I have seen a few posts on the Commodities Trading forum asking about how petroleum trading is priced, hedged, etc. I was reasonably high up in Risk Management for a “major” trading company in Houston for a few years and am now running a hedge book at a smaller company, so I thought I may be able to impart some knowledge (didn't burn out, just moved closer to family).
My focus has been primarily on gasoline, so that is primarily what I will discuss. However, I have also done some jet fuel, naphtha, and LPGs. There is some variance between those products compared to Crude, Bunker Fuel, and on down the line, but the concepts translate for the most part. A lot of this is easier to understand with back-of-the-envelope math, but I’ll do my best to get the point across verbally.
Energy Trading Basics for Crude Oil Traders
The two main trading methods are arbitrage (obtaining risk-free profit by moving product from one place to another) and basis trading (often a bet that prices in a certain region will rise or fall faster than another region). For the most part with these specific commodities, trades are done with five things in mind: Publication, Incoterm, Timeframe, Product, and Price/Differential. Below is a recap of a few terms, along with some examples for the uninitiated.
Publications for Physical Commodity Trading
There are four primary publications used: Platts, Argus, OPIS, and NYMEX. Platts, Argus, and OPIS are trade publications that report prices and basis differentials. OPIS and Argus both are have their settlements based on the 2:30pm NYMEX close. Platts has a “window” at 3:15 that their settlements are based on. The publications will also put out market reports that verbally recap what is going on in the market on a given day. NYMEX is mostly used just for the settlement numbers when the market closes.
Timeframe for Commodity Trading
The timeframes differ significantly based on the region and mode of transport. If you’re trading based on Colonial Pipeline in the Gulf, there are six cycles per month. New York Harbor usually trades based on three “cycles” per month, which are the 1st-10th, 11th-20th and the 21st through the end of the month (also known as the “Anys”). If you’re negotiating cargos, those can be based on any negotiated delivery timeframe. Usually when delivery times are further into the future, you can negotiate wider delivery timeframes.
Incoterms - Terms for Title Transfers
Incoterms – These are predefined terms that allow traders to quickly decipher when title transfers, which volume reading to use, and who is responsible for paying costs associated with transporting goods. Below is a list of the five that I have seen most frequently.
- FOB - Free On Board - Buyer takes title at origin, and will assume all costs after that point. Volume is measured at origin.
- CIF - Cost of Insurance and Freight - The price the buyer pays includes insurance and freight. The volume is measured at origin. The buyer takes responsibility for in-transit product losses.
- CIFOutturn - This is a slightly bastardized term, but means that the price the buyer pays includes insurance and freight. The volume is measured at discharge so that the buyer does not assume liability for in-transit losses, among other things.
- DDU - Delivered Duty Unpaid - Seller covers all freight and costs, except duty. Volume is measured at discharge.
- DDP - Delivered Duty Paid - Seller covers all freight and costs, including duty. Volume is measured at discharge.
Product Details for Physical Trading
Product - This is just a statement of the product's specifications. Sometimes it will fit into a fungible grade of fuel, sometimes it will be a blendstock which is more difficult to value.
Understanding the Pricing for Commodity Trading
Price/Differential – Many pipeline traders are actually “basis traders”. This means that rather than worrying about the NYMEX Crude or RBOB quote going up or down, they have a view on prices relative to the NYMEX for a specific part of the country. For example, let’s say that a trader has learned that the Tesoro refinery in Wilmington, CA will be going down for unplanned maintenance. The trader could view this as a major supply disruption in West Coast Gasoline. The trader has a few options on how to put his money where his mouth is.
The first option is to trade flat price. This means he would outright purchase some quantity of Los Angeles CARBOB (California-grade gasoline) while leaving the position unhedged. While this trade could still very well work out, he has taken on flat price risk, which in many ways is viewed as undesirable. From my experience, very few positions are entered this way unless you are working for a convenience store or something similarly small. Among your risks here is that the NYMEX futures could dive and bring the entire market with it. It’s a pretty volatile way of going about your business.
Buy 25,000bbl March CARBOB Gasoline FOB Los Angeles @ $3.20
Sell 25,000bbl March CARBOB Gasoline FOB Los Angeles @ $3.21
Result: Profit of $10,500 (25,000bbl * 42 gal/bbl * $0.01 profit) before associated costs like paying broker commissions. This could very easily go the other way and leave you down a significant amount of money.
