10/5/10

Hi,

Can someone explain how exactly a physical commodity trading house makes money and why there is a need for independent comodty houses, whats there right to exist?

What are the risk when trading commodities physical and how can they be hedged, are there specific hedging strategies that are applied by physical traders?

Thanks for the feedback.
Cheers.

Comments (184)

10/5/10

Location arbitrage.

10/5/10

Leveraged metals houses were popular a decade ago, and a few might still be around. They make their money on margin interest and storage fees.

They were usually the last stop for guys who got kicked out of the commodities business, because selling the physical didn't require a license. So you can imagine that most leveraged metals houses were bucket shops.

10/5/10
10/5/10

Physical Commodity houses make money by trading commodities that actually exist. Even though a futures contract is physically deliverable, most positions are closed out before physical delivery needs to be made. They are not just trading a piece of paper that is worth 1,000 barrels. They literally trade barges of oil or oil in a pipeline that NEEDS to go somewhere.

There are a few risks for physical commodity prices, but the two biggest are price risk and credit risk. You hedge the price risk with futures and you hedge the credit risk with CDS.

The physical trading of commodities is done between different counterparties and there is a time delay between when the deal is done and when oil is delivered. I believe it takes 40 days or so (depending on how full the pipeline is) for oil to flow from Canada down in to PADD 3 (Gulf Coast). There is a credit risk during that 40 day delay. Even though it is not likely that a counterparty defaults, in the unlikely event that one does, a trader could lose 10+ million. It is much safer just to hedge it with CDS.

Unlike a paper trader, a physical oil trader has to worry about supply and demand in different regions of the US (as well as what Brent and other grades of oil are doing abroad). They also have to look at transportation cost, storage costs, refinery set ups, ect.

"Greed, in all of its forms; greed for life, for money, for love, for knowledge has marked the upward surge of mankind. And greed, you mark my words, will not only save Teldar Paper, but that other malfunctioning corporation called the USA."

10/5/10

Thanks. Can someone explain what location arbitrage is, and which commodities are used for it, some classic examples.

But the question regarding the right to exists of independent commodity houses still remains, what's the advantage of dealing with them instead of completely integrated companies like the oil majors?

Cheers,
Alain

10/5/10
vanquan:

Thanks. Can someone explain what location arbitrage is, and which commodities are used for it, some classic examples.

But the question regarding the right to exists of independent commodity houses still remains, what's the advantage of dealing with them instead of completely integrated companies like the oil majors?

Cheers,
Alain

for me its exporting power from the midwest when prices falls and importing the crap out of it into cali as prices skyrocket.. aka enron

10/5/10
vanquan:

Thanks. Can someone explain what location arbitrage is, and which commodities are used for it, some classic examples.

But the question regarding the right to exists of independent commodity houses still remains, what's the advantage of dealing with them instead of completely integrated companies like the oil majors?

Cheers,
Alain

Different commodities can have slightly different prices based on their geographic location and the supply/demand in that area. There could be a lot of supply of crude in one pipline, but less crude in another geographic area which has a higher price (also different grades of crude have different finished product yields depending on the refinery set up). Those price differences allow for an arbitrage opportunity provided the transportation costs are less than the spread between the prices. traders will conduct this arb until the spread disappears. In the oil market arbs can last weeks or even months because you are dealing with the actual delivery of a commodity. There are also global arbs. The Brent-WTI (Atlantic Arb) is the most commonly traded oil arb in the world with traders being able to take North Sea Brent and ship it across the Atlantic depending on WTI prices and freight costs----the trade can also go the other way with WTI going to Europe. There is also different supply and demand characteristics with finished products, Asian economies use Naptha as a blend stock for petrochemicals while American companies use Ethane and Propane----there is higher demand for Naptha in Asia than the US and refineries in the US can earn a profit by shipping their Naptha production to Asia.

Why do commodity houses exist? They exist for the same reason that hedge funds exist--they provide increased liquidity and someone decided to start trading commodities with their own money that eventually became a large operation. They also invest in and build storage capacity which they use in their operations or can rent out. At the end of the day, they exist for the reason that any corporation exists....because they can make money.

"Greed, in all of its forms; greed for life, for money, for love, for knowledge has marked the upward surge of mankind. And greed, you mark my words, will not only save Teldar Paper, but that other malfunctioning corporation called the USA."

10/17/10
vanquan:

Thanks. Can someone explain what location arbitrage is, and which commodities are used for it, some classic examples.

But the question regarding the right to exists of independent commodity houses still remains, what's the advantage of dealing with them instead of completely integrated companies like the oil majors?

Cheers,
Alain

As the others have said, location arbitrage is exploiting discrepancies between different geographical markets. For example a product at New York Harbor might be trading over (premium) or under (discount) to a product in say Chicago. If you can buy the cheaper product in lets say Chicago and transport it to New York, you can capture the differential between the margin.Your margin will be dictated by transport (freight, rail, barge) rates and since these can also vary based on distance, time (prompt), fuel surcharges or even negotiations, there can be quite a bit of logistics involved in breaking up loads or re-directing loads to capture price differentials.

The advantages that these shops can offer are liquidity, pricing and flexibility with your goods--you don't want to be tied to one supplier since if anything happens to their logistics, for example a train delay, you should be SOL. Since you are delivering physical goods there is a very strong emphasis on relationship between you and your counterparties--if you are reliable and don't run someone dry, you'll see more repeat contracts and business.

10/6/10

Wow you really know your energy stuff Gecko. Great post(s).

10/6/10

it is illegal to ship WTI out of USA. Plus it is a landlocked crude.

In theory it is easy to say "traders will conduct this arb until the spread disappears". This doesn't always happen in reality. Also the arb might be open for one person and closed for another.

Otherwise not a bad post.

10/6/10
pillz:

it is illegal to ship WTI out of USA. Plus it is a landlocked crude.

In theory it is easy to say "traders will conduct this arb until the spread disappears". This doesn't always happen in reality. Also the arb might be open for one person and closed for another.

Otherwise not a bad post.

It's illegal to ship WTI out of the US? I was under the impression that WTI was deliverable under the ICE contract just as WTI, Brent, Bonny Light, and a few other crudes were deliverable under the NYMEX contract.

Also, can't they ship it through a pipeline, load it onto barges and then put it on a Super Tanker off the coast of New Orleans (I think?) or get it onto barges and ship it up to NY?

"Greed, in all of its forms; greed for life, for money, for love, for knowledge has marked the upward surge of mankind. And greed, you mark my words, will not only save Teldar Paper, but that other malfunctioning corporation called the USA."

10/6/10
Gekko21:

It's illegal to ship WTI out of the US? I was under the impression that WTI was deliverable under the ICE contract just as WTI, Brent, Bonny Light, and a few other crudes were deliverable under the NYMEX contract.

Also, can't they ship it through a pipeline, load it onto barges and then put it on a Super Tanker off the coast of New Orleans (I think?) or get it onto barges and ship it up to NY?

Ear is right ICE contracts are financially settled. They cease trading on the penultimate. Delivery only has meaning on the NYMEX contract.

You are right that WTI, Brent, Bonny Light and a few others are deliverable, provided they meet certain specifications. Brent which is inferior requires the seller be paid at 30c discount whereas for superior grades sellers are paid a premium, Bonny Light (+15c).

Delivery point is at Cushing which is landlocked (as mentioned in the above post), and you will need access to the pipelines to deliver. So not any Tom Dick or Harry can do so.

And no they cannot pipe it to the coast and sell it outside of the US simply because like i said it's illegal. Not that it cannot be piped or ship, but simply because it is against the law. If you are referring to NY, then it's doable (because it is domestic, not outside of US), but i don't think there are any crude streams in the US being priced off Brent.

Someone correct me if i'm wrong.

10/6/10

Gekko gave a great explanation. Read up on Glencore.

10/6/10

The ICE WTI contract is financially settled there is no delivery on it.
I haven't heard of the atlantic arb before but it could be possible i guess. Aren't there Grade differences between WTI and Brent?

Also phys commodity shops exist purely because the market demands for it. The forward curve for each commodity(contango or backwardated) shows the supply and demand out on the curve.If the mkt is in contango and it is wide enough it maybe advantageous to store the commodity and earn the carry of the curve. This is very common in the Nattie/CL and Ag mkts.

How can they be hedged?
-You can hold physical grain and hedge on the CBOT(CME).
The diff between Spot - future = Basis. If you run a hedged book your ultimately trading the basis.

10/6/10

I work for a physical Energy trading shop. The arbitrage described above is what our bread and butter business is, We transport crude oil, distillate, gasoline, Ethanol and NGL's using barges, pipelines etc.

I have never heard of it being illegal to ship WTI out of the USA. It most likely will never happen, as the US is still one of the biggest crude oil user and importer in the world. Thus, its hard to make a profitable trade to ship it abroad.

The location that someone spoke about in regarding to loading ships is LOOP. Stands for Louisiana Offshore Oil Port. You can offload VLCC's and ULCC's at this location and bring it into the Gulf Coast refineries systems using pipelines and barges.

WTI is landlocked but is also accessible to marine locations using pipelines. Specifically, the Pegasus pipeline which flows from Cushing to the Gulf Coast and Capline which goes from Louisiana to the Mid-Continent.

LLS grade crude oil is produced in the Gulf of Mexico and the new Bakken Field in ND (this crude really is a LLS lookalike but is traded using the LLS "basis" as a benchmark). LLS derives its value from the Brent-WTI relationship.

One of the other drivers of Brent prices (other than European demand) is the sulfur content of Brent crude.

Brent Crude frequently finds its way to the refineries in the Eastern coast of Canada. I would not be surprised if some of Valero's refineries at Paulsboro and Delaware city haven't used this grade before.

I look at a lot of offshore cargoes coming in daily to the GC, that use various different benchmarks. There are a lot of Saharan blends, Russian blends and South American crudes that find their way into the US.

