Physical Trading: Best commodities to be in?

LongGamma94's picture
Rank: Monkey | banana points 57

Hi all, I'm a long time lurker on this forum but I've benefited a lot from all of the discussions surrounding physical trading. Currently an undergrad with internship experiences in Base Metals and I'm looking to apply for grad positions as an entry-level scheduler/junior trader soon.

My question is this: for those in the physical space, given your long-term view of where different commodities are headed, what commodity group (Energy/Metals/Ags) do you think offers the best opportunities for those coming into the industry?

By this I mean the kind of product groups best poised to benefit from upcoming trends in the world, those with the greatest potential for interesting work, and miscellaneous considerations like comp and likelihood of getting a trading position.

Would really appreciate some advice on this - thanks!

Investment Banking Interview Course

  • 7,548 questions across 469 investment banks. Crowdsourced from over 500,000 members.
  • Technical, behavioral, networking, case videos, templates. All included.
  • Most comprehensive IB interview course in the world.

Comments (79)

Jan 1, 2018

For energy. NGL imo

    • 1
Jan 2, 2018
nattyphizz:

For energy. NGL imo

Why?

Jan 3, 2018

NGL's are predicted to see the most growth over the coming years.

There have been billions of dollars invested in steam crackers and petchem facilities throughout the US. These facilities are going to need NGL's to feed them and then on the other side of that they are getting built for a reason - demand. As this demand continues to rise and infrastructure is being built out there is most likely going to be quite a bit of volatility in the market. On top of that, energy trading typically pays more than other industries such as ag (there are obviously people making very good money in all types of physical trading. I am just speaking generally for non-trading roles).

    • 5
Jan 2, 2018

Why I hear that natural gas is so bad to be in?

    • 2
Jan 2, 2018
investro:

Why I hear that natural gas is so bad to be in?

who on earth hit me with monkey shit? that's horrendous!

    • 1
    • 8
Learn More

Side-by-side comparison of top modeling training courses + exclusive discount through WSO here.

Apr 11, 2018

investro,

Don't take the MS personally. There are several Richard Craniums on these boards whose only purpose in life seems to be to seek out innocuous posts and toss MS at them. Brainless turds who don't have enough horsepower to actually post anything, so they hide behind anonymous MS-tossing, I guess to make themselves feel like they're taking part in the discussion. Or not.

Jan 3, 2018

Well part of it is that natty has seen pretty depressed vol lately. Vol leads to opportunities to make money because it leads to arbitrage situations as prices slowly come back into equilibrium. Without vol prices tend to stay close to one another across the board and these opps don't exist.

Also, there are some people out there that think natty is boring because it is pretty much just one curve (the futures you see traded on NYMEX) and then all physical gas is just traded as a basis off that curve. So people see it as a pretty straightforward market that is easy to learn and gets boring quickly. I will say, I have never worked on a nat gas desk so before anyone hops in here to bust my balls I am just relaying the message from guys I have spoke with that have sat on those desks.

NGL's, crude, gasoline, diesel, petrochemicals, etc. on the other hand have the basis trading I mentioned above plus all of the spec differences in products as well. There are multiple grades of gasoline, diesel, crude, etc. so that adds another dynamic to trading the physical product.

    • 1
Jan 2, 2018

thanks! for the insight! Just a crucial question please: by saying that the market is boring and easy to learn, it means the profits are less?

Best Response
Jan 3, 2018

I think LNG will be a very interesting space over the next 15-20 years. Quick note, I'm in the industry so take with grain of salt. That said a lot of things relating to trading (if that's your interest) are happening at the moment ranging from the development of true physically settled futures contracts (CME and CBOE) to replace those junky Platts markers that mean nothing, electronic trading platforms are already developing the infrastructure for when that happens, spot trading is growing exponentially, many inefficiencies to capture around the world, direct link to the power gen industry which is very interesting especially as you dive into emerging markets, etc.

Been in the space for close to 3 years now and love the dynamics, currently on a deal structuring/origination desk covering the Americas market, focus on Brazil and Panama.

    • 8
Jan 19, 2018

@EnergyHOU When do you think those ICE futures will be up by? Also whats the best way to hedge LNG exposure right now (Swap or Platts Futures)?

Jan 3, 2018
tz15:

@EnergyHOU When do you think those ICE futures will be up by? Also whats the best way to hedge LNG exposure right now (Swap or Platts Futures)?

I think CME gets everything figured out first with a contract trading by June of this year, physically settling at a Gulf Coast facility (I'll let you narrow that down, freebie). The ICE futures aren't true physically-settled futures either, they're a slightly enhanced Platts marker: although the price won't be arbitrary like the markers, it still won't be a real signal because it'll be disconnected from the physical market

I wish I had a good answer for you on the LNG-specific hedging side but it doesn't apply to me so much as I structure term deals (not a spot trader) so I usually hit a bank for a longer term fixed-for-float type of transaction if I have to lock in a price, and the bank houses the risk.

    • 1
Jan 23, 2018

ICE Futures coming soon I believe. Also in addition to what Energy said Power/Environment markets are a nice field to get in as well which ICE has been a good job setting it up for the future.

