Paper trading at Physical Commodity Houses
As someone who's began there analyst job at an oil major within their trading division. I was wondering if anyone could give me insight into whether there are any desks or commodities that don't paper trade at all. So a desk that trade physical and hedge only, or does this not exist.
Based on the most helpful WSO content, it is highly unlikely to find a desk at a physical commodity house that does not engage in some form of paper trading. Even in physical trading, derivatives are commonly used to hedge risks such as price risk and credit risk. For example:
Hedging Price Risk: Physical traders often use futures contracts to hedge against price fluctuations in the commodities they trade. This is a standard practice to manage exposure to volatile markets.
Hedging Credit Risk: Credit default swaps (CDS) are used to mitigate the risk of counterparty default, especially during the time delay between deal execution and physical delivery.
While the primary focus of physical desks is on the actual movement and trading of commodities (e.g., oil, metals, or agricultural products), paper trading is an integral part of managing the risks associated with these trades. Even desks that emphasize physical trading will typically have some level of paper trading to support their operations and protect against market uncertainties.
Sources: Physical Commodity Trading, Books on Physical Commodity Trading, Crude Oil trading at big oil exit opps
Yeah, you’ll see this in the utilities and producers space in gas.
As I think on it, some portfolios at trade shops are set up like this as well. The book is one big physical option. They have set it up where they can hedge their molecules and flow them and not really have to ‘trade’ to generate alpha aside from that.
Appreciate the explanation. To build on that, are there also tier 1 trade shops that have these desks that focus on the physical-flow + hedging? Or is it mainly smaller shops.
Also does it mainly happen on natural gas desks, or can you also see it in power, LNG, refined products, etc.?
And lastly(sorry for all the questions), when looking at roles, how do you actually make sure you end up on one of those physical/desks instead of a more paper desk? I know even within gas some books are more speculative than others. Any pointers on how to identify the physical-heavy desks when applying or rotating and being able to get on them, or is it based of managements decision and you don’t really get a say in it?
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