Commodity Physical vs Financial Trading
Hello everyone,
I would like to learn more about the differences between working and building career in physical and financial trading of standardized products (oil, gas, wheat, corn, cotton, and other products). Those of you who work(ed) in one or another industry are welcome to share your experience:
-environment
-valued skills and competencies
-requirements to enter
-entry and exit possibilities
-remuneration (starting and upward potential in the next 5-10 years)
I will write down some info (which is not much) about the companies.
Among physical commodity trading the top houses are Mercuria, Bunge, Trafigura, Cargill, ADM, LDC and etc. They look quite appealing if not the only option for physical trading considering the last trends in U.S. regulation and BBs' exiting the business.
Shell, BP and Chevron also trade physical but the environment at the trading desk is less competitive and more risk adverse. My GUESS is that also people's background is more engineering rather than investment banking, M&As or trading. So for me this is a no go because of lower growth and learning opportunities, lower remuneration.
Financial commodity trading. Commodity Trading shops also do futures and options trading but to be fair I don't know anything else about it. Is it done in BB's and on a what scale? What would be the path from a graduate position into commodity trading at BB's? I guess to join a hedge fund I would need a proper experience of 4 years with good PnL from a reputable bank.
You're missing the point. It's not like investment banking.
There. is. not. a. defined. path. There. are. no. defined. paths.
Practically every person is an "exception" to the rule for whatever path you're thinking of. The only commonality really is networking. That and maybe being from Texas.
HERE HERE!!
During my first week as a trainee I asked about the supposed training program. My trader told me that when he started as trade support, his trader told him "this is like a swimming pool. Whether you sink or float it's up to you.". So this was the program :)
Also, it turns out some year they decided to hire some MBAs to get some divisions going. From 25 or so they hired by year one I believe only 2 were left. It's really cut-throat.
25 to 2?? I would consider myself a go getter but those stats are insane ...
How long does it take for a graduate to become a trader?
Very tough to land a position in that industry.
If it helps, though, most BB commodities stuff is going to be helping clients hedge, in one form or another. That means minimal physical interaction, really just to the extent you need to know it. That's just from my limited experience so I could be wrong on that. Power might be the one exception because it's not so easily defined, and it's not as straightforward as either owning oil or not, for example. It used to be different, and importantly a few shops will still do physical, but the direction things are going points to that becoming less and less of a thing. It's also important to understand that while a lot of hedging is fairly straightforward buying/selling of futures, it's hard to get the liquidity a lot of producers or big consumers need more than a year or two out the curve. I would imagine this is also, if not moreso, the case when it comes to long-dated options on futures. Furthermore, helping producers or consumers hedge some of the more complex deals is not so straightforward at all, and is honestly both more interesting and "proprietary" than a lot of straightforward speculating might be. Just my thoughts.
Also culture is something to consider. It's going to be a lot different working at a bank where people become traders in 2-3 years and there's plenty of people under 30 vs. an oil company where it will take longer to make trader and there are 60 year old traders on the floor.
Wow, another thread. To begin, BP trades more than pretty much all of your category A folks. No, people are not typically engineers wtf would investment banking have to do with physical trading...
That Search button is a magical thing.
Its called BP University for a reason haha.
lol
I think trading physical would be more interesting. At least you will understand how things are priced at destination/export constraints at marcellus etc./the world doesn't revolve henry hub etc.
I interned at one of supermajor trading floor this summer, can't believe there are still so many misunderstanding about the physical trading industry. If you are those kind that look to become trader 1-2 years onto the job, physical trading is not for you, graduates will usually need to go through 2-3 rotations across analytics, operations and trade support to understand the whole process of physical trading, this is not a place to make your fast bucks, people usually stick there for the long run and most of them don't consider that much of an exist opportunities. And oil major is one of the best place to start as they are the only few that intend to groom graduates to be trader. Most trading houses dont have graduate program and even those who have it like Glencore and Trafigura, it isn't mean to train you to be trader.
The supermajors aren't necessarily training you for that either...
Well there's a reason their programme is call the Trader Development Programme, although it still doesn't guarantee you to become a trader, especially if you sucks.
How long does it take for a graduate to become a trader?
Not sure being a trader in physical shops is tougher and less interesting than in BB.
BB= more competition, less and less seats available, prop trading is restricted etc.