As far as the OP's question about how these companies make money. Lots of producers and end-users are restricted in their ability to hedge and trade their systems. I am defining their "systems" as storage, pipeline shipping commitments, production and long-term supply/offtake agreements. Thus, companies like ours step in, take on long term commitments at index values (in case of physical product) and commitments on assets such as pipeline space and storage. Contango is ideally the preferred market structure for storage owners. We also make money on intermonth rolls on the NYMEX contracts etc. There is also a theory on physical players having better insight on NYMEX pricing and structure. But, that relationship seems to keep getting destroyed as energy becomes more of a mainstream asset class.

10/7/10

Just so everyone knows, LLS stands for Light Louisiana Sweet.

"I just want to be a monkey of average intelligence who wears a suit. I'll go to business school!"

10/17/10

Thanks for the explanations. Are there other well known physical arbs that are traded beside the Atlantic arb, does the same exists within the metal space?

As much of the world's resources are based in political insecure countries, how do the commodity house trade with that problems? Do they just take this risk?

Is it right that within the commodity market a contango situtation is preferred by the traders as they simply can store and sell foreward? How do they deal with backwardation?

Cheers.

10/17/10

Depends on product. Each product has a distinct arb depending on S/D dynamic worldwide. For ex : Naptha is one of the biggest feedstocks in the Asian Pacific petchem plants. The biggest driver of Gulf Coast naptha pricing is the Asian arb. So, the point is arbs are infinite if you have the capability of transporting said commodity and taking on the risk of pricing and hedging.

It's an interesting dynamic. Even the most volatile countries have a tendering process where companies bid to either buy or sell commodities. I would assume Letters of Credit and prepayments are the norm depending on country. This is also one of the reasons, why commodity houses exist. To take on the risk and deliver products to users who do not have the ability to/don't want the risk of trading internationally.

In backward markets, you try to dump your storage, go short and buy the back of the curve and hope to god that the curve flattens.

10/17/10

location arb happens daily in nat gas and power

10/18/10

Another strategy that was very popular last year is playing the contango in crude. I think the last # I heard was about $0.90 per barrel per month to store crude offshore in a tanker. If the contango (future price - current price) is higher than that, then you buy crude today, store it and sell it later on when the price is higher. Not sure how much of that is still going on now with contango spread being much tighter.

10/18/10

Very informative thread. thanks all, keep em coming

10/26/10

Industry volume and nature of transactions.

Great thread. Does anyone have some colour they can shed on the size of physical commodity trading in North America as well as key markets. Namely, what I wish to know is the size of physical commodity trading in Canada versus the US. Also, is the nature of transactions typically booked on an exchange via standardized contracts or if this largely takes place off-exchange between supplier-producer.

Any insight is greatly appreciated.

10/26/10

Canada produces approx. 2.5 MM bbls/day of Crude. There is approx. 17 BCF of wet gas and 13-14 BCF of dry gas produced in Canada. Some of the gas is used in Canada while the rest goes South to Chicago and then onto New York. Gas also flows west to California and Oregon. Crude is primarily all flowing south to Chicago and then to Cushing and then even to the Gulf Coast. There are also imports of NGL's, crude and gas produced in the US that flows north into Canada.

Lot of gas trades on NGX clearinghouse from what I am told. I am sure tons of OTC stuff gets done too. Majority of crude and NGL's trade OTC and starting to somewhat trade on the NGX clearinghouse platform in the last 12 months or so. ICE, Argus, Platts are all trying to make inroads into the Canadian market.

Markets are nearly not as liquid as gas or refined products in the US. Relationships matter and traders still help each other when one finds themselves in a sticky situation.

I am in the energy trading biz in Canada if you have further questions.

11/3/10
ad2345:

Canada produces approx. 2.5 MM bbls/day of Crude. There is approx. 17 BCF of wet gas and 13-14 BCF of dry gas produced in Canada. Some of the gas is used in Canada while the rest goes South to Chicago and then onto New York. Gas also flows west to California and Oregon. Crude is primarily all flowing south to Chicago and then to Cushing and then even to the Gulf Coast. There are also imports of NGL's, crude and gas produced in the US that flows north into Canada.

Lot of gas trades on NGX clearinghouse from what I am told. I am sure tons of OTC stuff gets done too. Majority of crude and NGL's trade OTC and starting to somewhat trade on the NGX clearinghouse platform in the last 12 months or so. ICE, Argus, Platts are all trying to make inroads into the Canadian market.

Markets are nearly not as liquid as gas or refined products in the US. Relationships matter and traders still help each other when one finds themselves in a sticky situation.

I am in the energy trading biz in Canada if you have further questions.

Very informative! Any ideas on how to size up the total volume of physical trading that occurs for crude, NG and gold in Canada.

Perhaps the NGX is indicative of dry gas trading but then there is the NGL component in the OTC space which might bring total annual trading to ~ 30000 PJ?

As for crude, any way to measure the size of trading in OTC? How would one measure totals for Canadian trading volumes in this space?

Looking to gold, are there any markets / clearinghouses in Canada that you are aware of or would most Canadian trading in this space be captured on the COMEX?

Lastly, anyone have any thoughts out there the amount of activity that the Big 5 banks may have in the physical trading space in general?

I apologize for the scattered thought process of mine behind this but your feedback is greatly appreciated.

10/26/10

Natty in Canada is all traded on NGX. They will trade Midwest markets some day too.

The risk is also not just price and credit, but also getting the damn crap there. There is liquid pools and illiquid pools, each has its own pros and cons. But bottom line phsyical trading is not just paper money, you all learn in school. Shit actually blows up, weather actually changes, ppl do die,

Even financial points once we reach cash/pysical aka day-to-day this shit becomes real son, the goldmans of the world cant just beat it down like they do on financial products.

11/3/10

Last month NGX traded approx. 410K BPD of Crude amongst 9 different grades. This is 15% of Canadian crude production. The rest is sold on term contracts and OTC as well. Think about it this way, atleast approx. 2.5 MM bpd trades every day notionally as these barrels have to leave Canada or go to a refinery to be processed. Some barrels go to storage. No idea on how to measure OTC volume.

No idea on NGL's as most trade OTC. C5 trades approx 15k bpd. Pipeline brings in approx. 40k bpd into Canada.

No idea on how much gas traded. Maybe someone else can pull that data.

Never ran into big 5 banks on the phys side. Have a Canadian bank that brokers financials a bit. Run into JPM, MS, Barclays, GS every now and then.

7/9/11

Could you tell me how these traders analyze if they go short/long?..Any mathematical proofs or just qualitativ analysis with luck?

7/9/11
Massiveattack1987:

Could you tell me how these traders analyze if they go short/long?..Any mathematical proofs or just qualitativ analysis with luck?

Depends on proudct and firm.

7/14/11

Great thread guys. I don't want to sidetrack this thing, but a quick side - Can someone give a brief description of what a physical energy trader actually does on a day-day basis?

And what skills do you think are most important for the job?

7/14/11
ibintx:

Great thread guys. I don't want to sidetrack this thing, but a quick side - Can someone give a brief description of what a physical energy trader actually does on a day-day basis?

And what skills do you think are most important for the job?

very high level move things from a to b for a profit

relationships is the strongest skill in my eyes and being able to form them

7/14/11
monty09:
ibintx:

Great thread guys. I don't want to sidetrack this thing, but a quick side - Can someone give a brief description of what a physical energy trader actually does on a day-day basis?

And what skills do you think are most important for the job?

very high level move things from a to b for a profit

relationships is the strongest skill in my eyes and being able to form them

Would you say energy trading a bit like derivatives market making in that you make money off the spread, albeit in a longer term than most liquid derivatives (if it takes 40 days to deliver)? but on the other hand, it is different in that there are way smaller number of participants in physical energy markets that the personal relationships with the clients actually matter a lot as opposed to a derivatives market maker who has plenty of anonymous customers(market participants) that buys/sells constantly without knowing who the buyer/seller is personally?

7/14/11
JSA:
monty09:
ibintx:

Great thread guys. I don't want to sidetrack this thing, but a quick side - Can someone give a brief description of what a physical energy trader actually does on a day-day basis?

And what skills do you think are most important for the job?

very high level move things from a to b for a profit

relationships is the strongest skill in my eyes and being able to form them

Would you say energy trading a bit like derivatives market making in that you make money off the spread, albeit in a longer term than most liquid derivatives (if it takes 40 days to deliver)? but on the other hand, it is different in that there are way smaller number of participants in physical energy markets that the personal relationships with the clients actually matter a lot as opposed to a derivatives market maker who has plenty of anonymous customers(market participants) that buys/sells constantly without knowing who the buyer/seller is personally?

short,mid or long you always know who your counterparty is

10/27/11

There's currently a decent spread between WTI and Brent that's wide enough to cover transportation and other associated costs involved in getting the stuff from Cushing (where you buy WTI and take delivery) to the Gulf (where you sell WTI at Brent prices). This spread obviously won't last and is in fact narrowing. Supposed one wanted to get into the trade - this is small stuff here, using trucks to transport a couple hundred barrels (per truck) at a time - is there a way to lock in the price differential, using futures, even though both activities will be unrelated for want of a better term. Basically, right now, there is an $18 spread between the two. Maybe this spread will be much narrower next year this time. How I can lock in the $18 difference?

Thanks

1/5/13

Le Capitalist:
There's currently a decent spread between WTI and Brent that's wide enough to cover transportation and other associated costs involved in getting the stuff from Cushing (where you buy WTI and take delivery) to the Gulf (where you sell WTI at Brent prices). This spread obviously won't last and is in fact narrowing. Supposed one wanted to get into the trade - this is small stuff here, using trucks to transport a couple hundred barrels (per truck) at a time - is there a way to lock in the price differential, using futures, even though both activities will be unrelated for want of a better term. Basically, right now, there is an $18 spread between the two. Maybe this spread will be much narrower next year this time. How I can lock in the $18 difference?

