oil futures, while for Houston it is the gas oil futures. Differences in hedging effectiveness across regional markets are attributed to the varying regional supply and demand factors in each market. In comparison to other markets, the cross-market hedging effectiveness investigated in the bunker market is low.

I . I N T R O D U C T IO N In markets filled with uncertainty and risk, it has always seemed a good idea to reduce uncertainty where possible. Energy markets, including the market for bunkers which are used as a source of energy to propel ships, are such markets. Bunker fuel is one of the major operating expenses of any shipowner, accounting for almost 50% of voyage costs (see Stopford, 1997), and as recent events have shown, have a major impact on the operating profits in the industry. While some empirical evidence exists regarding the effectiveness of hedging instruments, which may be used against freight rate fluctuations (see for e.g. Kavussanos and Nomikos, 2000), there has been no investigation of the possibility of hedging risks arising from bunker price fluctuations using traded financial contracts.

This paper investigates and explores the possibility of using a number of traded petroleum futures contracts as instruments for risk reduction in relation to these energy markets. For that, the hedging effectiveness of a number of proposed contracts is investigated and compared to the performance of futures contracts in other markets. Bunker fuel is a term which has been used for many years to designate the most thick and sticky of the residual fuel oils. When steamships were coal-fired, ‘bunkers’ was the home for the bins used to hold the coal. As marine diesel engines became prevalent, the term was carried over to include the liquid fuel tanks. Bunker fuel is essentially a ‘Residual’ fuel that was originally defined as whatever liquid was left behind in the petroleum distillation unit after the removal of more valuable products like kerosene, diesel and naphtha (Percy et al., 1996). There are two basic grades of bunker fuel, IFO 180 and the more widely used,

*Corresponding author. E-mail: [email protected] Applied Economics ISSN 0003–6846 print/ISSN 1466–4283 online # 2004 Taylor & Francis Ltd http://www.tandf.co.uk/journals DOI: 10.1080/0003684042000176801

1338 IFO 380. The distinction between the two grades is the distillate content, Grade 180 has 7–15% distillate content, while Grade 380 has 2–5% distillate content (Visweswaran, 2000). The higher the distillate content, the more energy the fuel has. 60% of world volume in bunkers is IFO380, 30% IFO180 and other grades, with the remaining 10% in Marine Diesel Oil.1 Although marine bunkers are bought and sold in almost every port in the world, the world bunker market can be broadly divided into three major regional markets in which the bulk of physical bunkering activities takes place. These markets are Singapore, Rotterdam and Houston. Singapore has long flourished as a transhipment centre due to its strategic geographical location. The Singapore bunker market is by far the largest marine fuels market in the world, and is duly considered to be a prime benchmark for the industry. Singapore’s turnover in marine fuel oil in 2000 has been 18.7 million tonnes.2 In Europe, the Amsterdam–Rotterdam–Antwerp (ARA) region sells as much as 16 million tonnes of bunker fuel annually. The heart of the ARA region is Rotterdam, which sells about 8–9 million tonnes of bunker oil and lubes annually, helped by a hub of oil refining and storage facilities sited in its Europort complex, which handles around 100 million tonnes of crude annually. Prices are quoted for a wide array of products including Gas Oil and Marine Fuels, among many others. Products in the ARA region are generally quoted as ‘barges Freight on Board (FOB) Rotterdam’ and are usually quoted on an FOB export basis. Bunkering on the US Gulf coast is dominated by Houston, recording annual sales volume of three million tonnes in year 2000. Houston has refining capacity to match its status as the world’s energy and oil capital. However, as plants have become more efficient, little or no ready-made fuel is available at the refinery gates and suppliers mostly blend themselves. The market in Houston looks set to increase as its current container facilities have reached saturation and a huge multibillion dollar terminal is planned at nearby Barbours Cut. Despite the high trade volume in the global and regional bunker markets and the high volatilities of bunker prices, which directly affect shipowners’ and shipping companies’ profit margins, the number of instruments available to shipowners and operators to minimize their exposure to bunker price fluctuations are limited. With the exception of some financial institutions,3 offering tailor-made derivatives products such as swaps and options, there is no tradable futures contract for the product.4 In the absence of 1

