10d (edited) • 💻 Technical Skills
The Oil Forward Contract Saudi Aramco - Sinopec Explained
The video below describes how the companies 'are thinking' before signing a forward contract.
This video has also been added to the online course 5.19 in the Classroom.
This process is very simple.
This is also an interview question for energy + economics + finance roles of various levels. From commodities trading, to investment banking, and from energy consultants to energy quants and energy data scientists.
It is a very popular question.
Interview Question and an interesting case study to know: The Saudi Aramco - Sinopec crude oil forward contract.
Beginner-friendly explanation (no 'scary' jargon used . No prerequisites needed).
The video focuses on the forward contract that Saudi Aramco signed with Sinopec. The details of the contract are private so we are using example dates.
On the 1st of December 2025 , the two companies signed a forward contract on crude oil , where Saudi Aramco agreed to produce and sell 250 000 barrels of crude oil and ship it from Saudi Arabia to China, where Sinopec is.
The delivery date will be months into the future i.e. 1st of September 2026. Sinopec needs crude oil because it has refineries.
These are facilities that use crude oil to produce diesel, jet fuel and other 'refined' products. Siniopec needs crude oil therefore. So they decided on the price of $77.5 / barrel.
Here is how they decided on this price:
a) They used machine learning to find a reasonable upper bound (maximum value) and lower bound on the spot crude oil price on the delivery date i.e. 1st of September 2026.
b) In between these two bounds, they assume possible values for the spot price of crude oil. For each value they calculate the PnL index (profit and loss).
PnL = (spot price - forward price)* quantity of crude oil.So if spot price on delivery date is $60/barrel and forward price is $77.5 , then we find the spread (difference) and multiply it with the 250,000 barrels of crude oil agreed in the forward contract.
This is the PnL for the buyer (Sinopec) ,and it is negative (bad deal).The whole process is described in this video.
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The Oil Forward Contract Saudi Aramco - Sinopec Explained
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