Thanks

You can trade the WTI-Brent as a product in itself, its on the ICE.
Of course, going short $18 would NOT have made you money btw.

3/5/13

Le Capitalist:
There's currently a decent spread between WTI and Brent that's wide enough to cover transportation and other associated costs involved in getting the stuff from Cushing (where you buy WTI and take delivery) to the Gulf (where you sell WTI at Brent prices). This spread obviously won't last and is in fact narrowing. Supposed one wanted to get into the trade - this is small stuff here, using trucks to transport a couple hundred barrels (per truck) at a time - is there a way to lock in the price differential, using futures, even though both activities will be unrelated for want of a better term. Basically, right now, there is an $18 spread between the two. Maybe this spread will be much narrower next year this time. How I can lock in the $18 difference?

Thanks


Just re-read this one... Not all of these details are accurate, but the general idea is what is important (Louisiana Sweet is the benchmark for GC crude. It's highly correlated with Brent, but not perfect).

I thought the same thing about this spread at the time, but we both would have been VERY wrong paper trading that spread. All you would have to do is buy WTI and sell Brent as hedges, then unwind those hedges when your physical cargo prices in. You would probably buy the physical product based on the average price in the days surrounding the Bill of Lading. Whatever your pricing exposure is on those days, you unwind that number of hedges to manage your risk properly.

I will make a post about how this is done in the near future.

11/27/11

Does anybody know some of the major physical shops?

11/27/11

define major?

11/27/11

I don't have any requirements for major, but I was thinking the top 10 or so in terms of AUM.

2/15/12

Hi,

Interesing thread....

A couple of questions:

  1. Is a license required to trade physical oil, fuels, and petrochemicals within the U.S. or internationally?
  2. Are there any courses on this that you know of?

Thanks

2/15/12

Reading Oil 101 helps me understand this thread much better

12/24/12

Hi Everyone,

Thanks for providing such information

12/30/12

Great thread guys, as someone who is new to physical crude trading what hedges would you recommend implementing to protect a cargo of Petroleum bought today for future delivery in one region on local pricing with intention to deliver if by sea to a different region on totally different pricing??

1/5/13

bsasegbon:
Great thread guys, as someone who is new to physical crude trading what hedges would you recommend implementing to protect a cargo of Petroleum bought today for future delivery in one region on local pricing with intention to deliver if by sea to a different region on totally different pricing??

Not in the industry, so please correct me if im wrong. I would say a combination of hedging via a future contract to expire after the delivery of your cargo (currency and the oil grade ur trading). You might want to buy a credit default swap to remove counter party risk. Also, be sure not to get screwed on the bill of lading (read the fineprint) and double check the demurrage terms in case of logistical problems at the port, bad weather or low tides.

1/5/13

Not in the industry, so please correct me if im wrong. I would say a combination of hedging via a future contract to expire after the delivery of your cargo (currency and the oil grade ur trading). You might want to buy a credit default swap to remove counter party risk. Also, be sure not to get screwed on the bill of lading (read the fineprint) and double check the demurrage terms in case of logistical problems at the port, bad weather or low tides.[/quote]

Thanks a lot for your help, thats exactly what I was looking for. So besides price and counter-parties is there anything else that might need to be hedged against?

11/3/14

Hi there, I have an interview at an oil trading company (graduate scheme). Do you know if they will expect us to be this technical (I.e. did you have a similar interview)?

Thanks in advance, appreciate your help.

12/15/14

Can any post a list of resources (books, articles, videos, etc.) where one can go and learn more about the industry and how the commodities houses are run? Thanks!

12/15/14

Can any post a list of resources (books, articles, videos, etc.) where one can go and learn more about the industry and how the commodities houses are run? Thanks!

12/26/14

Hi, I have a video interview with a physical commodities trading firm. Any suggestions on how to prepare ?

12/26/14

Hi, I have a video interview with a physical commodities trading firm. Any suggestions on how to prepare ?

12/26/14

pay out depends on firm and trader.. no two are alike

12/26/14

very insightful. Does anyone who actually work/worked for these firms have any insight?

12/26/14

10-12% is more common, bear in mind though that upto 50% of this can be in stock, sometimes vesting over as long as 5 years.

12/26/14

Agree with Monty, these firms can structure thier offer however they want, depending on how badly they want to hire you (at the senior level anyway), there is no 'standard' at these kind of shops.

12/26/14

We pay 17%..very similar to one of the shops you listed above..

12/26/14

How do you determine the payout for a single trader in a particular location, if there is a significant part of his book that involves arbitrage cargos? I.e he could be the one sourcing or he could be the one marketing the cargo.

12/26/14

At a top place like Glencore, a general rule of thumb is that 10% of group P&L is available for bonuses. You're smoking dope if you think you'll personally get 10% on what "you have" brought in for the group. In reality, your personal number might be more like 2-6% depending on how senior you are and how easy it is to show attribution that you're truly the one responsible for the return.

12/26/14

EarTotheStreet,

The move from analytics to trading work out?

Where'd you end up?

12/26/14

anywhere between 10-20% is pretty standard payout for a trader on the buyside regardless of the product. And yes it is in writing for sure.

12/26/14

You beat me to it. The bigger and related story of the day is that John Arnold is shutting down the Centaurus Master Fund. He doesn't get nearly as much attention as some of the other HF managers here on WSO. I've always looked up to the guy.

I'm a commodities guy, but my background is financial/derivatives.

NATURAL GAS HEDGE FUND MANAGER JOHN ARNOLD TELLS INVESTORS HE IS CLOSING Centaurus Energy MASTER FUND - RTRS

12/26/14

Look a the massive profits from the commodities firm (Vitol, Glencore,...) that mainly trade physical.
I don't believe that paper is going to decline anytime soon.

12/26/14

Revenues:

Gunvor: US$65 billion
Vitol: $195 billion
Glencore: $186.2 billion
Xstrata: $33.8 billion
Mercuria: $47.2 billion
Cargill: $119.5 billion

How many employees do each of these firms have in their marketing divisions? 1000-2000? 3000 max?

The HBS guys have MAD SWAGGER. They frequently wear their class jackets to boston bars, strutting and acting like they own the joint. They just ooze success, confidence, swagger, basically attributes of alpha males.

12/27/14
SonnyZH:

Revenues:

Gunvor: US$65 billion
Vitol: $195 billion
Glencore: $186.2 billion
Xstrata: $33.8 billion
Mercuria: $47.2 billion
Cargill: $119.5 billion

How many employees do each of these firms have in their marketing divisions? 1000-2000? 3000 max?

Each? That seems really high.

12/27/14
GoodBread:
SonnyZH:

Revenues:

Gunvor: US$65 billion
Vitol: $195 billion
Glencore: $186.2 billion
Xstrata: $33.8 billion
Mercuria: $47.2 billion
Cargill: $119.5 billion

How many employees do each of these firms have in their marketing divisions? 1000-2000? 3000 max?

Each? That seems really high.

That shit real. Mercuria alone had 350 people in marketing and trading a few years ago. The rest were in 'industrial production', if you know what I mean.

The HBS guys have MAD SWAGGER. They frequently wear their class jackets to boston bars, strutting and acting like they own the joint. They just ooze success, confidence, swagger, basically attributes of alpha males.

12/26/14

The hedgies have had a challenging couple years. John Arnold probably had the most meteoric rise to HF riches of any trader I can think of. Can't blame him for retiring considering the money he's made.

12/27/14

A fair amount of Glencore's revenue is from production not marketing/trading activities. Most of Xtrata's is from production. Not sure about the rest.

12/27/14
safricactury:

A fair amount of Glencore's revenue is from production not marketing/trading activities. Most of Xtrata's is from production. Not sure about the rest.

Obviously, especially if they move in for long-term investments through buying mines, etc.

TheSquale:

What do you mean by marketing ? For me it's how to create and maintain good relationship whith customers, I don't think that it's what u're talking about.

Marketing commodities, they produce, store and transport these globally (trade them).

The HBS guys have MAD SWAGGER. They frequently wear their class jackets to boston bars, strutting and acting like they own the joint. They just ooze success, confidence, swagger, basically attributes of alpha males.

12/27/14

double

12/27/14
TheSquale:

What do you mean by marketing ? For me it's how to create and maintain good relationship whith customers, I don't think that it's what u're talking about.

Marketing commodities, they produce, store and transport these globally (trade them).

Ok, I see. Thanks for the clarification.

12/27/14

What do you mean by marketing ? For me it's how to create and maintain good relationship whith customers, I don't think that it's what u're talking about.

12/27/14

Glencore has offtake agreements with mining majors like Anglo, BHP etc. They purchase the material from these producers and market it to end clients. This is called 3rd party marketing.

12/27/14

Didn't know that SonnyZH. Physcial trading is a pretty huge industry when you consider all the stuff on the side as well: shipping, trade finance, warehousing... And obviously the numbers explode if you consider producers.

12/27/14
GoodBread:

Didn't know that SonnyZH. Physcial trading is a pretty huge industry when you consider all the stuff on the side as well: shipping, trade finance, warehousing... And obviously the numbers explode if you consider producers.

yea its not just pure paper trading... all the various logistics need to be handled well too.

12/27/14

the day every aspect of physical trading can be done by algo's is the day we might as well all stop fucking working. if an algo can get a ship out of some of these fuckers, it's the most advanced AI out there.

12/27/14

I work at a midstream company and we do a lot of physical trading, especially around assets we own and can leverage off of. Commodities are real goods used for real purposes that require reaching real destinations. Physical trading will always be important and will always be a large business. There are so many market inefficiencies due to infrastructure constraints that there will be growth in this space for many years to come.

The article was simply pointing out that paper traders no longer require extensive experience on the physical side. A lot of hedge funds might not care about the physical market because they understand the other dynamics behind the paper products. They might understand the global economics that impact WTI pricing and take a position based on that. With the ability to leverage, this might dwarf (in financial terms) any of the physical movements. But the physical guys will still move those WTI based barrels because oil needs to refined and sold. Hell, there are so many products out there that don't even have a futures market that the physical guys operate in a completely different space than guys taking a spec position on paper.

