Refinery Planning Considering Financial Risk Management Using Crude Oil Derivatives

The profit of refinery sensitively fluctuates as crude oil price changes. Uncertain prices and demands of products also affect the profit. The refinery cannot control these exogenous market conditions. So the refinery must actively manage the financial risk. Crude oil derivatives are used for financial risk management. Futures or options help the refinery reduce the financial risk because they can buy the crude oil at the pre-determined price.

In this research we make a risk management model using contracts in the planning of refinery. First, we maximize the profit of a hypothetical refinery based on two-stage stochastic programming. For Monte Carlo simulation, various scenarios are generated with the assumption that prices and demands follow geometric Brownian motion. Then prices of futures and options are modeled with the stochastic process. The optimal number of contracts varies depending on decision maker's objectives. Lastly we draw cumulative risk curves to compare risk profiles of three different objectives.