A. H. Alizadeh et al. bunker futures contracts, hedging against bunker price fluctuations using futures contracts involves a cross-hedge against an existing crude or petroleum futures product. However, the disadvantage from the reduced hedging effectiveness that cross hedging may entail, may be outweighed from the benefits of the lower capital needed to initiate a futures position (initial margin requirement) and the flexibility and reduced cost of closing the position in comparison to OTC contracts. Table 1 shows the currently existing products and the market they are traded on. The aim of this paper is two-fold. First, to search for appropriate futures contracts which may be used for hedging bunker price fluctuations. Second, to investigate the hedging effectiveness of these contracts using both constant and dynamic (time-varying) hedge ratios and compare their effectiveness. To do this, recently developed multivariate vector error correction models with generalized autoregressive conditional variance–covariance specification (VECM-GARCH) are utilized to model means, variances and covariances of both spot bunker prices and futures contracts in a multivariate framework to determine the hedge ratios. The findings of the paper are potentially useful for agents involved in the sale and purchase of bunker fuel, including shipowners, ship operators, oil companies, and bunker suppliers. This paper then contributes to the existing literature in a number of ways. First the effectiveness of constant and time-varying cross-hedge ratios for marine bunker in three major bunker markets is investigated, for the first Table 1. Actively traded petroleum futures and options contracts Product IPE (London) Brent crude Gas oil (ARA) NYMEX (New York) Heating oil (#2) Light, sweet crude (Oklahoma) NY unleaded gasoline Middle East crude SGX (Singapore) Brent crude


Kerosene uses

Kerosene (kerosine) is also known as paraffin. It is a thin, clear liquid, insoluble in water. By far its biggest commercial use is as jet fuel. It has a low flame temperature, so it is safer than most other hydrocarbon fuels when used for cooking or lighting. It is used by fire breathing or fire juggling entertainers because its low flame temperature poses a lower risk if the performer is exposed to the flame.

Kerosene has been used medicinally since ancient times. People in ninth century Persia distilled crude petroleum fossil oil into hydrocarbon fractions, taking off kerosene, bitumen (tar) and other fractions. They used these products for heating, lighting, building and medicines. Kerosene is still widely used as a traditional and folk remedy in many parts of the world today. It is most used in poorer countries and non-Western countries where there is less corruption (misinformation) by pharmaceutical companies, including Russia, Eastern Europe and Africa. A 2009 study in Nigeria found that about 70 per cent of the population used petroleum products medicinally. (1)

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Fungi and parasites are some of the greatest enemies of trees, and most trees have evolved compounds that kill or repel them. For thousands of years, people have managed to extract some of these compounds and use them as natural remedies. They include eucalyptus oil, oregano oil, neem oil, tea tree oil, pau d’arco extract, olive leaf extract, gum turpentine and a variety of essential oils. Most of these oils are composed of hydrocarbons with a similar chemical structure to kerosene.

The widespread use of antibiotics after World War II encouraged the rise and spread of fungi and mycoplasma that are at the root of most of our modern diseases like allergies, asthma, cancers and various autoimmune diseases. Kerosene’s effectiveness against fungi means that it is a valuable treatment, well-proved over many centuries as a traditional or folk remedy.

Kerosene has powerful antimicrobial properties and can prevent an autoimmune attack. However, it does not repair the damage caused by an ailment. A healthy lifestyle and good food are essential for full recovery and to prevent recurrence.

Kerosene and pure gum turpentine have many similar health and medicinal properties, but they are not the same product. Here in Australia they are both easily available and affordable. Given the choice, I prefer to use gum turpentine rather than kerosene because I like its taste, smell and feel. If cost or availability is a concern, each product is a partial substitute for the other, provided you adjust the dosage and you carefully read how to use them.

Kerosene medicinal properties

  • Powerful antifungal.
  • Treatment for parasites throughout the body. Eliminates parasites including worms in the blood and bowel.
  • Kills bacteria, especially mycoplasma (bacteria without cell walls). Eliminates pathogenic microbes from the blood and bowel. Especially useful for eliminating CWD (cell wall deficient) microbes while not harming normal gut bacteria.
  • Anti-viral.

Kerosene as a traditional remedy

  • Arthritis. Dilute one part of kerosene with one or two parts of olive oil. Massage on the skin or use in a warm pack placed on painful areas.
  • Autoimmune diseases.
  • Bites, stings, poisonous ivy. Wet the area with kerosene or spray liberally. (2)
  • Bladder infections including cystitis.
  • Blood poisoning (sepsis, septicaemia).
  • Cancers. One teaspoon of kerosene a day on an empty stomach. May need to increase up to a maximum of one tablespoon. See How to use Kerosene below. Tumours may be covered with a kerosene pack on the skin.
  • Candida. Kerosene rapidly kills candida in the intestines, in the blood, and in other organs. Because it is so effective, beware of the Herx reaction (see below).
  • Diabetes.
  • Fungi. Nail fungus and fungal infections of the skin such as athlete’s foot and jock itch. The affected parts may be soaked in concentrated or diluted kerosene. Thrush in the mouth or vagina may be treated by coating or rinsing with diluted kerosene.
  • Infections with bacteria, fungi, viruses, parasites.
  • Joint and muscle pain. Rub a little kerosene on the skin with a sponge/cloth, or use a kerosene pack on the skin.
  • Lung diseases including bronchitis, pneumonia, tuberculosis.
  • Neuralgia. Spray on the painful area. Repeat hourly. (2)
  • Paralysis.
  • Parasites. Take the dose before a meal, so that it may pass through the stomach and into the intestines.
  • Preventative. Take a few teaspoons a year to protect against infections by microorganisms, particularly fungi.
  • Prostate. BPH (swollen prostate). Half teaspoon in morning, half teaspoon in evening. Rapid cure within weeks. (2)
  • Sinus blockage, severe head cold.
  • Throat infections. Dilute one part of kerosene with one or two parts of olive oil. Place in a warm pack over the throat. Sore throat: use one spray every three hours. (2)
  • Wounds. Shake with clean/sterile water in a spray bottle and spray with a little kerosene, or moisten wound coverings with a little kerosene. It is a good antibiotic and speeds wound healing. (2) However, if too much is used it can burn (see below).