Now the reason for a decline in the number of physical traders may be (and this is just my guess) that there is consolidation in the market where a few dominant firms are now running the show in their respective spaces. This means they have a lot of assets to trade around and have access to a lot of information. Therefore one guy can make better and more informed decisions vs many years ago in a more fragmented market where it may have been advantageous to have more traders to gain that insight

12/27/14

Can any on who has experience working on trading desk answer this question what is the real role of the commodity exchange?

I am confused here why would any commodity producer (oil, gas, sugar) would sell his product in the exchange (ICE, Chicago mercantile exchange, new York mercantile exchange) specially that the spot market is way high that the paper market (sugar for example)

Those big commodity trading houses (Cargill, Louis dreyfus, glencore) I thought they are just doing PAPER trading but NO they are doing physical as well. But what is the role of the exchange? For example I called a sugar company asking for 10 metric tons and they quoted the price at 820 while in London it is traded at 570. if that's the case who is the company that is going to sell a contract of sugar in the market if it is in the Canadian market at 1200 spot and in the American market at 1280. Can not they just sell that directly in the market? In other words, coming the delivery month, there is going to be about 12000 mt standing for delivery. Who is the stupid who sold that in the exchange for 570 while he can sell them in the physical spot market for double the price? The same thing for oil, cotton , cocoa and so on

12/27/14
MD finance:

Can any on who has experience working on trading desk answer this question what is the real role of the commodity exchange?

I am confused here why would any commodity producer (oil, gas, sugar) would sell his product in the exchange (ICE, Chicago mercantile exchange, new York mercantile exchange) specially that the spot market is way high that the paper market (sugar for example)

Those big commodity trading houses (Cargill, Louis dreyfus, glencore) I thought they are just doing PAPER trading but NO they are doing physical as well. But what is the role of the exchange? For example I called a sugar company asking for 10 metric tons and they quoted the price at 820 while in London it is traded at 570. if that's the case who is the company that is going to sell a contract of sugar in the market if it is in the Canadian market at 1200 spot and in the American market at 1280. Can not they just sell that directly in the market? In other words, coming the delivery month, there is going to be about 12000 mt standing for delivery. Who is the stupid who sold that in the exchange for 570 while he can sell them in the physical spot market for double the price? The same thing for oil, cotton , cocoa and so on

Commodity futures contracts are exchanged this way.

Different commodities can have slightly different prices based on their geographic location and the supply/demand in that area. There could be a lot of supply of crude in one pipline, but less crude in another geographic area which has a higher price (also different grades of crude have different finished product yields depending on the refinery set up). Those price differences allow for an arbitrage opportunity provided the transportation costs are less than the spread between the prices. traders will conduct this arb until the spread disappears.

The HBS guys have MAD SWAGGER. They frequently wear their class jackets to boston bars, strutting and acting like they own the joint. They just ooze success, confidence, swagger, basically attributes of alpha males.

12/27/14
SonnyZH:

Those price differences allow for an arbitrage opportunity provided the transportation costs are less than the spread between the prices. traders will conduct this arb until the spread disappears.

If you are in the physical market you will know that transportation costs are always higher than any spread. I dare any trader to find arb there

what you wrote is what they teach in books and in theory. My question attempts to understand the real market

If the price of oil in one pipeline is low, BP , exxon or whatever will not do anything to refill that pipe. They will just leave it there until there is a buyer. Plus they are both the producers and refineries and how this will affect the NY commodity exchange oil price?

Let me put my question this way. I am a major oil producer in Saudi Arabia. I will produce oil and sell it directly to whoever needs it. Why would I sell contracts in any exchange what is the benefit and who is the buyer. Can not they contact me directly.

The same thing I am a Brazilian sugar company that own both the Cane fields and the refinery why would I sell a contract in ICE if the spot market is 870 ( by the way these are real numbers I have from my daily work. I did not come up with these numbers). Why would I go to London or ICE and sell a contract for 570 while it is in the market for 870

If I am us airways why I will go to hedge oil prices if I use Jet fuel and delivery is going to be oil not jet fuel so I can not buy this from the exchange I have to go to a refinery for my fuel.

12/27/14
MD finance:
SonnyZH:

Those price differences allow for an arbitrage opportunity provided the transportation costs are less than the spread between the prices. traders will conduct this arb until the spread disappears.

If you are in the physical market you will know that transportation costs are always higher than any spread. I dare any trader to find arb there

what you wrote is what they teach in books and in theory. My question attempts to understand the real market

If the price of oil in one pipeline is low, BP , exxon or whatever will not do anything to refill that pipe. They will just leave it there until there is a buyer. Plus they are both the producers and refineries and how this will affect the NY commodity exchange oil price?

Let me put my question this way. I am a major oil producer in Saudi Arabia. I will produce oil and sell it directly to whoever needs it. Why would I sell contracts in any exchange what is the benefit and who is the buyer. Can not they contact me directly.

The same thing I am a Brazilian sugar company that own both the Cane fields and the refinery why would I sell a contract in ICE if the spot market is 870 ( by the way these are real numbers I have from my daily work. I did not come up with these numbers). Why would I go to London or ICE and sell a contract for 570 while it is in the market for 870

If I am us airways why I will go to hedge oil prices if I use Jet fuel and delivery is going to be oil not jet fuel so I can not buy this from the exchange I have to go to a refinery for my fuel.

I wouldn't say it's about the benefit of trading over exchanges. As Eddie has answered you on your other thread, exchanges such as the NYMEX or the IPE grant both parties a certain "security".

What I mean by this is, futures contracts are ''standardized'' in terms of their characteristics (maturity, quantity of the underlying commodity, quality or variety). They are traded on an exchange so they carry no counterparty risk since both the buyer and the seller of the futures deal with the clearing house of the exchange which is in principle fully trustworthy.

Forward contracts, on the other hand, are private agreements between two parties and are not as rigid in their stated terms and conditions. Because forward contracts are private agreements, there is always a chance that a party may default on its side of the agreement - higher risk exposure.

The HBS guys have MAD SWAGGER. They frequently wear their class jackets to boston bars, strutting and acting like they own the joint. They just ooze success, confidence, swagger, basically attributes of alpha males.

12/27/14
SonnyZH:

What I mean by this is, futures contracts are ''standardized'' in terms of their characteristics (maturity, quantity of the underlying commodity, quality or variety). They are traded on an exchange so they carry no counterparty risk since both the buyer and the seller of the futures deal with the clearing house of the exchange which is in principle fully trustworthy.

Forward contracts, on the other hand, are private agreements between two parties and are not as rigid in their stated terms and conditions. Because forward contracts are private agreements, there is always a chance that a party may default on its side of the agreement - higher risk exposure.

"''standardized'' in terms of their characteristics (maturity, quantity of the underlying commodity, quality or variety). " All of that is covered in series 3 and in text books. But who is the European idiot that will take delivery of 12000 tons of raw sugar at 485 while the refined is sold at 570 so 85 for storage, refining and profit per ton is not worthy. I think that will explain the original post of DECLINE OF PHYSICAL. Because there is no relation between paper and physical. Paper is just speculation. It is a POKER GAME. My company is large consumer of sugar and we can not buy it from exchange or trading house. We have to go to a sugar company and buy spot

12/27/14
SonnyZH:

What I mean by this is, futures contracts are ''standardized'' in terms of their characteristics (maturity, quantity of the underlying commodity, quality or variety). They are traded on an exchange so they carry no counterparty risk since both the buyer and the seller of the futures deal with the clearing house of the exchange which is in principle fully trustworthy.

Forward contracts, on the other hand, are private agreements between two parties and are not as rigid in their stated terms and conditions. Because forward contracts are private agreements, there is always a chance that a party may default on its side of the agreement - higher risk exposure.

"''standardized'' in terms of their characteristics (maturity, quantity of the underlying commodity, quality or variety). " All of that is covered in series 3 and in text books. But who is the European idiot that will take delivery of 12000 tons of raw sugar at 485 while the refined is sold at 570 so 85 for storage, refining and profit per ton is not worthy. I think that will explain the original post of DECLINE OF PHYSICAL. Because there is no relation between paper and physical. Paper is just speculation. It is a POKER GAME. My company is large consumer of sugar and we can not buy it from exchange or trading house. We have to go to a sugar company and buy spot

12/27/14
MD finance:

If you are in the physical market you will know that transportation costs are always higher than any spread. I dare any trader to find arb there ...

Couldn't be more wrong. In terms of natural gas transportation, there are plenty of places that present arbitrage opportunity, the problem is that in order to take advantage of these opportunities, Initial investment (Firm Transportation Agreements) needs to be made, and it can take quite awhile to recover the sunk cost and start making money, furthermore, regional spreads fluctutates due to supply and demand, so recovering investment may not be a guarantee, however despite the risk, the opportunities are there and there are plentiful.

12/27/14

MD finance:

SonnyZH:

Those price differences allow for an arbitrage opportunity provided the transportation costs are less than the spread between the prices. traders will conduct this arb until the spread disappears.

If you are in the physical market you will know that transportation costs are always higher than any spread. I dare any trader to find arb there

what you wrote is what they teach in books and in theory. My question attempts to understand the real market

If the price of oil in one pipeline is low, BP , exxon or whatever will not do anything to refill that pipe. They will just leave it there until there is a buyer. Plus they are both the producers and refineries and how this will affect the NY commodity exchange oil price?

Let me put my question this way. I am a major oil producer in Saudi Arabia. I will produce oil and sell it directly to whoever needs it. Why would I sell contracts in any exchange what is the benefit and who is the buyer. Can not they contact me directly.

