Seems trading this product is still somewhat niche and that the market still has a ways to go before it becomes as mature as gasoline, heating oil etc. Does anyone know much about what being in the LPG trading business is like in terms of volatility, liquidity and general particuliarities vs other oil products? Looks like some of the usual suspects like Traf and Vitol are big there and trying to get bigger. Anyone else, who is not necessarily a "household" commodity trading name?
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Not familiar with US and European situation, but in Asia Most oil majors are trading LPG and trying to expand activities in this product, In terms of market maturity it's probably 10-15 years behind crude oil, 5 years behind LNG, not that many spot cargoes in the market to trade and the pricing mechanism isn't that robust yet. And volume definitely not as big as crude however it's a niche market where margin can be much higher.
Surprised to hear that you think the market is behind LNG in terms of development. What makes you say that?
LNG isn't a new thing even though it is for the U.S. It's actually a pretty old technology -- Qatar and others have been exporting it to the Far East and Europe for a long time now.
Still very new and niche. It ain't really trading truly its probably the most of any area in terms of specific to assets and contracts still. All the major firms are there need a big asset portfolio and balance sheet.
Haven't both LPG and LNG been traded since the 1950s or so? From what I've heard, LNG trading is often done with long-term complex contracts, sometimes indexed to oil rather than nat gas, dependent on a lot of new investment in very expensive assets and buyers in certain instances can't resell the product. All of this makes it sound like a rather underdeveloped market. Is any of that accurate and if so, is LPG really that far behind? If it is, can you explain what aspects in particular? Can you explain what you mean by "it ain't really trading truly", as it seems that LPG is moved all around the world on small/mid-sized vessels and paper markets exist where you can hedge exposure, though it's sometimes indexed to other products?
Trading,like that PTJ documentary is when one can constantly take a position daily and change their position. One can also easily speculate.
Both LNG and LPG is mostly logistical optimization. When you have long-term contracts linked to different products and various locations and as you mentioned basically super difficult barriers to entry you ain't really trading. You are optimizing a very expensive series of assets someone else owns on annual/monthly/daily process, thing is you are a logistical expert and know those contracts/assets/etc better than anyone. Basically no one is going to buy a ship and say lets sell market x, buy market y. No they are optimizing a previous business decision someone else has made.
Since your question is about LPG and not LNG. Same thing basically the LPG folks I know work on specific contracts, are on the road making connections and finding niche areas of the market and optimizing it etc...
Doesn't matter how long its been around it depends on the needs of the market. The concept of environmental trading been around for years too and again has near specialized contracts for everything.
Thanks for this. Correct me if I'm wrong but it sounds like the main difference between LPG and trading something like crude or gasoline is liquidity.
Optimizing logistics/assets is done in other products as well. You see this with traders investing in storage, production, refining, pipelines etc. in more liquid markets too. They can just get in and out of positions more easily - as you mentioned - as they trade around the assets and they perhaps don't depend as much on structured and more complex contracts as LPG traders do. I said "perhaps" because I don't know to what extent long-term structured contracts are used vs simpler deals in LPG.
At the end of the day, don't both LPG and heating, crude oil etc. traders (physical) both look to arb products by optimizing logistics?
Also, is it really that complicated for a trader to go to a customer, decide to purchase a certain amount of LPG with the view that another market is going to rise and sell it to customers he knows in the other market - i.e. buy market x, sell market y?
Now you comparing a whole lot of things across different desks. Natty/power are the most easy to speculate and also the ones where smaller shops can take risk a lot easier again a natty/power hedge fund is truly just trading. Crude is next as there is some funds and shops who trade financial and directionaly, but as you said there is whole area of physical crude that is again mostly logistics and dominated by larger players.
When you get to LNG/LPG etc you truly ain't trading as you mentioned you are optimizing a major asset base in most cases. Yes it is super difficult for anyone to give you capital to say let's go build a business then just go long X and hope it goes up, no one is handing out ships/trucks/railcars easily. While natty/power and crude in some ways you can just go buy and sell and truly are just speculating end of the day, contracts are completely transparent, everyone has the same tools and rules.
When comparing LPG with trading in other oil products, I was referring to trading those products on the physical side, rather than being a derivatives trader in crude vs being a physical trader in LPG for example. That may not have been clear.