The next step up from there would be to trade the basis. While initiating a long position in physical gasoline, the trader would sell one futures contract for every 1,000 barrels of physical product they are buying, or vice versa. The futures would be sold one month further in the future than the month in which he was taking delivery (hence the term future). For example, you would buy 25,000 barrels of March CARBOB and sell 25 April RBOB futures on the Merc. Many brokers will do this for you as an EFP (Exchange Futures for Physical) and you won’t have to actually go out and sell the futures, but they would just come as a part of the trade and need to have a price set by your clearing broker. When trading this way you don’t really have to care about Merc direction, because it’s offset. You only care about your region’s price relative to the Merc.
Buy 25,000bbl March CARBOB Gasoline FOB Los Angeles @ $3.20
Sell 25 April RBOB Futures @ $3.15
Sell 25,000bbl March CARBOB Gasoline FOB Los Angeles @ $3.21
Buy 25 April RBOB Futures @ $3.10
Result: Profit of $63,000 before associated costs… $10,500 on the physical and $52,500 on the futures because you were right about the LA market being relatively stronger than the futures market.
The third way would be to trade “the arb”. Traders would look to buy product from some other part of the world and bring that product to the West Coast. In this scenario, you would probably try to buy a South Korean or Japanese cargo to be brought to the US the following month. If the specs match up, you could just sell CARBOB one month further out and lock in your P/L.
Arbitrage can get much more complex than the pipeline trading. I will outline more about basic arbitrage and locking in differentials when using multiple pricing mechanisms in the next post. Hopefully this is helpful as a first look into the physical markets.
Learn more about physical trading in the video below.
Read More About Commodity Trading on WSO
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Awesome post, would SB if I had any.
Great post!
Great post. I'm looking forward to part 2!
Good work and NYH has blown up in the past few years... so have some of the good BP guys who left to Traf, Glencore and Vitol did very well for some time. Lot has however changed in the last 12 months
Good point, Monty. I haven't been doing NYH for about 2 years, so I missed that move. That's good info to know.
Gasoline looks to be a strong product in coming years along with NGL/LPG........ the NG and Power space has def taken a back seat to more refined products across the industry.
SB, this is very good stuff. I was looking for something like that for a long time.
This is why I love WSO. Thank you for thr post
Thank you, this was great.
Great post. Knowledge dropped. Thanks,
Great post. Thanks. A little over my head though.f
Please excuse my ignorance but I didn't quite get the basis trade with the futures would anyone be so kind as to elaborate on that? Are the futeres to buy of to sell at a futuere date? And why does the price of the future fall if the price of gas gets up?
ps waiting for part 2
No problem, Tata. First, I should clarify a quick part of the mechanics of the futures. Let's say that you were making this trade today, March 11. The front-month futures contract is the April contract. At the most basic level, there will not be a March contract right now because that is the present, not the future. If you are buying physical, you would sell futures in the most nearby month. In this case, buy March physical, sell April futures. The main reason to do this in a different month than April would be if you are going to put the product in tank and hold it until another contract is the "front month" or "nearby" contract.
While the futures do give you the opportunity to deliver or take delivery, you're usually going to exit the trade before the futures contract expires, making it a simple paper trade.
Here is what I don't get. I am buying physical from whatever source I find(let's say in March) and at the same time I go to a futures exchange and write up futures contracts to sell the amount I bought? What is the negotiated price is it the spot? where is the quantity I bought stored until I sell it again? Do I have to arrange the logistics for tranfer and delivery?
Great post, reading this and part 2 was very informative!
Great stuff!
This is a very helpful article. Thanks for posting.
great post doc, I am a little iffy in my understanding of basis trading, hoping you would elaborate. Why would you buy physical in the current month if you are going to make your future sells a paper trade anyways? not really understanding the ideal between buying physical and selling in the futures market
Is the right way to interpret the example given is that the trader is selling the physical gasoline at a loss of $0.05 but gaining $0.11 on the futures market?
really great stuff!! thank you
Can anyone explain how to do this for say a fob purchase on basis for 50,000 mts corn and selling at a small profit at a flat pmt to buyer. i.e. we are a middleman providing the ocean freight.