The same thing I am a Brazilian sugar company that own both the Cane fields and the refinery why would I sell a contract in ICE if the spot market is 870 ( by the way these are real numbers I have from my daily work. I did not come up with these numbers). Why would I go to London or ICE and sell a contract for 570 while it is in the market for 870

If I am us airways why I will go to hedge oil prices if I use Jet fuel and delivery is going to be oil not jet fuel so I can not buy this from the exchange I have to go to a refinery for my fuel.

... the company I work for buys several base metals basis LME and sells basis SHFE when the spread is higher then transport + import duty taxes, which happens often.

They also buy physical aluminium cash / store / sell forward; since contango is often much higher than costs of financing/storage/insurance

I would recommend abstaining from making such absolute statements...

12/27/14
MD finance:

Can any on who has experience working on trading desk answer this question what is the real role of the commodity exchange?

I am confused here why would any commodity producer (oil, gas, sugar) would sell his product in the exchange (ICE, Chicago mercantile exchange, new York mercantile exchange) specially that the spot market is way high that the paper market (sugar for example)

Those big commodity trading houses (Cargill, Louis dreyfus, glencore) I thought they are just doing PAPER trading but NO they are doing physical as well. But what is the role of the exchange? For example I called a sugar company asking for 10 metric tons and they quoted the price at 820 while in London it is traded at 570. if that's the case who is the company that is going to sell a contract of sugar in the market if it is in the Canadian market at 1200 spot and in the American market at 1280. Can not they just sell that directly in the market? In other words, coming the delivery month, there is going to be about 12000 mt standing for delivery. Who is the stupid who sold that in the exchange for 570 while he can sell them in the physical spot market for double the price? The same thing for oil, cotton , cocoa and so on

You know what hedging and the basis are right?

12/27/14
GoodBread:
MD finance:

Can any on who has experience working on trading desk answer this question what is the real role of the commodity exchange?

I am confused here why would any commodity producer (oil, gas, sugar) would sell his product in the exchange (ICE, Chicago mercantile exchange, new York mercantile exchange) specially that the spot market is way high that the paper market (sugar for example)

Those big commodity trading houses (Cargill, Louis dreyfus, glencore) I thought they are just doing PAPER trading but NO they are doing physical as well. But what is the role of the exchange? For example I called a sugar company asking for 10 metric tons and they quoted the price at 820 while in London it is traded at 570. if that's the case who is the company that is going to sell a contract of sugar in the market if it is in the Canadian market at 1200 spot and in the American market at 1280. Can not they just sell that directly in the market? In other words, coming the delivery month, there is going to be about 12000 mt standing for delivery. Who is the stupid who sold that in the exchange for 570 while he can sell them in the physical spot market for double the price? The same thing for oil, cotton , cocoa and so on

You know what hedging and the basis are right?

Yes of course but how you will hedge 1200 Mt SUGAR that you sell in retail for 570 paper contract . does not make any sense.

12/27/14

What is the point of most future contracts if they are never delivered?

12/27/14
Crass009:

What is the point of most future contracts if they are never delivered?

According to text books and theory, it is hedging. Only 20% of contracts end in real delivery and 80% are offset before the delivery month

12/27/14

You are confusing yourself with all the various numbers which relate to different things.

Transportation costs are not higher than any arb, it depends on various factors. Paper trading can be speculative, but it can also be used as a hedge to protect against future price fluctuations in the physical market. So for instance, if your company buys physical sugar and has to ship it to your location from the field or wherever, you will want to hedge it so that you minimize the risk of the price fluctuating while the sugar is being transported. Your company will use the futures contracts to hedge the physical, hence the exchange.

There are various reasons why the physical and financial prices do not always match up (such as grade / quality differences, location, fx, etc), but likely it means you are missing something in your analysis, not that another sophisticated market participant is clueless about the markets. I can guarantee you that your company does not simply buy large amounts of sugar in the spot market as their sole sourcing strategy. There will be storage, hedging, term contracts, there will be multiple components to how they source their sugar. To go spot all the time would mean you take on considerable risk which no large company would do because that would be true speculation.

12/27/14

John Arnold closed Centarus because it's impossible to make money trading natural gas when the federal government and the USDA go to extreme lengths to depress that market and keep prices artificially low. The story for natural gas is extremely bullish, but the government is too in bed with the corn industry.

When you start seeing companies offering cars that run on nat gas, fill stations offering facilities conducive to those cars, and the USDA admitting that the conversion rate for ethanol is actually 2.8 gallons / bushel of corn instead of 2.1 gallons / bushel, Arnold will be back. And I actually see most of that stuff happening within the next 3 years.

For now, he can enjoy being an under-40 billionaire.

12/27/14

buy the book - Oil 101. Good book on oil and gas and written by an ex physical trader. From here its all about reading and networking..

12/27/14

UnclePanda...I looked at table of contents of this book and it seems like it only discusses oil and refined products.

12/27/14
Onyxcap:

UnclePanda...I looked at table of contents of this book and it seems like it only discusses oil and refined products.

just read it and you'll figure out why it's relevant

12/27/14

energy trading and investing is the book i prefer.

12/27/14

Oil 101 is a good overview the the whole industry from e&p to refining and marketing

12/27/14

The EIA typically has good material -- see the link below -- provides you with good insight into the road map that is pipelines throughout the Continental U.S.
http://www.eia.gov/pub/oil_gas/natural_gas/analysi...

Also, I'd rather see people learn from material on the web that we use in the industry as opposed to reading a book off the book shelf. While I have learned a thing or two from books, I must say that the majority of my learning came from industry based news -- whether it be government driven ie. EIA or third-party research such as OPIS.

12/27/14
Urban Guerrilla:

The EIA typically has good material -- see the link below -- provides you with good insight into the road map that is pipelines throughout the Continental U.S.
http://www.eia.gov/pub/oil_gas/natural_gas/analysi...

Also, I'd rather see people learn from material on the web that we use in the industry as opposed to reading a book off the book shelf. While I have learned a thing or two from books, I must say that the majority of my learning came from industry based news -- whether it be government driven ie. EIA or third-party research such as OPIS.

any other suggestions for what to read?

12/27/14
Urban Guerrilla:

The EIA typically has good material -- see the link below -- provides you with good insight into the road map that is pipelines throughout the Continental U.S.
http://www.eia.gov/pub/oil_gas/natural_gas/analysi...

Also, I'd rather see people learn from material on the web that we use in the industry as opposed to reading a book off the book shelf. While I have learned a thing or two from books, I must say that the majority of my learning came from industry based news -- whether it be government driven ie. EIA or third-party research such as OPIS.

I agree, but you need to get an understanding of what tport and storage are to begin with. The book I mentioned I give or recommend to anyone who joins our firm. The main thing is understanding storage and weather, how the two equalize the market at all times any trade you have is based off that idea. Same reason something like QE could move every commodity except natty since it beats to its own drum due to the 4.2tcf storage we gots.

http://www.naturalgas.org/naturalgas/naturalgas.asp is decent site too, a history lesson never hurt anyone.

12/27/14

I agree - I've found the EIA a very valuable resource. Importanty, it is up to date, free and thorough. It's hard to find material that specifically focuses on fundamental pillars without embedding them in an example, but on the upside, you have to dig your way through the material and learn it all using relevant examples. Another great site is: http://www.jai-energy.com/

1.) What do you want?
2.) What realities are between you and what you want? What is true?
3.) What are you going to do about it?

12/27/14

Spot on MW -- transportation is KEY -- boils down to value at the destination..which traders take the value and subtract out transportation cost, thru- put cost, and looking at the most efficient routes/ cost basis for each route. Storage is just as important -- especially when dealing with arbs and production levels..some producers can get squeezed when times are tough and get crushed by traders that can sell out their storage at a discount to production break-even econs creating artificial values in the market

12/27/14

Thank you all. I understand basics of natural gas storage and prices as well as power prices in various ISOs. I guess what I am looking for is more information on storage and pipelines operations and flow of natural gas.

12/27/14
Onyxcap:

Thank you all. I understand basics of natural gas storage and prices as well as power prices in various ISOs. I guess what I am looking for is more information on storage and pipelines operations and flow of natural gas.

If you looked at the resources listed you could see they provide exactly that framework.

12/27/14

I have one more firm resource-- see below:
http://www.ingaa.org/Topics/1330.aspx

Also offers project downloads so you'll have talking points during interviews about things happening "in the market".

Download/ print out a pipeline map and learn all the major pipelines, evaluate all potential arbs based on spot/forward prices and geographical location. Start looking at transportation cost and see what's feasible. I am not offering any books because I believe the best education is material that I would actually use at work. I've ready many of the oil/gas/energy books over the years and found tidbits useful, but nothing near the usefulness of actual data and research.

12/27/14

If you are planning to get into natural gas trading, I suggest getting yourself a bentek map and familiarize yourself with all the major hubs and what pipelines they connect to

12/27/14

Unless you already have experience trading a product, there should be no problem with diversifying your options.

"Well, you know, I was a human being before I became a businessman." -- George Soros

12/27/14

Whatever gets you to a desk.

12/27/14

I have a bad feeling about this

12/27/14

And with recent news showing they manipulated aluminum prices - They won't be trading phyiscals

12/27/14

I have absolutely no idea why deposit-taking banks should be allowed to trade physical commodities. It's utterly absurd.

12/27/14

Martinghoul:

I have absolutely no idea why deposit-taking banks should be allowed to trade physical commodities. It's utterly absurd.

While I agree, the advantage is there just like any other investment banking activity. They are able to secure financing and internal hurdles are much lower allowing them to secure physical assets (options) at a much lower cost than others in the marketplace, using such assets to create alpha. Same as why they are in the real estate private equity game.

12/27/14

Don't get me wrong, I understand perfectly why it makes sense for banks to be involved in physical commodity trading. What I don't understand is why it makes sense for society as a whole to let them.

12/27/14

You nailed it. It doesn't.
Check this article:
http://www.nytimes.com/2013/07/21/business/a-shuff...

12/27/14

Martinghoul:

Don't get me wrong, I understand perfectly why it makes sense for banks to be involved in physical commodity trading. What I don't understand is why it makes sense for society as a whole to let them.