Go the physical route if you want to make a career with valuable, transferable skills. You will rotate around different departments, learning the ins-and-outs of the business. All of these rotations are important because each one will go some way to help you generate PNL if/when you land a trading role. Because of your breadth of experience, you will be an attractive candidate if you choose to leave and you will have more exit opportunities. For example, you could join a refiner because of your time in refinery planning/procurement, you could join a logistics company because of your time in scheduling and chartering or you could even join a paper shop because you understand how to manage derivatives risk and also how the physical world works and the linkages between each function. Precious few people in this industry have ever actually loaded a tanker or pipeline with crude oil.
Go to paper route if you want the opportunity to retire in your mid 30's after 10 adrenaline fuelled years of waking up to check your PNL on the close, on the open and in the middle of the night. And we haven't even begun to consider the periods when geopolitical risk is at a premium because someone is firing RPG's into a refinery. Unlike the physical shop, you will focus on a specific suite of niche products. You will become a subject matter expert in anything and everything to do with those products. Your job will be to know everything that happens, why it happened, how it will effect price and when it will cease to effect price. People will probably ask your opinion on a certain event and you will be expected to speak fluently of market developments and prospects. Despite this, your skills wont be transferable; except to other funds/prop desks and these opportunities are few and far between. There is also the reputational risk: what if you blow up? What if your shop blows up? What if you flunk your track record after 3 years? If any of these three things occur, your uphill struggle just got harder.
Speaking from personal experience, I took the latter route and after 5 years I am beginning to regret my decision. I accumulated a reasonable amount of personal wealth in my 20's; enough to fund an MBA and live a comfortable life. But now I am coming to a time where I want to switch careers and I'm realising that I have very few transferable skills. I missed that whole "annoying rotation" thing that the younger guys did and without taking a step back, I can't move froward.
What did I learn on my "rotation"? How to be comfortable with risk. You know that churning feeling in the pit of your stomach when you lose money? That is the perpetual feeling that you will experience every single day, even when you're making money. The commodities markets are volatile and unforgiving and will punish a poorly researched position. Only after 5 years is that churning feeling beginning to fade and I guess that is what many of the great value investors have learned in their respective industries; the importance remaining confident in your own views and analysis and keeping a cool, level head when things get tough. If you aren't comfortable sticking your neck on the line every day to justify your views, going against the herd and being judged by how much money you made or lost that quarter then this isn't for you. There is no hiding from your PNL.
Very well written post, delayed.
Based on the last comment, everyone is going to go into paper trading thinking they'll make a mint by their 30's - not so. It works for some, it doesn't for others, and to top it off, not near as many people are making the crazy money like they were several years ago
There's also some pretty careless lack of distinction between the programs. Some of them have "trader" development programs, some have "graduate" development programs... Lots of people on here seem to assume this is like a legal or binding definition.
The GDP at a place like Trafigura could be a much better path to trading than the TDP at Shell, depending hugely on the individual (more than anything), cultural fit (also huge), luck, which job functions you get and how you fit in with those desks, and so on. If you can't jibe with BP's...new... culture, than another place with a "GDP" could well be a better path to trading than trying to stick with a "TDP." Just my opinion.
There's also some pretty careless lack of distinction between the programs. Some of them have "trader" development programs, some have "graduate" development programs... Lots of people on here seem to assume this is like a legal or binding definition.
The GDP at a place like Trafigura could be a much better path to trading than the TDP at Shell, depending hugely on the individual (more than anything), cultural fit (also huge), luck, which job functions you get and how you fit in with those desks, and so on. If you can't jibe with BP's...new... culture, than another place with a "GDP" could well be a better path to trading than trying to stick with a "TDP."
I've met people who finished the TDP at a place and didn't get an opportunity to trade despite passing the tests. I've met people who finished a "GDP" and received an offer to trade. It's way more about the individual experience than what your technical job title might say. Just my opinion.
What you said here is golden
Very well said.
It really depends on what your goal is. If you want the chance to trade physical as soon as possible (and this is WSO so we'll assume you do), find a shop where you mesh with the culture and will be well liked by the traders. Assuming you want to do oil and gas, you may learn more faster at BP/Shell given the structure of their programs but the same structure can also work against fast upward mobility.
There's a bit of luck and lots of internal politics involved of course, but at the end of the day, the only way you will become a trader at these places is if a head of desk says "I want this guy to be a trader on my desk". Therefore, your best bet is to get a trader-facing position at any of the shops (be it a GDP positions, ops role, deals, whatever else there is), not fuck up, be well liked, and get a senior trader to vouch for you and get you on their desk.