If you're the middleman, you should be taking no pricing exposure if terms are back to back. Your profit will come from the premium you can charge the buyer for taking the shipping risk.
Physical Oil Trading Basics (Part 2 of 2) (Originally Posted: 03/17/2013)
After Part 1 last week, I’m pretty pleased with the feedback I have received, both from comments and PMs. If you have not yet read Part 1, check it out here. I think last week gave a pretty good primer on the basics of physical trading and hedging. This week’s summary is going to be a little more technical and complex, but I believe it can be learned pretty easily with the right examples. I didn’t really have anyone teach me this because the person’s job I took had already moved on to a new desk, so I hope this will help any of you going into the physical trading world.
After looking at flat price and basis trading last week, this post will be focused on formula pricing and arbitrage. A few different products and modes of transport tend to be priced this way, but IMO the best examples tend to be the ones which look at large cargoes being priced. Without further ado, let’s get into it. As outlined in Part 1, pricing can be negotiated in a number of ways. One of these ways would be to do a “wrap” version of formula pricing. The “wrap” signifies that pricing will be based on some number of days surrounding a designated pricing event. One of the more common versions of this would be to price a cargo based on the Platts price three days around the Bill of Lading (shorthand: 3 @ B/L) or three days around Completion of Discharge (3 @ COD). At a basic level, that means you do not have an actual price for your product until those three days have been completed. Your purchase or sale price is completely based on the Platts settlements of those three days. Don’t let the Platts name confuse you. It is just a settlement price like any stock or future.
The arbitrage scenario from Part 1 was for buying a cargo from South Korea and selling into the West Coast US. We’ll examine this further below to really dig into the mechanics of how you execute a deal like this. After that, I’ll give another example to take it even one step further. As you think about this, the biggest factor you need to remember is that once the product is sold, you want to be “flat” in both your futures and your physical trades, meaning that all purchases have been matched up to an equivalent number of sales.
Example 1: Korea to US – Let’s repeat the scenario from last week that there are refineries going down in Los Angeles, either for turnaround or unexpected maintenance. As a result of that, you think the LA Market is going to shoot through the roof and you want to take on some pricing exposure. For the sake of using round numbers, let’s say that you agreed to buy 300,000 barrels of March gasoline on EFP at an FOB price of NYMEX April RBOB + 5 cents per gallon (a less long-winded way of saying this would be 300mb at April RB + 5cpg). Your initial trade would look something like this:
Buy 300mb March Gasoline @ $3.0500/gal Sell 300mb April RBOB @ $3.0000/gal (the actual prices don’t matter as long as the 5 cent differential remains)
Now you know exactly what your purchase differential will be. When thinking about a sale, you have a number of options. You can sell on EFP (Exchange Futures for Physical), sell based on a publication like Platts, or just roll with it and assume you can get a better price later. Since you believe the market is heading up, you will definitely choose not to sell on EFP right now because that cuts off your upside. Waiting until later would make for a boring example, so let’s say you choose to sell based on a Platts price. As we have discussed, when a deal is done based on a publication, it will usually be based on the average of a few days’ pricing surrounding an event, often the Bill of Lading date at a loading location and the Completion of Discharge date at an unloading location. The question from there is: how do you hedge that and manage the risk? Well, we know that we are effectively short 300 contracts of April RBOB already, so you will clearly be looking to buy back April RBOB at discharge. For simplicity’s sake, let’s say that you sold based on Platts LA CARBOB’s quote 3 days around Completion of Discharge with no differential. In a scenario like this your operations team will be very important because in order to hedge properly, you’ll need to accurately gauge which day discharge will be completed. If your cargo completes discharge on Wednesday, your pricing will be based on the average of Tuesday, Wednesday, and Thursday. As such, your exposure is based on the settlement prices on those days and those are the days you want to hedge. With a 300,000bbl cargo, you are effectively selling 100,000bbl of physical product each day. To hedge, you would simply buy 100 April RBOB contracts at settlement each of those days. Generally speaking, as long as that difference between the Platts sale and the RBOB purchase is high enough to cover the 5cpg premium paid at origin and the cost of freight (including demurrage and product lost in-transit), you’ll make money. Here’s how that would work:
Sell 300mb Physical @ Platts LA Carbob, 3 around Bill of Lading – For example, let’s assume this average is $2.9500 Buy 100mb April RBOB Tuesday at $2.8500 Buy 100mb April RBOB Wednesday at $2.8000 Buy 100mb April RBOB Thursday at $2.7500
On average here, you are selling 300mb physical at $2.95 and buying 300 futures contracts at $2.80, for a differential of 15cpg. You have now completely flattened your positions and managed your risk properly. Let’s take a look at the results. I’ll split them up into physical and futures so that you can see why avoiding flat price exposure is so important.
