(723c) Exploiting Market Fluctuations and Price Volatility Through Feedback Control

Many products of the chemical and petroleum industries are fungible goods. They are highly liquid and, in many case, actively traded on centralized exchanges. Examples include not only petroleum distillates, such as reformulated gasoline blend-stock for oxygen blending (RBOB) gasoline, but also common plastics such as polyethylene and polypropylene. While this liquidity reduces market friction, it also subjects producers to rapid changes and potential shocks in market prices. Even in cases where the products themselves are not explicit commodities, the feedstocks are -- petroleum and natural gas being prime examples -- and further subject the producer to the whims of the market and potential dislocations in prices and spreads. While financial instruments such as future contracts and swaps can be used to hedge against these potentially disruptive market forces, they may not always exist. In addition, they may require exceptionally large premiums due to limited volume and the absence of market makers.

In this work, we wished to explore how feedback control can be used to make the chemical producer responsive to market forces through dynamic operating policies as opposed to through the use of financial instruments To explore this problem, we developed a toy model of a marginal chemical producer with variable capacity operating in a dynamic market environment. While the model is admittedly simple, we nonetheless demonstrate that it can be used to develop and analyze a number of different operating strategies for not only dealing with market risk but also exploiting it through arbitrage. In the process, we further demonstrate how core ideas from finance can be injected into control.