Building a physical commodity business

Based on the most helpful WSO content, building a physical commodity business in energy, such as gas or diesel, involves several key steps:

1. Networking and Relationship Building:

   • Engage with suppliers and customers regularly. This can involve international or domestic travel to meet for coffee, lunch, dinner, or personal catch-ups.
   • Understand the constraints and advantages of a supplier/customer's supply chain, product quality, and working style by being on the ground and engaging in their business.

2. Market Information and Price Discovery:

   • Each region has different supply/demand dynamics that are not easily known. It's crucial to hunt for market information, develop relationships with counterparties, and ensure paperwork and logistics are handled efficiently.

3. Logistics and Operations:

   • Ensure the transport for your goods from point A to point B is reliable. This involves getting on the phone and sorting out issues with field operators when problems arise, such as pipeline breakdowns or truck delays.

4. Origination and Trading:

   • For crude and products, most originators have physical trading backgrounds. Building a network of decision-makers in the physical commodity space is essential.
   • In gas, power, and renewables, there are more direct routes to marketing and origination without trading first, but starting on the trading side can be beneficial.

5. Long-term Commitments and Hedging:

   • Companies like yours can step in to take on long-term commitments at index values and commitments on assets such as pipeline space and storage.
   • Contango is ideally the preferred market structure for storage owners, and making money on intermonth rolls on NYMEX contracts is common.

6. Cold Calling and Direct Engagement:

   • Cold calling end users and producers to secure long-term contracts can be part of the strategy, but it should be complemented with building strong relationships and understanding the market dynamics.

By following these steps, you can effectively build a physical commodity business in energy.

Sources: Physical Energy Trading And Logistics, Physical Energy Trading And Logistics, Physical Commodity Trading, Q&A: I'm a Dry Bulk Physical Trader, Calling all Physical Commodity TRADERS: Benchmark indices and physical commodity trading risk