Oil TDP Interview Question
I am prepping for a technical round with Exxon for their internal trading graduate program. I spoke to someone who mentioned that one part of the interview involves a small scenario. In this scenario, you are assigned to a refinery that has its own storage and are provided with information on a forward curve that is in contango and the costs of transportation. You are responsible for giving one fixed price for the refinery. The correct strategy is to purchase from the market when prices are cheaper, store it, and move it once the transportation costs are lower.
I tried to clarify what he meant but didn’t get any further details so wanted to see if my thinking is in the right direction. I’m assuming this might just be a simple contango play, so the forward curve was a products forward curve rather than crude oil. So you purchase all the refinery needs at the beginning at the forward curve and store it until prices are high enough such that the spread (price - what you originally bought at) exceed the costs of transportation. So the minimum price that satisfies this condition would be the single fixed price that should be given. Is this something that would make sense? I wasn’t sure so wanted some feedback.
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Your thinking aligns well with the fundamentals of a contango market strategy. Based on the most helpful WSO content, here's how you can refine your approach:
Understanding Contango: In a contango market, future prices are higher than spot prices. This creates an opportunity to buy at lower current prices, store the product, and sell it later at higher prices, provided the storage and transportation costs are covered.
Refinery Needs and Fixed Price: The goal is to determine a single fixed price for the refinery that accounts for:
Key Calculation:
Optimization:
Practical Considerations:
This approach demonstrates your understanding of contango dynamics, cost management, and logistical optimization, which are key skills for a trading role. If you can articulate this clearly in your interview, it will showcase your ability to think strategically and manage real-world trading scenarios effectively.
Sources: Physical Energy Trading And Logistics, Physical Energy Trading And Logistics, Energy Trading 101: The Crack Spread, Physical Oil Trading Basics (Part 1 of 2), ExxonMobil trading
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I’m not really sure what you are asking exactly- there are a few concepts you might be touching on.
But generally speaking, a refinery buys crude and sells products. A crack spread is products minus crude. A refinery is implicitly long crack spread (ie makes more money if product sales are costlier than crude purchases).
Contango is a state where contracts for future delivery dates are more expensive than ones closer by. If the variable cost of storage is less than contango, traders are incented to buy earlier and lock in future sales at a profit. If a refinery has assets associated with it (ie onsite tankage) that a trader can use, you can perform this storage play with those assets.
I’m not sure what you are getting asked with regard to quoting them prices, but it likely has something to do with some of the pieces above. Keep in mind they can see most prices just as well as you can. Seeing prices is how refineries make decisions on what crudes to buy and products to make.
So if they are relying on you to execute, perhaps the question is psychological in nature and has to do with how much of a margin you will take for yourself vs the plant. You are making some causal mistakes like stating that monetizing a storage play involves buying, waiting and then selling when monetizing it actually involves simultaneous buying and selling of short and long dated contracts in order to lock in your econs. Also I’m not sure what the “cost of transportation” refers to or how that is relevant to the question asked.
When you are referring to the simultaneous buying and selling of contracts, is that in reference to the hedging strategies refineries use?
In terms of transportation costs, apparently this is a component use in some comparable case studies for the firm, so would this possibly be in reference to the cost of transporting the crude from where it is bought?
Thanks for all the info on contango and the crack spread.
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