Physical Crude Oil Trading

Hello guys!!! as someone who is new to physical crude trading and WSO 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??

thanks for any help..

 

short the future contract on the delivery region, i think, you wouldn't do anything with hedging the cargo of petro you already bought assuming you already paid for it upfront. can you be more specific with your example though? As in where is the delivery region what pricing its based on, etc

 
TheHoustonFlight:
short the future contract on the delivery region, i think, you wouldn't do anything with hedging the cargo of petro you already bought assuming you already paid for it upfront. can you be more specific with your example though? As in where is the delivery region what pricing its based on, etc

Thanks a lot, thats exactly what I was looking for. Another question just popped up, lets say the cargo was bought in the USA (WTI priced related) and was going to be sold in Europe (Brent priced related), instead of treating the two markets as completely seperate, is there a way to hedge the WTI-Brent spread thereby linking the two markets?

 
zeropower:
^ easiest is to buy or sell Brent-WTI spread futures, it's an actual contract traded on the ICE.

You can hedge using each contract separately as well, or use calendar spreads if you really want to focus on certain months.

Oh ok, so if I bought the cargo in the U.S.A and sold it in Europe I'd hedge myself by buying WTI futures and selling Brent future? or alternatively I could just buy Brent-WTI spread futures?

 
Best Response
bsasegbon:
zeropower:
^ easiest is to buy or sell Brent-WTI spread futures, it's an actual contract traded on the ICE.

You can hedge using each contract separately as well, or use calendar spreads if you really want to focus on certain months.

Oh ok, so if I bought the cargo in the U.S.A and sold it in Europe I'd hedge myself by buying WTI futures and selling Brent future? or alternatively I could just buy Brent-WTI spread futures?

Are you just asking this for general knowledge or what? That is a pretty real scenario that requires a couple different instruments, that said usually how to correctly hedge it all is not exactly public knowledge. For instance it could depend on regions, type etc...

 
bsasegbon:
zeropower:
^ easiest is to buy or sell Brent-WTI spread futures, it's an actual contract traded on the ICE.

You can hedge using each contract separately as well, or use calendar spreads if you really want to focus on certain months.

Oh ok, so if I bought the cargo in the U.S.A and sold it in Europe I'd hedge myself by buying WTI futures and selling Brent future? or alternatively I could just buy Brent-WTI spread futures?

buy usa physical, sell wti futures.... your hedge on transportation risk is expertise and insurance to an extent... once the cargo arrives you could theoretically cover your wti short and immediately go short brent again but i'm not sure how necessary thatd be... a trade like that sounds like a basis trade where the trade is priced against a single benchmark, and you would hedge using that benchmark

so youd buy 500k bbls in houston (as an example) for WTI -2, and sell WTI, and that would lock in the price differential you got against your benchmark. then you could ship it to europe (as an example) and the deal would be priced at WTI +1... when the cargo arrives you set the benchmark price using settlement prices from the day that you cover your futures.

so you made 3 minus your transport/insurance/inspection/etc costs

edit: the post above mine is very accurate about it not being nearly this simple but hopefully this gives you a (very) basic idea

 
bsasegbon:
zeropower:
^ easiest is to buy or sell Brent-WTI spread futures, it's an actual contract traded on the ICE.

You can hedge using each contract separately as well, or use calendar spreads if you really want to focus on certain months.

Oh ok, so if I bought the cargo in the U.S.A and sold it in Europe I'd hedge myself by buying WTI futures and selling Brent future? or alternatively I could just buy Brent-WTI spread futures?

if you bought the cargo in the USA, you'd hedge against the closest benchmark. the quality of your cargo shouldnt change unless blending (whole seperate issue) so your hedge should be effective despite location, and the value of that quality is essentially what you're trading.

 

When we interview we are more interested in your thinking process and problem solving skills. What analytical tools you will use to solve such issues as a new grad. I could careless if you know what a benchmark is, what this or contract do, or what size they, or conversion.

The thing I care about, is if you could pinpoint to me each layer of risk in such a transaction. How you would go about looking or hedging that risk. If you gave an indepth answer like Tupac did as a new grad, I would be like ok what book is this dude copying this shit from and ask you if you know what any of those contracts do or really are.

The true answer should be like part one's of Tupac's, as he was kind of enough to solve. Which is you have credit risk, you have insurance risk, you have different types of quality risk, you have basis risk between two locales and so on.

 
marcellus_wallace:
When we interview we are more interested in your thinking process and problem solving skills. What analytical tools you will use to solve such issues as a new grad. I could careless if you know what a benchmark is, what this or contract do, or what size they, or conversion.

The thing I care about, is if you could pinpoint to me each layer of risk in such a transaction. How you would go about looking or hedging that risk. If you gave an indepth answer like Tupac did as a new grad, I would be like ok what book is this dude copying this shit from and ask you if you know what any of those contracts do or really are.

The true answer should be like part one's of Tupac's, as he was kind of enough to solve. Which is you have credit risk, you have insurance risk, you have different types of quality risk, you have basis risk between two locales and so on.

still a few years before i graduate. couldn't tell you too much about those contracts, really just know they exist and their very basic function.

 

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