Which kerosene to use?

According to Walter Last (3), the most suitable kerosene has a boiling point of 100C to 200C. It should be pure.

Australia: Diggers Low Odour Kerosene, sold in hardware stores.
USA: Klean-Strip 1 Kerosene from Walmart and hardware stores.
Germany: SBP (Siedegrenzbenzin) 100/140.
Around the world:
Shell Chemicals Shell-Sol D40 with a boiling range of 145C to 210C.
Shell Special Boiling Point Solvent SBP 100/140 with a lower boiling range may be more suitable for cancer treatment.
BP White Spirit is low in aromatics and boils from 142C to 200C.
Total Spirdane D40, free of aromatics and with a boiling range from 156C to 198C.
Solane 100-155 and Solane 100-140 have lower boiling ranges.

How to use kerosene

How much kerosene you take and for how long is flexible. Some people take it as needed for a specific ailment, while others have a precautionary maintenance dose every year.


Adults should start cautiously with a few drops or half a teaspoon per day for the first couple of days. Continue with one teaspoon per day for several weeks, but cut back if this causes diarrhoea or other symptoms. If not much seems to happen then gradually increase up to one tablespoon for a week or longer, and then decrease the dose until ending with one teaspoonful, for a total duration of about six weeks. You may need to do a shorter or longer follow-up course two months later, depending upon how your ailment has resolved.

The best time to take kerosene is before breakfast or at bedtime. Take it on an empty or nearly empty stomach because it floats on anything that is in the stomach and will not move down into the colon where you need it. If kerosene is sitting on food in the top of the stomach it may cause burping / repeating for a long time.

A traditional way to take kerosene is with molasses. Lick some molasses to coat the tongue, then take the dose of kerosene on a spoon and wash it down with a small amount of drink and food.

Children may be dosed with kerosene by placing a couple of drops on sugar.

In the lungs

Place two teaspoons of kerosene in a bowl of steaming hot water, hold the head over the bowl and cover with a towel. Take deep breaths through the nose for 10 minutes. Repeat morning and evening. (2) Kerosene dissolves phlegm and gives quick relief. (2)

Adults only. For direct access to the lungs, buy an atomiser mist spray with a small tube. A single spray should deliver about 10 drops. Start by spraying away from the face in front of you, and then move forward to inhale the mist hanging in the air. Do not get it in your eyes. If this is working successfully for you and you feel you need a more substantial dose, gradually try a small single spray while inhaling through the mouth. Eventually you may be able to take a full single spray through the small tube to the back of the throat while inhaling. (2)

On the skin

If used on the skin, undiluted kerosene may burn after 10 to 60 minutes depending on the sensitivity of the skin and the kerosene’s boiling range and purity. The skin goes red and will eventually blister. This is why it is important to dilute one part kerosene with two or three parts of another oil such as olive oil or coconut oil. Start cautiously, and monitor the skin to ensure it is not burning.

Toxicity, precautions, contraindications, warnings

Kerosene is NOT the same thing as mineral turpentine. Mineral turpentine, also known as white spirit or mineral spirits, is a petroleum-derived clear liquid commonly used as a brush cleaner and paint thinner for enamel, oil based or solvent-based paints. Do not use mineral turpentine.

Do not use kerosene while taking any pharmaceutical drugs.

If more than several mouthfuls are swallowed, abdominal discomfort, nausea, and diarrhoea may occur. (4)

Herxheimer reaction. If you have serious systemic candida or other pathogenic infections in your body, when you start taking kerosene internally a Herxheimer reaction can occur. The die-off of yeasts such as candida; the debris from other fungi, bacteria, biofilms or tumours; and toxins being released into the bloodstream can make you feel quite ill for a short period. Symptoms can include fatigue, headaches, nausea, joint and muscle pain, general body aches and malaise, sore throat, sweating and chills. If any of these symptoms occur, reduce the dose of kerosene you are taking and help your body clear the toxins that are causing the Herxheimer reaction by drinking plenty of water, avoiding constipation and having at least one bowel movement per day.