Buy 300mb physical at $3.0500 Sell 300mb physical at $2.9500 – This is a loss of 10 cents per gallon, or ($1,260,000)
Sell 300 April RB contracts @ $3.0000 Buy 300 April RB contracts @ average $2.8000 – This is a gain of $2,520,000
At this point, you have made a total of $1.26 million before costs. As long as your freight, demurrage, and other miscellaneous costs total to less than that amount, you have made a profitable trade. As you can see, the flat price exposure would have lost you over a million dollars in this scenario. The reason for the flat price fall could be any number of things. Maybe New York Harbor had a ton of product come in. Maybe the economy as a whole weakened. All that matters to you, as a trader, is that LA strengthened relative to the NYMEX price.
Now that we've taken a look at a pretty tame example, we can go one step further and look at different basises on the same trade. In arbitrage scenarios especially, you may not be able to buy and sell based on the same index.
Example 2 – Let’s say you know someone who wants to buy 50,000 barrels of a blendstock that will allow them to complete an in-tank blend. They want you to act as a middle-man and find them this blendstock. These are often hard to value, but you know what they’re bidding and decide to figure out if you can make a deal. You find a blendstock that works being offered on EFP at NYMEX WTI + $5 per barrel DELIVERED into tank in Los Angeles (how nice of them!). However, your contact who is in need of the blendstock is bidding on EFP based on a price of April RBOB minus 10 cents per gallon. Assume that RBOB futures are currently at $3.00/gallon and WTI is at $100/bbl
How can you manage your risk properly and lock in the profit? I think the easiest way to continue looking at “locking in” profits is to look at what your position will look like after the deal without locking in. Then you can work backwards to figure out what you need to do as you enter the deal. Here is what we know so far:
Buy 50mb Blendstock at $105 per barrel ($100 WTI + $5 Diff) Sell 50mb Blendstock at $2.90 per gallon, which equals $121.80 per barrel ($3.00 RBOB - $0.10 Diff * 42 gal/bbl)
Sell 50 WTI at $100 Buy 50 RBOB at $3.00
From looking at your ultimate position, you now know that you would be left short 50 contracts of WTI and long 50 contracts of RBOB. To close your position, you simply need to close those positions! Since you know that you are sitting in a profitable position, you would sell 50 RBOB contracts and buy 50 WTI contracts (called selling the “RBOB crack”). Once you have completed executing those futures contracts, you have finalized your profit. This is the definition of risk-free profit. It just may take a couple of steps to get you to where you want to be, but if it was easy, everyone would do it.
In practice, you may see a number of different publications and products, but if you simply work backwards from your final position, you will always know how to lock-in a profitable trade. Isn't arbitrage great?
Thank you for both of your posts !
Great articles....SB.
"And to you, Doctor... clk clk cluk clak!......Oh. Sorry."
Really great posts, thank you.
Great post yet again. Hoping there's enough support to encourage another continuation.
Great Post, thank alot
Great ! Thanks again ! I'm looking forward another primer haha
Appreciate this post. Very insightful.
Very nice post. I was wondering how many of these trades do you usually execute? One a day or multiple a day?
Some days will have 5-10 trades in a day, while others will be 0-2. It depends a lot on volatility and liquidity. The one thing to be careful of is that you do not want to trade too much throughout the day. Commissions on these types of physical trades can be at least 5-10 points ($0.0005/gal to $0.0010/gal), but on 25,000+ barrel trades, it will add up quickly.
Very fad explanations on pricing.
