Crude oil price exhibits a high degree of volatility which significantly varies from time to time. In the month of May 2006, the crude oil prices exceeded $70 per barrel in response to tight markets and uncertainty over the energy securities market. The article discusses energy risk-based hedging model for crude oil price risk management.

The topic of crude oil prices is the subject of interest for both corporate and retail customers. The reason for this can be attributed to its influence on the cost of production or living of the corporate and individual users. Asia is the second largest importer of oil, next only to America and it will shortly be the leader in importing oil, as most of the densely inhabited countries are in Asia. It has more than half of the world's population. Energy dependent companies are forced to pass on the cost to their customers to avoid economic difficulties.

Energy markets are volatile and the annual volatility of energy products fluctuates in a range of 40 to 50%. The International Energy Outlook 2005 projections indicate continued growth in world energy use, (See Chart I) including huge increases for the emerging economies of Asia. Energy resources are thought to be adequate to support the growth expected through 2025. No major oil field has been discovered in the world for a very long time.

Treasury Management Magazine, Commodity Derivatives, Energy markets, Risk Management, Organization for Economic Co-operation and Development, OECD, Globalization, Gross Domestic Product, GDP, Organization of the Petroleum Exporting Countries, OPEC, Oil industry, International Energy Agency, IEA.