Diarrhoea often occurs when taking kerosene internally. This may be a reason to use pure gum turpentine rather than kerosene.

The LD50 for rats depends on the brand of kerosene. I have seen ratings between 2,000 and 5,760 mg/kg. (4) To put it in perspective, table salt is in this range with an LD50 of 3,750 mg/kg according to the Merck Index.

The greatest danger of taking kerosene internally is if there is a risk of vomiting (not necessarily from the kerosene, but from other causes). If vomit gets into the lungs after a large amount of kerosene has been swallowed this can cause death.

Your comments about any of your experiences – positive or negative – with your use of kerosene are welcome at Grow Youthful. I am always curious about your use of and experience with natural remedies, and your feedback is very welcome.


1. G Arikpo, M Eja, E Enene, S Okon, K Enyi-Idoh, S Etim. Petroleum Distillates Used in Folk Medicine in South Eastern Nigeria. The Internet Journal of Health. 2009 Volume 11 Number 1.

2. C O Frye. Consumption of the lungs and kindred diseases treated and cured by kerosene. Its value as a remedy, when to use it, how to use it. Democrat Printing Co, Tulsa, Oklahoma. 1914.

3. Walter Last. Kerosene – a Universal Healer. health-science-spirit.com

4. Diggers Low Odour Kerosene Material Safety Data Sheet. Retrieved online 16 March 2020. LD50 Oral (rat) > 2000 mg/kg.

The information and suggestions in this website are intended for educational purposes only. Their intention is to encourage the reader to think, and to question current medical practices and advice, and other aspects of our modern way of living. They do not offer medical advice or diagnosis, or prescribe the use or discontinuance of any remedy or treatment, directly or indirectly, without the knowledge and cooperation of the visitor’s doctor or health professional. Sick people, or those with chronic or persistent symptoms should seek the advice of a doctor or health professional. Only use the information and suggestions in this website under their supervision. What you read here is not a substitute for professional medical diagnosis or treatment. The author, publisher, distributor, and any of their agents or employees disclaim all responsibility or liability in connection with the accuracy of and use of the information and suggestions in this website.

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Hedge Yourself Against Rising Oil Prices

The political chaos in North Africa and Middle East caused Brent oil price to hit $110 a barrel for the first time since 2008. Libya is at the edge of a civil war; foreigners are trying to save their lives by running away from the country. It is not just Libya. Another large oil supplier, Iran witnessed thousands of protesters marching in Tehran demanding a change. Even in Saudi Arabia, the ministry of interior confirmed about protesters and threatened to crash them. The dictatorship regimes of the region are falling one-by-one. Tunus first, Egypt second. Who knows which one will be next? Obviously, there is a lot of uncertainty in that region which raised the oil prices above $100.
The crude oil prices are up by $4.63 from a week earlier, and $21.04 higher than the last year. The future contracts imply that oil prices are expected to stay at least at the current level:

Naturally, changes in crude oil price is quickly reflected in the retail gasoline prices: Gasoline is now at a national average of $3.392 a gallon. Two years ago the national average retail price was $1.90

What can we do about rising gasoline prices? Automotive Experts suggest the following:

  • Check your air and oil filter.
  • Straighten up and align your tires properly.
  • Tune up the engine.
  • Pump up the tires.
  • Check the gas cap.
  • Drive slowly and smoothly (optimal speed is 55mph).
  • Lighten up your load.
  • Turnoff the engine when you are idle.

Besides listening the automative experts, you can also follow T.Boone Pickens, and invest in energy stocks. While the increasing gasoline costs are not good for consumers, it benefits those who invest in energy stocks. The best hedge against retail oil prices is the energy stocks that have the highest correlation with them. Therefore, we decided to compute the Pearson Correlation coefficient between major oil related stocks and retail oil prices. This coefficient shows how two variables are related. A value close to 1 implies perfect positive correlation and a correlation coefficient close to 0 implies no relation at all. Since it is also of interest to see how correlation changes between intrasector classifications, therefore largest 3 companies are selected from each oil and gas category. When available up to last 19 years of data were used.

Here are the results:

The 1 st table shows the correlation coefficient for Independent Oil & Gas Companies ( Occidental ( OXY ), Apache ( APA ), Anadarko (APC)) and Major Integrated Companies ( Exxon (XOM), Chevron (CVX), ConocoPhillips ( COP )). Data on Chevron starts from October 2001.

As we can see, the correlation between large oil and gas companies that have integrated operations are very high. Companies in these sectors provide almost perfect hedge against rising oil prices.

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