Korea to USA. RON 95 vs Carbob ! no one in Korea will accept to get paid on Rbob pricing. Opsss
In the real world this trade cannot be settled by a differential + or minus RBOB.
Seller will want the pricing 3 days around the loading around Ron95, buyer will want 3 days around the discharge on Platts Carbob.
Physical Oil Trading - Jones Act and Exports (Originally Posted: 02/04/2014)
There seem to be quite a few people interesting in oil trading, but it tends to fly under the radar in terms of the amount of information available to WSO monkeys. A little while back, I wrote a couple of posts about the basics of physical oil trading (for those who would like to check them out, they are HERE and HERE). One of the aspects of physical trading that is often overlooked or misunderstood is the role of waterborne shipping. Since these regulations have been getting some press recently, I figured I would help provide some insight to those who are interested. When looking at the United States, there are two pieces of regulation that have quite a sizable effect on both logistics and prices. One is typically referred to as the “Jones Act”, but its official name is the Merchant Marine Act of 1920. The other I have never heard of as anything but the “Crude Export Ban”.
Jones Act
Generally speaking, the Jones Act regulates waterborne commerce between U.S. ports and within U.S. waters. More specifically, it states that only a vessel with a U.S. flag can carry cargo when both the origin and destination are within the United States. Since some voyages have multiple stops, there are a few basic rules to live by:
-U.S. Origin to U.S. Destination – Jones Act applies. The vessel must have a U.S. flag. -U.S. Origin to Foreign Destination – Jones Act does NOT apply and foreign flag ships are acceptable. Multiple origin ports within the U.S. are acceptable.
-Foreign Origin to U.S. Destination - Jones Act does NOT apply and foreign flag ships are acceptable. Multiple destination ports within the U.S. are acceptable.
Now that we’ve looked at the general rules behind the Jones Act, we can consider the effects of those rules. First, in order to qualify as a U.S. flag vessel, the crew and owner must be U.S. citizens, plus the vessel must be constructed in the United States. As you may have guessed, the U.S. flagged ships tend to be significantly more expensive to charter than foreign ships because of increased labor and manufacturing costs. The U.S. also has one of the oldest tanker fleets in the entire world, arguably because of those manufacturing costs. Since the start of the new millennium, the number of Jones Act-eligible ships has dropped from 110 to just about 40.
The most obvious market that this regulation hurts is the East Coast. The Gulf Coast has the most refining capacity of any region in the world, but we are very reliant on pipeline shipping and imports to get refined products from the Gulf to East Coast. Especially when the pipelines either have problems or when New York Harbor runs low on fuel, trading companies have to take on the extra cost of Jones Act ships, most of which is ultimately passed on to the consumer.
In addition to the inability to take advantage of arbitrage opportunities within the U.S., the Jones Act creates arbitrage opportunities for non-U.S. refiners and terminal operators. From the north, Irving Oil has a Canadian refinery located only about 50 miles from the U.S. border, but it has the ability to book foreign flag ships at a discount that ship fuel into the Northeast United States. From the south, there are terminals strategically placed on islands away from U.S. soil that act as export terminals to the United States for that exact same reason.
If the Jones Act were to be lifted, the U.S. shipping industry would suffer, but consumers would benefit a small amount on a very large number of transactions. In the aggregate, the country would be likely be better off without the Jones Act, but we all know how these things tend to go. The shipping industry has its own lobby and this law does not seem to have repeal in sight. The railroad industry is also in favor of this regulation, since it opens more opportunities to ship via rail.
Crude Export Ban
Virtually all of my work has been related to refined products, so this is a subject where some of the other WSO users may be able to chime in with more info. During the energy crisis in the 1970s, the U.S. government placed a ban on the export of unrefined crude oil that is still in place today. The idea being that the U.S. should hold onto as much crude as it can produce in an attempt to reduce prices for consumers. In recent years this ban has been the subject of debate and the repeal of this law appears to be gaining some support.