I doubt physical activity will continue much longer in banks, regulatory changes are squeezing small margins as it already is. The real physical houses don't have to deal with these issues.

The HBS guys have MAD SWAGGER. They frequently wear their class jackets to boston bars, strutting and acting like they own the joint. They just ooze success, confidence, swagger, basically attributes of alpha males.

12/27/14

If they are or want to trade in the US, they most certainly have to do deal with the various regulatory changes. Ice position limits, reporting of swaps, etc all apply to anyone not just "banks". That said banks have the worse designation as a "bank swap dealers" and the heaviest of rules go against them.

Also all banks exiting the space in the long-run is a not a good thing for trading/commodity/physical shops...not good at all.

12/27/14

Why? A relative dearth of counterparties?

12/27/14

less liquidity...means wider spreads...wider spreads customer angry/confused...customer angry/confused less hedging...less hedging less room for optimization....less room for optimization....makes life a lot harder.

12/27/14

marcellus_wallace:

less liquidity...means wider spreads...wider spreads customer angry/confused...customer angry/confused less hedging...less hedging less room for optimization....less room for optimization....makes life a lot harder.

How do you think this will fair for current power traders? More or less opportunity?

less liquidity means less efficiency in the markets, and less efficiency in the markets means better for traders?

12/27/14

JPM pulling out?

12/27/14

I would say, since I work in the space Energy is one of the most affected and at risk markets. Power very much so since a lot of customers are "government owned entities" which is where the worse of DF rules come into play.

Less liquidity/efficiency could be a good thing for a prop trader or market that is monopoly controlled. Otherwise in most other cases it is horrid for flow traders. Let's say customer X, has a cost base of 100..efficient hedging, etc allows that cost base to maybe go down to 70, the customer executes. What if that cost base only goes to 90? Does the customer care, will they hedge, will they find a long-term solution etc... Angry/confused customers are not motivated ones.

Now could fear force hedging and volumes, ofcourse look at 2000-2008, but then you need to pray for a supply shock that hurts the customer's bottom line, those do not come around all the time.

If anyone has different views/comments I would like to hear them, i.e. has the new rules made it easier in metals, FX, etc..

12/27/14

Banks have many reasons to trade physicals. Banks often execute physicals contracts for clients. For example if you wanted to buy 1000 micro oil contracts you could go to your bank to source the contracts through their market desks. I don't see any problem with this, nor do I see any problem with banks running prop desks. Everyone freaks out about banks trading their own accounts. The real problems are systemic problems created by political meddling in the system not a bank by bank issue.

Follow the shit your fellow monkeys say @shitWSOsays

Life is hard, it's even harder when you're stupid - John Wayne

12/27/14

1000 micro oil contracts? The ones traded on the CME? I am not sure this falls under physical commodity trading, given it's an exchange-traded derivative.

The problem with banks doing all these things is always the same, namely that all these activities are, unfortunately, subsidised by the taxpayer.

12/27/14

Martinghoul:

1000 micro oil contracts? The ones traded on the CME? I am not sure this falls under physical commodity trading, given it's an exchange-traded derivative.

The problem with banks doing all these things is always the same, namely that all these activities are, unfortunately, subsidised by the taxpayer.

That was just an example, the point I was making was that banks provide services to their customers and are not just trading on their own accounts.

Follow the shit your fellow monkeys say @shitWSOsays

Life is hard, it's even harder when you're stupid - John Wayne

12/27/14

http://www.ft.com/intl/cms/s/0/4901bdaa-f627-11e2-...

JPM is looking to exit the industry altogether after MS failed last year to sell a stake of its business. Tough times ahead.

12/27/14

you can summarize the difference by looking at which shops are public and which are private, and just following the implications of that to their logical ends

12/27/14

what do you mean by this?

12/27/14

Supermajors are more bureaucratic, have a less "urgent"/fast-paced culture, are relatively limited in what they can pay, focus more on asset optimization / trading around their assets and using their trading operations to optimize their other operations, slower to promote people or give more responsibilities, and maybe a bit less competitive to get into.

Trading houses are less bureaucratic, have a faster paced / more "risk taking" culture, aren't nearly as limited in what they can pay their people, focus on making as much money as they can - period, will promote as fast as they have to and when a person is ready and not much later, and probably a good deal harder to get into, at least out of college.

Before any of you say anything, notice how that is a RELATIVE comparison. Supermajor trading floors will still have a fairly flat structure/feel/culture, take on lots of risk, etc.

In terms of training, what people really need to understand about this industry is that you are going to get the best training, at least out of the shops you listed, at the shop where you are going to fit and work the best. If you can't take lots of heat, you probably shouldn't even consider Trafigura. If you can't stand a culture that makes you hold the hand rail and focuses more on diversity than ability, you might want to avoid BP. And so on.

12/27/14

Thanks for the clarification Tupac!

12/27/14

that's a great explanation. thank you. what do you mean by that diversity vs ability comment about BP?

12/27/14

I think what Tupac means by diversity v ability is that as a huge corporation BP could have some top-down culture implementation which manifests itself through HR having recruiting goals that do not align with the trade managers' goals. Also, there tend to be company-wide rules that seem irrelevant and unnecessary for trading floors, like holding hand rails, extensive substance-abuse policies, and layers of bureaucracy.
I haven't worked at BP but I have found this to be true at the oil company trading floor I worked on as well as from others elsewhere. This happens because they have company-wide 'values' and policies that are designed for the engineer-dominated parts of the companies but get applied to the trading floor as well. I imagine a trading house would have far less of these types of rules.

12/27/14

Lerg:

I think what Tupac means by diversity v ability is that as a huge corporation BP could have some top-down culture implementation which manifests itself through HR having recruiting goals that do not align with the trade managers' goals. Also, there tend to be company-wide rules that seem irrelevant and unnecessary for trading floors, like holding hand rails, extensive substance-abuse policies, and layers of bureaucracy.

I haven't worked at BP but I have found this to be true at the oil company trading floor I worked on as well as from others elsewhere. This happens because they have company-wide 'values' and policies that are designed for the engineer-dominated parts of the companies but get applied to the trading floor as well. I imagine a trading house would have far less of these types of rules.

zing

you said it way nicer than i could have

12/27/14

thanks very much to both tupac and lerg. that was really helpful

12/27/14

I am gonna be in Shell Trading next summer, but I can tell you BP/Shell gives a better fundamental training to be a good energy trader. I read somewhere on this forum that people from grad programs for the trading houses tend to end up in mid/back office.(Not entirely sure) From what I heard and talked to (people in the energy industry), Shell and BP would be a very solid start to a trading career.

12/27/14

People from grad programs at trading houses do not usually end up in mid or back office. "I read somewhere on this forum" is about the worst source you can have for this, especially since you haven't started yet. Also, people from the supermajors (even if they've "traded" a little bit) still usually have to do a year or two in mid/back office before they're allowed to trade again at a trading house.

Not bashing supermajors, just saying that what you're saying isn't very accurate and is borderline misleading.

12/27/14

http://www.wallstreetoasis.com/forums/qa-commodity-trading-commodity-hedge-fund-from-physical-commodity-trading-exit-opscompensatio

12/27/14

don't forget Trafigura, Noble, Gunthor and dozen other low profile sharks.

yeah it could be profitable. Physical trading is much more different from financial trading. You take on a much more administrative and people oriented role. It's not like clicking the buy and sells on a trading platform after doing some due diligence from public information. No, you talk to people and hunt for market information, develop relationship with counter parties, make sure the paperwork gets signed, and logistics do their job in getting the transport for your goods from A to B, when the pipeline breaks down or your trucks ain't going from point A to point B, you get on the phone and sort it out with the field guys. Lots of informal contracts done over some emails and words of mouth.
and on and on. not for the faint hearted.

Best Response
12/27/14

1. Price Discovery: Each region of the globe has different supply/demand dynamics that are not easily known, unlike stocks or futures. Prices within one hundred miles can vary wildly without every market participant knowing this. Traders who can understand these regional differences are able to capitalize on them and profit. This is done by forging relationships with counter-parties in order to gain information that others do not have.

2. Specifications: Although physicals are commodities, buyers can often vary in what specifications they are willing to accept and sellers vary in what they can offer. Traders are able to capture these differences. This goes hand in hand with price discovery; as the old saying goes, one man's trash is another man's treasure.

3. Logistics: Anyone idiot can buy and sell physicals. The real meat of the trade is in the execution. Understanding freight, storage, and opportunity cost is the hallmark of a good physical trader. Your reputation in physical trading is determined by the volume of profitable trades you execute successfully, not the trades that you put on paper that look good but can't be executed. Traders who can execute consistently can command higher margins.

4. Relationships: Price is not the only thing that drives the decisions of buyers and sellers. Traders who can ingratiate themselves with their counter-parties by knowing where the market is (price discovery), understanding the buyer's or seller's needs (specifications), and executing reliably for the counter-party (logistics) can often protect their markets from interlopers and command higher margins on their products.

Large firms can offer informational advantages simply because of their reach, but there are also smaller companies that do extremely well by working within a niche market (either product or region) and knowing the ins and outs of that market better than anyone else. Physicals continue to look bright because of growing markets and huge logistical issues that offer tremendous opportunities for skilled traders.

12/27/14

BOTT1702:

1. Price Discovery: Each region of the globe has different supply/demand dynamics that are not easily known, unlike stocks or futures. Prices within one hundred miles can vary wildly without every market participant knowing this. Traders who can understand these regional differences are able to capitalize on them and profit. This is done by forging relationships with counter-parties in order to gain information that others do not have.

2. Specifications: Although physicals are commodities, buyers can often vary in what specifications they are willing to accept and sellers vary in what they can offer. Traders are able to capture these differences. This goes hand in hand with price discovery; as the old saying goes, one man's trash is another man's treasure.