Additionally as a side note, if you look at the hiring numbers for TDP/GDP/etc programs at a lot of shops, one might suspect that they expect a certain degree of attrition. Not even the likes of Trafigura/Glencore/Mercuria/etc need 15 new incoming junior traders or graduates every year.
I take Shell and BP over any other shop out of college
You will find very few physical traders with significant M&A or investment banking backgrounds.
However, I feel that it is actually very important to point out that there are other (many well paying, even!) jobs in the physical commodities space other than trading. A lot of the bigger shops are vertically integrating which means they have internal M&A and fixed Asset Management groups; you'll find lots of ex investment banking/M&A/PE folks here. Trade and structured finance are also big - lots of guys move from banks to trading houses. Some shops let deals/pricing desks run their own P&L. Some of the guys who handle risk are basically quants. The list goes on. Some of these guys make more than some traders.
I would note that a lot of the traders(technically brokers)in the renewable commodities space are basically just business development people who source, originate, and structure deals to sell carbon credits. This type of trading is 80% Sales or so it seems. I find it fascinating.
Since I wrote this post, I have learnt a lot about how the physical commodity trading house is operating, also through discussions (a separate thanks to mehtal).
Great post, delayedresponse!
I don't believe in fast bucks careers and wouldn't recommend to anyone, fast bucks leave as fast as they can arrive. It's all about whether you like what you do and whether you are made of the right material to do it.
Right now I am looking at ADM as a place in agri but as several people mentioned here, indeed it is important to note two things: 1) to become a trader through development program you must have at least one rotating at/next to the trader. 2) the cultural fit is important unless you like changing companies every year.
If you go to ADM to trade grains, be prepared to spend at least 2 years in a small town in the Midwest. They also have a reputation for routinely moving people from location to location without those people having much choice in the matter. Good company though.
There is lots of comments here, I will speak from my experience as a practitioner. -environment People with big egos and people from all walks of life. You need to learn how to find a common language both with oxford graduate and a guy with no formal education who started out selling coal domestically in some small ukrainian town. Note - second guy, can be much more valuable contact. Slightly macho culture in big trading houses. -valued skills and competencies Being quick on your feet, hardworking, multitasking, responding in real time. You load a vessel somewhere in the world, and you are deciding on quality of delivered material. Nobody cares it is late in a part of the world you based and you attend your aunt birthday party. Languages can help. Being a natural salesmen can help. Reading FT and following geopolitical news can help. Same for being details oriented. Competencies? Read on supply/demand landscape for given commodity. Read Platts or Argus Media. Understand INCOTERMS, understand shipping, payment terms (LCs and et cetera). Understand basics on derivatives and check out the contracts specification for futures based on commodities you are interested in. -requirements to enter Sell yourself at the interview, show you realize what this business is about. You can help your luck by taking a Master Degree in Commodities Trading at University of Geneva or physical trading course at Commodities Academy in London.
RE: full time availability, I remember an anecdote where one trading operator was on a wedding (Sunday) and there was a major issue with some vessel that caused a 6 figure loss for not being dealt with appropriately (it would have been for sure a big loss anyway, but maybe a 5 figure).
When confronted by the MD on that, the operator argued she was on a wedding and somwhat didn't pay attention and couldn't handle it real time.
The MD literally screamed "Even on MY OWN wedding I would have taken care of it on the spot"...
Yeah - I know an operator who allegedly was at the hospital giving birth and had them bring a telephone in to deal with a contamination issue.
In my first marine ops role they couldn't get ahold of me as my phone had died. I had stayed the night at my girlfriends house and she was dropping me off and when I got out of the car my trader was in front of my house knocking on my door.
What have i walked into :/. Its going to be exciting i guess!
I am a trainee at a large agri-trading house in Continental Europe. Physical trading is truly a full 360* experience, you get to know the whole supply chain and if you are lucky you travel quite a lot even as a junior. In agri/softs you can make it to jr. trader after 2 to 5 years, depending on the above-mentioned factors. I feel like junior employees are treated better (comp and benefits wise) than at energy firms although O&G people tend to make more dough over the long run with bonuses etc.
Big point to mention: forget what you know about S&T at BBs, physical trading is a different world! Feel free to ask away, if you need!
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