Calling all physical commodities traders
Can someone tell me what goes into a physical commodity trade (oil, products) throughout the trading day? How do you know where basis (regional) prices are moving towards? How do you decide what price to enter a position at? How do you find a customer to sell or buy from? Is this done with the use of brokers or just being in constant communication with other traders?
Extremely broad questions here. I’m relatively new to my desk (~1 year). I think the biggest mindset I had to kick coming out of school was thinking about entering and exiting at trade. Trading physical means literally moving something, storing something, or processing something the most efficient way possible. Half of your job is just making sure your asset (boats, rail, plants, elevators) is being used and is not “out of the market.” If you shut down, you basically suck at your job and are fired. If you run, but at mediocre basis values, people will see you as a sucker and you probably won’t last long. If you run the best you can with the given market environment, and trade the values of the market or slightly better, you’ll get promoted and move up to higher responsibilities.
The first point is I’d say, at least half of physical commodity trades aren’t trying to predict market direction they're focusing on maximizing their assets. If my asset is a refinery where I can buy oil at $45 and gasoline for $55, with a processing fee of $5, I should make money every month. Therefore, understanding what combination of crude and gasoline output maximizes profit is what I focus on all day.
The next part where I make maybe 10% of my money is speculating. If my fundamental view says I should wait a week to hedge my crude and gasoline, I'll take on the risk of not being hedged to express this view. My fundamental views are based on a bottom ups approach of who are the suppliers, who are the buyers, and what is their imbalance relative to price.
Got it thanks! So from my understanding from your comments it comes down to optimizing your assets (refineries, tanks, vessels, pipeline space), and if i'm able to understand what's happening to the supply and demand dynamics ofthe specific market, i can accurately trade and capture margin either through locational arbs or calendar arbs
Anyone else with an input please go ahead and share!
A large physical trading book is made up of shorts (annual sales contracts, spot opportunities..) and longs (purchase agreements, spot buys, assets...). There is a connection between the two but the money is made by being creative in your logistics and how you match up your shorts and longs. So it's not like you are just sitting there with a gtc waiting for the basis to be in your target range, you are constantly pushing to buy cheaper and sell dearer with each supplier/customer, and trying to position the overall book in accordance with where you think the basis is going.
Views on the basis come from talking to suppliers, customers, logistics people, and some S&D analysis.
Finding customers is about being creative, going to conferences, databases, reading industry news...
The gtc point answered all of my questions... i guess the way i was thinking about it might only relate to spec financial trades.
I also had another burning question that i hope you can answer...
Why don't traders just close their deals as EFPs and save themselves the hassle of having to put hedging positions on the merc. Don't these two action both have the effect of covering flat price risk?
Physically delivering or taking delivery on a future can be extraordinarily complicated even for sophisticated players. It also adds a lot of unnecessary complications. In some cases it’s worth it but in most cases for most products traders would prefer to roll a hedge or sell on the cash market
Ut quae et doloremque voluptatibus sed. Sint expedita laudantium in.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...