3. Logistics: Anyone idiot can buy and sell physicals. The real meat of the trade is in the execution. Understanding freight, storage, and opportunity cost is the hallmark of a good physical trader. Your reputation in physical trading is determined by the volume of profitable trades you execute successfully, not the trades that you put on paper that look good but can't be executed. Traders who can execute consistently can command higher margins.

4. Relationships: Price is not the only thing that drives the decisions of buyers and sellers. Traders who can ingratiate themselves with their counter-parties by knowing where the market is (price discovery), understanding the buyer's or seller's needs (specifications), and executing reliably for the counter-party (logistics) can often protect their markets from interlopers and command higher margins on their products.

Large firms can offer informational advantages simply because of their reach, but there are also smaller companies that do extremely well by working within a niche market (either product or region) and knowing the ins and outs of that market better than anyone else. Physicals continue to look bright because of growing markets and huge logistical issues that offer tremendous opportunities for skilled traders.

Would like to add 4 specific PL drivers:

1. Freights plays:

It costs aprox. $10 less per wmt to ship 15k wmt of copper concentrates from point a to point b than it does 5k wmt.

If you buy 15k wmt of mineral in Chile and then line up three different smelters in Asia for 5k wmt clips, you pocket this freight differential.

This is most simple example I can think of, but there are many other pays: taking tonnage on COA or time charters and then using it to cover spot shipments, taking directional positions on freight market, cost savings from operating own fleet, etc.

2. Blends

You buy 1,000 wmt of shit, and 1,000 wmt of super clean concentrates. Blend that and you end up with 2,000 wmt of OK grade material. Since the difference between OK and super clean materials is MUCH smaller than difference between shit and OK materials, you make money by blending.

3. Financing

Trading houses have much lower costs of financing than most commodity producers and suppliers.

Additionally, trading houses understand the risks involved in producing and processing commodities much better than banks.

Consequently, traders can borrow cheap and lend at higher rates to their clients and suppliers.

They further benefit from this interest rate arbitrage by being in a much better position to monetize collateral (as opposed to a traditional lender).

I.E. It is much easier for a trader to take the couple thousand tonnes of raw ore which a mine posted as collateral on a defaulted loan, pay someone to process it into concentartes or metal, and then sell that than say a bank would. Same goes for productive assets etc (a trader might even want to keep the mine or plant on its books after having executed the guarantee, whereas a bank is probably not even allowed to hold the mine and will have to sell it for cents on dollar).

4. There are some strategies you can ONLY do if you have access to physical (i.e. physical warehousing deals when contango on metal is higher than insurance, interest and storage costs).

My two cents.

12/27/14

contagoman:

BOTT1702:

1. Price Discovery: Each region of the globe has different supply/demand dynamics that are not easily known, unlike stocks or futures. Prices within one hundred miles can vary wildly without every market participant knowing this. Traders who can understand these regional differences are able to capitalize on them and profit. This is done by forging relationships with counter-parties in order to gain information that others do not have.

2. Specifications: Although physicals are commodities, buyers can often vary in what specifications they are willing to accept and sellers vary in what they can offer. Traders are able to capture these differences. This goes hand in hand with price discovery; as the old saying goes, one man's trash is another man's treasure.

3. Logistics: Anyone idiot can buy and sell physicals. The real meat of the trade is in the execution. Understanding freight, storage, and opportunity cost is the hallmark of a good physical trader. Your reputation in physical trading is determined by the volume of profitable trades you execute successfully, not the trades that you put on paper that look good but can't be executed. Traders who can execute consistently can command higher margins.

4. Relationships: Price is not the only thing that drives the decisions of buyers and sellers. Traders who can ingratiate themselves with their counter-parties by knowing where the market is (price discovery), understanding the buyer's or seller's needs (specifications), and executing reliably for the counter-party (logistics) can often protect their markets from interlopers and command higher margins on their products.

Large firms can offer informational advantages simply because of their reach, but there are also smaller companies that do extremely well by working within a niche market (either product or region) and knowing the ins and outs of that market better than anyone else. Physicals continue to look bright because of growing markets and huge logistical issues that offer tremendous opportunities for skilled traders.

Would like to add 4 specific PL drivers:

1. Freights plays:

It costs aprox. $10 less per wmt to ship 15k wmt of copper concentrates from point a to point b than it does 5k wmt.

If you buy 15k wmt of mineral in Chile and then line up three different smelters in Asia for 5k wmt clips, you pocket this freight differential.

This is most simple example I can think of, but there are many other pays: taking tonnage on COA or time charters and then using it to cover spot shipments, taking directional positions on freight market, cost savings from operating own fleet, etc.

2. Blends

You buy 1,000 wmt of shit, and 1,000 wmt of super clean concentrates. Blend that and you end up with 2,000 wmt of OK grade material. Since the difference between OK and super clean materials is MUCH smaller than difference between shit and OK materials, you make money by blending.

3. Financing

Trading houses have much lower costs of financing than most commodity producers and suppliers.

Additionally, trading houses understand the risks involved in producing and processing commodities much better than banks.

Consequently, traders can borrow cheap and lend at higher rates to their clients and suppliers.

They further benefit from this interest rate arbitrage by being in a much better position to monetize collateral (as opposed to a traditional lender).

I.E. It is much easier for a trader to take the couple thousand tonnes of raw ore which a mine posted as collateral on a defaulted loan, pay someone to process it into concentartes or metal, and then sell that than say a bank would. Same goes for productive assets etc (a trader might even want to keep the mine or plant on its books after having executed the guarantee, whereas a bank is probably not even allowed to hold the mine and will have to sell it for cents on dollar).

4. There are some strategies you can ONLY do if you have access to physical (i.e. physical warehousing deals when contango on metal is higher than insurance, interest and storage costs).

My two cents.

Good points and all, but don't only like 3% of contracts actually get delivered upon?

12/27/14

Im not very creative:

contagoman:
BOTT1702:

1. Price Discovery: Each region of the globe has different supply/demand dynamics that are not easily known, unlike stocks or futures. Prices within one hundred miles can vary wildly without every market participant knowing this. Traders who can understand these regional differences are able to capitalize on them and profit. This is done by forging relationships with counter-parties in order to gain information that others do not have.

2. Specifications: Although physicals are commodities, buyers can often vary in what specifications they are willing to accept and sellers vary in what they can offer. Traders are able to capture these differences. This goes hand in hand with price discovery; as the old saying goes, one man's trash is another man's treasure.

3. Logistics: Anyone idiot can buy and sell physicals. The real meat of the trade is in the execution. Understanding freight, storage, and opportunity cost is the hallmark of a good physical trader. Your reputation in physical trading is determined by the volume of profitable trades you execute successfully, not the trades that you put on paper that look good but can't be executed. Traders who can execute consistently can command higher margins.

4. Relationships: Price is not the only thing that drives the decisions of buyers and sellers. Traders who can ingratiate themselves with their counter-parties by knowing where the market is (price discovery), understanding the buyer's or seller's needs (specifications), and executing reliably for the counter-party (logistics) can often protect their markets from interlopers and command higher margins on their products.

Large firms can offer informational advantages simply because of their reach, but there are also smaller companies that do extremely well by working within a niche market (either product or region) and knowing the ins and outs of that market better than anyone else. Physicals continue to look bright because of growing markets and huge logistical issues that offer tremendous opportunities for skilled traders.

Would like to add 4 specific PL drivers:

1. Freights plays:

It costs aprox. $10 less per wmt to ship 15k wmt of copper concentrates from point a to point b than it does 5k wmt.

If you buy 15k wmt of mineral in Chile and then line up three different smelters in Asia for 5k wmt clips, you pocket this freight differential.

This is most simple example I can think of, but there are many other pays: taking tonnage on COA or time charters and then using it to cover spot shipments, taking directional positions on freight market, cost savings from operating own fleet, etc.

2. Blends

You buy 1,000 wmt of shit, and 1,000 wmt of super clean concentrates. Blend that and you end up with 2,000 wmt of OK grade material. Since the difference between OK and super clean materials is MUCH smaller than difference between shit and OK materials, you make money by blending.

3. Financing

Trading houses have much lower costs of financing than most commodity producers and suppliers.

Additionally, trading houses understand the risks involved in producing and processing commodities much better than banks.

Consequently, traders can borrow cheap and lend at higher rates to their clients and suppliers.

They further benefit from this interest rate arbitrage by being in a much better position to monetize collateral (as opposed to a traditional lender).

I.E. It is much easier for a trader to take the couple thousand tonnes of raw ore which a mine posted as collateral on a defaulted loan, pay someone to process it into concentartes or metal, and then sell that than say a bank would. Same goes for productive assets etc (a trader might even want to keep the mine or plant on its books after having executed the guarantee, whereas a bank is probably not even allowed to hold the mine and will have to sell it for cents on dollar).

4. There are some strategies you can ONLY do if you have access to physical (i.e. physical warehousing deals when contango on metal is higher than insurance, interest and storage costs).

My two cents.

Good points and all, but don't only like 3% of contracts actually get delivered upon?

Physicals shops trade mostly negotiated contracts (industry standard/OTC) to deliver a certain commodity with specific time-frame/location/grade; you are referring to futures contracts that are primarily used for hedging/spec positions.

12/27/14

Physical trading involves spending time and experience to cultivate a very specific skill-set. This will involve learning the the ins/outs of logistics, basis spreads, freight arbs, draft sizes for water-born terminals and the variety of players in your markets. In the process you will typically have a huge informational advantage over a screen trader--now whether it's more profitable or not will vary by your commodity/market.

12/27/14

yes there is an informational advantage. there's also a regulatory advantage. truth is to be able to trade commodities well in a speculative way, it really helps to understand the physical mkt. at the end of the day the price of oil is based on how much physical oil is being produced and consumed

12/27/14

Because as Propane/Natty/Heating Oil/Power have shown this winter, there is massive VAR and risk that most people do not understand. Historically volatility in these markets was very high for a period of time then it went away over the last 4months its back and its ugly back, many sleepless traders and marketers out there. You may ask why is so much VAR unknown the reason is because "real life happens", black swan events in the physical world happen all the time from accidents/strikes/weather/new technology/new discoveries etc... There is so much imperfect information.