Since North America really started ramping up its oil exploration, inventories of crude oil have been rapidly expanding in the U.S. as you can see in the attached image. Cushing, OK is the delivery point for WTI futures and is a major oil hub. Inventory levels there have been historically very high and consistently increasing over roughly the past decade. That oil has been bottlenecked in the middle of the country, causing a major divergence in the prices of WTI crude in the Midcontinent and international benchmark crudes like Brent. Historically WTI and Brent traded almost at parity, but over the past couple years WTI has seen discounts against Brent as high as $28/bbl and currently sits at about $10/bbl. In addition to the difference in the prices of crude grades, the past couple years have seen correlations between refined products (gasoline, diesel, jet) flip from being related to WTI to being related to Brent crude. This is because refined products can actively be exported, which makes them trade in line with the international market. The combination of the bottleneck in Cushing and the export ban makes WTI trade at a depressed value relative to international crudes. So as you see the WTI price on TV at night, you should probably delve a little deeper and look at products and Brent to see what the overall market is really doing.
Some new pipeline infrastructure has been built already to help ship more oil from Cushing down to the Gulf, but it has not happened fast enough to make up for the additional supply being produced in the U.S. and Canada. The Seaway Pipeline is already moving product and the much-debated Keystone XL Pipeline could help as well in the future. TransCanada’s President said this week that he believes the pipeline will be approved this year, but time will tell if that is just wishful thinking. Either way, we can debate all day about the environmental impacts of these pipelines (I still believe it to be vastly superior to shipping via rail), but there’s little doubt that they make economic sense.
As crude production and inventories rise, this issue should get more attention in the coming years. I do expect this ban to be lifted in the short- to medium-term, but the timing will be dependent on politics, the expansion of pipeline infrastructure, and how much further oil production expands in the near future.
Thanks as always for the insight. Great stuff you put out there. For the newbies, if you haven't read the Dr's other posts, do so...
great post
great post
The first step finally went through today!
http://www.businessinsider.com/us-approves-landmark-crude-oil-export-sw…
I was in until i saw the part 3 which is word for word taken, potpourri from
Navigating The Commodities Markets with Freight and Spreads.
Physical Oil Trading - Graduate Program Interview (Originally Posted: 09/22/2015)
I received an email today, after a phone screen, for a first round interview at a commodity trading firm in their graduate development program (Trafigura). I was asked some technicals over the phone I was able to answer because of research I have done before but the interviewer told me that questions during the first round interview will be a lot more technical. Any suggestions on books/readings I can go over before my interview in three weeks? I'm an undergrad with a Finance major. Have a few internships under my belt, but none trading related. Thanks!
Hi Wantibd,
Congratulations. Secondly, which program did you apply for and at which office? If i remember correctly Trafi splits it between metals / oil derivatives.. following that selection you choose your preferred location eg. Moscow, Singapore, Geneva etc and which part of the business you want to be a part of.. operations/deals desk/ Finance. If you give me some more info I could advise you accordingly as I went through the process in 2013.
Best, Tim
Got an interview for Stamford - looking to do oil or refined products. Which locations go for that? Would gun for ops
Hi Tim,
I applied for the oil/derivates program as a senior undergrad. I'm interested in going for corp fin or the deals desk rotation. I applied for Montevideo and Geneva. Any insight is greatly appreciated!
Physical Oil Trading Operational Knowledge (Originally Posted: 05/18/2013)
I just started working in a company that trade across the barrel. Would like to ask any experience oil trader/operator which stream of oil is the most knowledge intensive in terms of operational aspect (e.g. blending).
gasoline and fuel oil as these are the major products that are blended. north sea crude bidding / chains are interesting as well.
@Ichimoku nailed it. Gasoline and fuel oil are where it's at for blenders. It's one of the only places where you can add value to a product so you're not operating in a zero sum game.
gasoline is high if you're in the us. something like 100 different grades
The BOB/Conventional gasoline. Many different specs (http://www.colpipe.com/pdfs/cplmansec3-01202014.pdf)
Look up Probo Kuala; that was fucking brilliant (until those penny pinchers at Trafi decided to use Cote D'Ivoire "waste mgmt" sub-contractors to get rid of the toxic sludge left over, instead of paying pros in Rotterda;; God knows the PL would not have been affected much...)
Interesting to see the difference between Trafi's side and the reported version of these events.
http://www.trafigura.com/media-centre/probo-koala/trafigura-and-probo-koala/ http://en.wikipedia.org/wiki/2006_Ivory_Coast_toxic_waste_dump
the email correspondence for Probo Kuala that came to light during the trial is amazing ahah
"Yes, but we need dogs. And cheap ones too"
Classic.
is any of it available online?