From what I've seen, when it comes to trading physical cargoes, the process is generally the same across oil products, in terms of putting together a deal. I.e. find supply, find demand, figure out how to manage the logistics and financing in between - which often involves using yours or other people's railcars, ships, storage tanks etc- hedge your risk and hopefully make money. The logistics may be harder - due to less developed infrastructure - liquidity lower, contracts sometimes more complex and price volatility higher in some products such as LPG but don't you think that the basic mechanics are largely the same?
We are saying the thing. Yes they are all basically optimizing and logistics. But still LPG is an area that is more specialized than others. That said I have seen crude, lpg, folks move back and forth so you are correct basically same sort of job.
Yeah the "more specialized than others" part definitely seems to be true. Sounds like we're ont he same page.
I didn't know that crude and lpg traders moved between each other's markets. Interesting to know.
Being on the nat gas side, any idea if going back and forth between lng and lpg is something that happens, or may happen more frequently in the future? It looks like the logistics of lng are closer to the logistics of lpg than those of crude, for instance, and in certain markets around the world, lpg and lng may compete for market share for things like power generation. I assume that contracts may also be of similar complexity. Any idea?
Base supply for Asian LPG demand comes from the AG (Arabian Gulf) where LPG was always a byproduct of oil. Prices are set once a month -- known as the Contract Price (CP). There is no effective way of hedging that exposure, so paper liquidity in the LPG market is restricted. Physically, there is more spot activity and US shale has also upended some of the conventional flows, i.e USGC competes with Middle Eastern barrels into West Africa and as far as East Africa. LNG is an entirely different ball game. Because of the massive capital investments, LNG still requires a big portion of the supply to firmed up by buyers; essentially "de-risking". Again, because the market is long some of that thinking is being upended and buyers are starting to trigger clauses in their contracts allowing for cargoes to be re-sold. In other situations, buyers are opting for short-term supply deals (6 months - 1 yr). This has created opportunities for traders like Trafigura and Vitol who are taking out higher risk shorts more aggressively.
@Soundclouding" Any idea what the best companies are if you want to learn to trade the LPG market? Do you know who the major players are?
All of the big trading houses and majors have LPG benches with varying degrees of size. Trafigura, Vitol, Glencore, Kock, BP, Shell, Total. There are specialized players also like Geogas, Petredec.
On LNG, you are spot on, and it is huge what has happened during 2015 with the new Australian capacity coming online exactly at the same time with the oil price collapse.
On LPG. i am not sure that i understand how paper trades work in Asia. Are there hedge contracts available, apart of the Ginga swaps? Can physical spots be offered to paper traders that need to close positions?
I also find it difficult to understand the price finding around the CP price: most of the time CP + shipping does not add up to the Far East price. Neither does AG spot price (which exists and is different from the CP) + shipping add up to the destination spot. Basically, how can i establish the "fair" premium or discount on CP at a given moment.
In Asia, Argus prints the Far East Index (FEI) which theoretically gives you the instrument to hedge. But it is illiquid and disconnected from how the physical prices (AG CP monthly prices), so it doesn't really fulfill its role. You're effectively still exposed to flat price, so LPG trade requires a much closer matching of shorts and lengths to eliminate risk.
Traders will not often just take a physical position in the spot market and try to place the barrels. They're completely exposed to the cash diff. When they do it maybe because they have a strong fundamental view (supply/demand, LPG cracking). Otherwise it's usually big Asian trading houses with systems behind them that buy up the LPG. No easy answer I'm afraid.
depends, do you have any LPG/NGL experience
LPG (Originally Posted: 05/26/2014)
Has anyone traded LPG / know much about this mkt?
I think LPG is a fascinating market. We just came out of one of the worst record shortages we've ever had. I imagine there are more opportunities in this market then nat gas yet it's rarely discussed here. It's a huge market in Europe btw, bigger then nat gas. In the US it's more a regional market.
What caused the squeeze?
Do you have an idea of who major players / what main trade flows and popular plays are?
LPG will be and has been a very strong market for anyone long a crude biz. Lot of the bigger trading houses will have US, London and Far East guys trading LPG
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