At the most basic level when you model risk in Physical world you do not even use a B-S or style model, its usually a very compliated binomial or monte-carlo style.

Lastly, WSO glamorizes shit big time, its only profitable if you have the right assets, connections or win there is lots of losers out there, lots and lots.

12/27/14

Thanks to everyone for sharing - SB's for all! I've been reading Oil 101 and surprisingly, I do find myself interested in the technicalities of the oil industry.

Can I just ask how much of the job is driven by relationships? I don't consider myself a natural salesman and it seems like this could limit my potential.

Also, how much travelling is involved in physical (oil) trading? Would you be inspecting the assets/wining & dining counterparties?

Thanks again!

12/27/14

Dece:

Can I just ask how much of the job is driven by relationships? I don't consider myself a natural salesman and it seems like this could limit my potential.

Marc once told one of my bosses "There are 3 secrets to trading; personal relations, personal relations, and personal relations".

12/27/14

contagoman:

Dece:

Can I just ask how much of the job is driven by relationships? I don't consider myself a natural salesman and it seems like this could limit my potential.

Marc once told one of my bosses "There are 3 secrets to trading; personal relations, personal relations, and personal relations".

Ah ok. How often would you meet with your counter parties? Do you have to travel a lot to meet with them, as I assume they are quite geographically dispersed.

Thanks!

12/27/14

Dece:

contagoman:
Dece:

Can I just ask how much of the job is driven by relationships? I don't consider myself a natural salesman and it seems like this could limit my potential.

Marc once told one of my bosses "There are 3 secrets to trading; personal relations, personal relations, and personal relations".

Ah ok. How often would you meet with your counter parties? Do you have to travel a lot to meet with them, as I assume they are quite geographically dispersed.

Thanks!

A lot.

Apart from talking on the phone every day, there are a lot of site visits involved, as well as conferences where you get to schmooze all your clients / suppliers / service providers.

The expense account is very generous, and for a reason. As an investment, wining and dining gives you a big bang for your buck. People will always prefer to do biz with people they know and trust. Also, information flows a lot easier between friends than some rando on the end of the phone.

12/27/14

contagoman:

Dece:

Can I just ask how much of the job is driven by relationships? I don't consider myself a natural salesman and it seems like this could limit my potential.

Marc once told one of my bosses "There are 3 secrets to trading; personal relations, personal relations, and personal relations".

Interesting. In the king of oil Amman say that Marc Rich told him that the ability to analyze a market and see the opportunity was the single and biggest factor for being successful.

12/27/14

TheSquale:

contagoman:
Dece:

Can I just ask how much of the job is driven by relationships? I don't consider myself a natural salesman and it seems like this could limit my potential.

Marc once told one of my bosses "There are 3 secrets to trading; personal relations, personal relations, and personal relations".

Interesting. In the king of oil Amman say that Marc Rich told him that the ability to analyze a market and see the opportunity was the single and biggest factor for being successful.

Amman knew Rich for how long? My boss worked directly under him for over 3 decades...

12/27/14

contagoman:

TheSquale:
contagoman:
Dece:

Can I just ask how much of the job is driven by relationships? I don't consider myself a natural salesman and it seems like this could limit my potential.

Marc once told one of my bosses "There are 3 secrets to trading; personal relations, personal relations, and personal relations".

Interesting. In the king of oil Amman say that Marc Rich told him that the ability to analyze a market and see the opportunity was the single and biggest factor for being successful.

Amman knew Rich for how long? My boss worked directly under him for over 3 decades...

I am not saying you're wrong, I am just pointing the discrepancy.

12/27/14

contagoman:

Dece:

Can I just ask how much of the job is driven by relationships? I don't consider myself a natural salesman and it seems like this could limit my potential.

Marc once told one of my bosses "There are 3 secrets to trading; personal relations, personal relations, and personal relations".

Marc who? Marc Walhberg?

no kiddings aside, can you describe the legend himself from what you been able to glean from your boss? I also read the king of Oil, from the book, as well as other description of the man, he doesn't seem to be the type of extroverted sales-entrepreneur type. there are source that claim that at younger age, he was shy and awakward. Of course the man is driven. my question is, how the hell does a guy like Marc Rich, who has been described to be very introverted and some even say quite awkward and adept socially, become a master of relationships? or maybe everything I read was wrong....

12/27/14

There is a reason some of us trade natty or power. "Good morning mr. screen, good afternoon mr. screen"..."mr. screen i luv you"...

Want to trade anything else, contangoman is bang-on. It is completely about relationships.

12/27/14

marcellus_wallace:

There is a reason some of us trade natty or power. "Good morning mr. screen, good afternoon mr. screen"..."mr. screen i luv you"...

Want to trade anything else, contangoman is bang-on. It is completely about relationships.

Could you please clarify why this difference exists?

Thanks!

12/27/14

Dece:

marcellus_wallace:

There is a reason some of us trade natty or power. "Good morning mr. screen, good afternoon mr. screen"..."mr. screen i luv you"...

Want to trade anything else, contangoman is bang-on. It is completely about relationships.

Could you please clarify why this difference exists?

Thanks!

Homogenous product with standard contracts, established deregulated markets. While relationships are also important most of our time is spent gathering, understanding, forecasting data and cleared through an exchange. Natty/power requires a lot more var at times and customer margins are very thin. While other things like crude is all about being a master at logistics and dealing with specific contracts/rules while being able to charge much wider margins.

12/27/14

Also interested.

What is more profitable generally, agri or energy ? short/long run...

Thanks

12/27/14

tonixity:

Also interested.

What is more profitable generally, agri or energy ? short/long run...

Thanks

There is no such thing as a more or less profitable trade or product: profits cannot be analyzed in isolation of risk.

What I am getting at, is that what you should really compare is profit vis-a-vis the amount of risk you take on.

12/27/14

Just curious - because relationships with counter-parties are a big part, are bridges ever burned? If so, what are the consequences? Can anyone give an example how this might happen?

12/27/14

This happened at a very shady shop in Eastern Europe, definitely not your Glencores of the world but:

A buddy of mine had to renege on a steel deal because the firm had virtually no working capital and a bunch of deals had fallen through for other traders, meaning my buddy couldn't pay for the steel he was buying. My buddy ended up quitting over it because he felt he was toast. He was basically buddies with the counterparty in question but the guy never talked to him again.

Then again, that firm is still kicking.

12/27/14

for real-time traders in bilateral markets this happens all the time. you're always on the phone and traders will naturally build relationships with other traders. piss off a trader at a different company and they will be less likely to trade with you. this is on a personal level not on a company level. just dont be a dick when talking to counterparties.

12/27/14

Doesn't the answer essentially come from the fact that they are typically less liquid markets with less transparency?

12/27/14

Do you think commodity houses are the place to be now just like HFs ?

12/27/14

tonixity:

Do you think commodity houses are the place to be now just like HFs ?


Don't worry so much about "the place to be right now." By the time you hit your peak earning years, it will be different.
12/27/14

GoodBread:

tonixity:

Do you think commodity houses are the place to be now just like HFs ?

Don't worry so much about "the place to be right now." By the time you hit your peak earning years, it will be different.

Thanks. I wonder about this because of all the regulation, IT and support positions increase in investment banks. It is said commodity houses don't encounter the issue for now and are much more skilled and specialized to add value and make nice premium thin margins.

Hope it'll still be the case if I experience my peak earning years.

12/27/14

Thanks for the help everyone. What are the hours for physical oil trading like? I've seen 40 - 50 hours floating around.

Thanks!

12/27/14

There is some very good comments over here, thanks contangoman, blender, marcellus_wallace and BOTT1702 for chiming in.

12/27/14

Regulations, IT, etc all impact physical trading shops not just banks that is a misconception. They are just different impacts some banks have decided to focus on brokeage, FX, fixed income and let go of commodities. Outside of some extreme bank capital rules most of the same rules apply to any major physical trading shop.

12/27/14

I am new to this forum but I am interested in working in grains and coffee commodities. How do you approach a physical trading shop to ask for internship?

12/27/14

Ah-Meng:

I am new to this forum but I am interested in working in grains and coffee commodities. How do you approach a physical trading shop to ask for internship?

I don't know how old you are / what previous experience you have. For sophomores and juniors who perhaps would be overlooked for roles at physical shops i would HIGHLY suggest trying to land an internship with one of the myriad support / service sectors, or with a commodity prodicer / consumer first.

Competition for places is much lower, they are not used to receiving as many cold calls / emails for people asking for internships, and you will learn a lot of actually useful information / make your CV stand out when you do go for a trading position...

For example, an aspiring coffee trader could get experience -and boost his CV prior to applying to a position at a trading shop- at any of the following type of companies:

+ container shipping company / freight forwarder / warehouse (Look up Steinweg)
+ a coffee futures broker or dealer (look up Marex Spectron, etc)
+ a coffee roaster
+ trade finance department at ANY bank
+ getting your ass down to ivory coast or brazil and working for a farm (you can probably do this through some sort of volunteer organization for poor farmer's or whatever, but GREAT way to understand the most important part of the supply chain; origination)
+ purchase dpt at a large consumer goods company like Nestle or Starbucks
+ a sampling / verification company (SGS, Bureau Veritas, etc); these are the guys traders hire to insure that the materials they are paying for thousands of KM away are actually what the contract says.

12/27/14

Hey guys, can someone tell me what the typical success or transaction fee that one can obtain (as an independent contractor) on any given fee? Is it a % of revenues? Thanks.

12/27/14

Jason Borne:

Hey guys, can someone tell me what the typical success or transaction fee that one can obtain (as an independent contractor) on any given fee? Is it a % of revenues? Thanks.

Margins are usually razor thin. Volume and sound risk management are your friends.

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