Pretty interesting how Trafi's CEO was involved in some of the discussions. No matter how genius the whole thing had been up to that point, there probably was no cheap way to get rid of the slops.
word on the street is that Claude actually participates in the running of the zinc book
there's a book called "Oil 101" that might help
I heard many times that scheduling is really important and gives priceless informations for paper trading.
In your opinion does this really impact paper trading ? What to look for when you're starting in scheduling ? Which type of information should you gather or gain from counterparties ? Any good reads to understand how traders reflects on current markets and find trade ideas ?
thanks
Trading ideas arise on the go, when you are everyday on the market and talk to buyers and sellers. You see the price differentials, you know transportation costs, so you see where is a potential for physical arbitrage.
Profits can be also made based on management of paper position in relation to physical position and on quality, by playing with specs (blending).
From materials available for free I can not recommend enough Barrels Blog on Platts website.
For all the inspiring physical traders, there are two interesting initiatives that I try to support: Master in Commodities Trading at University of Geneva and Commodities Academy in London.
On Twitter you can follow #OOTT hashtag, its an extremely interesting "open source" initiative depending on volunteer traders, journalists and aficionados covering physical oil market. Picture of physical oil market that they paint happens to be very accurate.
OP, to answer your question, I don't think it's really possible to answer the question of "which is the most knowledge intensive". The stream that will require the most knowledge is the one with the most specs ( because you will need to hit all of those specs to sell it as that stream).
When you're blending, you're trying to combine different streams that you're buying at a discount to hit the specs of something that you can sell for a profit. This is going to be extremely simplified but imagine we're trying to sell Stream A.
Stream A: 0-5 ppb Sulfur Range. Selling for $10. Stream B: 5-10 ppb Sulfur Range. Selling for $5.
We buy 10 bbls of Stream A with a tested Sulfur of 1 ppb. Cost ($100)
We buy 10 bbls of Stream B with a tested Sulfur of 9 ppb. Cost ($50)
We blend this together and now presumably have 20 bbls of product that falls within Stream A specs. Our all in cost is ($150) and our selling price is $200.
The point of this is to demonstrate that you need to know all the specs and how they'll interact with each other of what you're buying/blending and what you're selling it as.
This is quick and dirty, but I wanted to get more physical trading discussion going on the forum again.
This is what I was about to say.
There is a lot of contraints in the physical product markets (qualities taxes, logistics and intermediary processes, information).
Rarely in the U.S, you hedge and ship a straight product, deliver it straight and an arbitrage will work.
The CARBOB is worth more than the RBOB because it costs more to produce.
Once it also marked in the Platts e-windows that a trader is bringing a cargo on a tanker to Torrence, California for a future delivery, pricing will also react.
Physical oil trading: MO to FO (Originally Posted: 01/12/2014)
Hi Guys,
Anyone have any views on how difficult it is to lateral to another company into a front office role in physical oil trading after say, 2 years in the middle office (risk/ops)? Has anyone here seen or made the move? Any idea what sort of skills and experience you need to display to be considered for such a move? I'm thinking a move to a junior trader or market analyst type of role. Perhaps even a hybrid role where you still do middle office work but also are involved with keeping an eye on the market and how it may affect traders' portfolios.
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Sinopec New York office for physical oil trading? (Originally Posted: 02/24/2013)
I may be able to get a summer gig at Sinopec's New York office. Does anyone know if they trade physical or derivatives? Or if they even trade?
Thanks!
My understanding is that they do trade physical but mostly to market their own North American production. Not sure if the NY office would handle hedging or head office in China.
Great post. I have a question for you monkeys: i would like to work in O&G hedge funds, trading or at least transactions (ie M&A). My dream is to work in Dallas or Houston. Actually I'm working as FP&A intern in the UK (i'm European) with trading experience for business schools associations and projects. Given my interest, I got an admit from a target bschool in the UK for the energy and finance program. How hard is to break in the industry? If I'll realize that i am suited more for global markets instead of O&G I will have opportunities as well? How hard is to come from the EU in Texas or the US?
Thanks
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