Over the course of the term, you will be asked to complete ten assignments that we will call “Fundamental Factors” exercises. These are meant to get you to do some independent research and to think on a regular basis about the various forces that might push crude oil and natural gas prices higher. While there are other energy commodities traded in futures and forward markets, our Fundamental Factors exercises will focus on oil and gas specifically since those are the largest energy commodity markets by far.
These instructions are meant to guide you through the process of doing the Fundamental Factors assignments and to give you a sense for how they will be graded.
Other than the first two Fundamental Factors assignments (which will have some special introductory instructions) each of the Fundamental Factors activities will have two parts: research and trading.
Each week, starting in the third week of class, you will be asked to perform some independent Internet research on the following factors affecting crude oil and natural gas prices:
- domestic economy
- global economy
- currency markets
- geo-political situations
- cross-commodity markets
- changes in inventory and storage
- domestic economy
- changes in inventory and storage
- electricity markets
Each week, you will need to research whether each individual factor might contribute to an increase in crude oil or natural gas prices for that week (a “bullish” outlook); might contribute to a decrease in crude oil or natural gas prices for that week (a “bearish” outlook); or might not affect crude oil or natural gas prices for that week (a “neutral” outlook). For each factor, you will need to cite the source(s) you used to do your research and provide a one or two sentence summary of the factor and why you feel it contributes to a bullish/bearish/neutral outlook for crude oil or natural gas prices.
Please note that you are being asked to evaluate all eleven factors for every Fundamental Factors assignment. If you skip factors, you will lose points. If you don’t cite your research, you will lose points. If you don’t explain your bullish/bearish/neutral recommendation, you will lose points.
In addition, you will need to make a determination as to whether you should buy or sell crude oil and natural gas each week. This will involve your judgment in weighing the various factors.
Put your (virtual) money where your mouth is! Based on your research and determination that the crude oil and natural gas markets are bullish, bearish, or neutral, each week you will be asked to make a decision to buy or sell both crude oil and natural gas futures. If your research is strongly bullish on crude oil, for example, you should buy crude oil. Each week, along with your Research report, you will be asked to describe the position (buy or sell) that you are taking for both crude oil and natural gas, along with a brief written summary of why you are taking the position. You will then be asked to submit two screen shots of the price of front-month NYMEX crude oil, and two screen shots of the price of front-month NYMEX natural gas, taken at least two days apart. These two screen shots represent the opening and closing of your position on crude oil and natural gas. Links for the crude oil and natural gas contracts are available under the “Resources” tab of the EBF 301 website and are also given below. You will use these two screen shots to calculate whether you made or lost money on crude oil and natural gas during that week.
You will not be evaluated based on whether you make or lose (virtual) money – only on the quality of your justification for taking the market position that you are taking and compliance with the submission instructions.
Each Fundamental Factors assignment will be graded on a 30-point scale according to the following rubric:
Research (25 points total):
For each factor you will earn:
- 2 points if you provide a brief description of your research; a citation; an outlook; and a brief explanation of how your research influenced your outlook recommendation;
- 1 point if any of the above four items are missing from your response;
- 0 points if you skip the factor altogether.
In addition, you will earn 3 points if you provide an overall outlook recommendation for both crude oil and natural gas.
Trading (5 points total):
You will earn 5 points if you demonstrably take a market position based on your research in both crude oil and natural gas and explain the reason for the position that you take. Failure to take a position in either crude oil or natural gas for the week will result in a two-point deduction for each commodity in which you failed to take a position. Failure to explain the position you are taking for either commodity will result in an additional one point deduction.
Each week, beginning with Week 3 of class, you should submit a single word processed document to the Drop Box on Canvas. Each submission should include responses to the Research and Trading activities as described above. The Fundamental Factors assignment for Week 2 will be slightly different, so please refer to the Lesson 2 activity page for those instructions. Do not submit more than one document to the Fundamental Factors Drop Box. Do not submit any type of document other than a word processed or PDF document. No spreadsheets, image files, powerpoint files or any other file format should be submitted. Submissions that do not comply with these submission instructions will not be graded.