Jan 18, 2018

Thanks for all of the great replies guys; some really interesting and insightful comments here. Transparent, electronic trading for commodities was a big topic of conversation in the companies that I interned at, and I find it very interesting myself how some of these markers are developed (and whether that's an accurate reflection of the market).

Perhaps as a follow-up question: with all the hype surrounding EV batteries (and the corresponding demand for metals like Nickel Sulphate and Cobalt etc.), do you guys see Metals as being a more interesting space than Energy over the next few decades?

    • 1
Jan 2, 2018
LongGamma94:

Transparent, electronic trading for commodities was a big topic of conversation in the companies that I interned at

How does electronic trading in commodities actually work? Do you mean like an exchange or an app on a computer on which you could trade (eliminating the need for a middleman)??

How would that make things more transparent exactly?

Jan 18, 2018

Floating price = transparency

Jan 18, 2018

Most of the majors don't trade lithium etc. on any scale, if at all these days. There is talk of the LME listing lithium at some point though.

Jan 18, 2018

+1 to EnergyHOU, LNG is so interesting and I think it is the future.

But to give some unwarranted advice:
I wouldn't say 'energy trading' per-se has a lot of opportunities at the moment, but there are a lot of roles in energy becoming available, whih could get you there. I would imagine you're asking this for potential career choices, so I'd say this.

Keep an open mind and realize there are so many parts of the 'energy business' that you're not familiar with yet. You may end up in a role that you love and may realize that it really isn't as important to trade as you once thought. When I interviewed for my job I was upfront and told them I would like to trade one day, but then again I also don't truly know what it is like to trade power or NG, and would like to be exposed to all parts of the business.

I'm in our 'asset' risk group, and I'm right on the trade floor, two desks away from the traders, very much a boys club on the floor, (putters, footballs, talking shit to each other, big tv's on the wall etc...) and that is usually what people kind of want when they talk about trading.

    • 1
Apr 11, 2018

Tandem, Out of curiosity, what type of degree and years of experience does it take to get in a position similar to yours?

I worked in the fossil fuel energy field for many years, but in a much different capacity. Recently made a career change, but interested in additional avenues.

Thx in advance.

Jan 18, 2018

I think so but I'm in metals so probably just talking my book.

Feb 13, 2018

GoodBread,

Where in metals, if I may ask? I'm awfully curious about that part of the industry. Would love some insight. Thanks.

Jan 18, 2018

Precious metals are consistently big earners if you get into one of the big shops.

Jan 19, 2018

Hi I have a really noobish question. How does one enter the energy industry to be a trader?

Like, are people who have an energy related degree preferred or any one knowing about financial markets?

The reason I ask this is because I have never seen offers being advertised for entry level positions. Also I'm not based in the US

Jan 3, 2018

Energy traders tend to start their careers in roles that support the energy trading function. Reason being is that as a trader, it's fundamental that you understand the activities of the various groups that you will be interacting with during your day-to-day. If we're talking about physical energy markets those roles would traditionally include: scheduling, middle office, commercial operations, and market analysis/research, among others.

    • 3
Jan 19, 2018

.

Learn More

Side-by-side comparison of top modeling training courses + exclusive discount through WSO here.

Jan 19, 2018

if you want a career in commodities you need to be vested long term... there is no this product is great for next 10 years.... also a lot of factors out of your control on what product you may trade... my advice is to get into the industry and work hard... opportunities will find you

Jan 19, 2018

Could you expand more about how can one go about getting into the industry? For example what kind of roles.

I have read your older threads. So specifically, How has it changed now? Is automation hitting the energy and commodity sector as well? Also is knowing how to code considered an asset if I want to enter into this industry?

Jan 19, 2018
DeltaDecay:

Could you expand more about how can one go about getting into the industry? For example what kind of roles.

I have read your older threads. So specifically, How has it changed now? Is automation hitting the energy and commodity sector as well? Also is knowing how to code considered an asset if I want to enter into this industry?

my advice is the same... with the banks leaving the phy space - more recruiting focus is now on the majors and trading shops

Apr 12, 2018

I've been in ag procurement for the last 3 years with ABCD, trend or margin if you like is in the specialty crops (crop that are usually not easily hedged) like pulses, lentils, and durum. wheat seems to have the thinnest margin

Jan 23, 2018

Any thoughts on ethanol/biofuels?

    • 1
Jan 23, 2018

Lucky, I like the field. PM me if you have specific questions.

Jan 23, 2018

Will do, thanks!

Jan 29, 2018

I'm in Ag Commodities. Ethanol space is alright for margins right now. Biofuels is one of the most profitable platforms at my company. That said, I'm not exactly bullish the Ag space in general right now.

Jan 18, 2018

How about you pick the commodity you like best as opposed to what some strangers think will be doing well 4 years down the road. You have a career that should last a few decades before you, every single commodity will have many ups and downs in that period.

And that career structure you outlined is more or less what you see in power but the industry is far too broad to generalize. If you've done so many internships in the field, why don't you just pick what you liked best and go with what they'll give you at this point?

Jan 2, 2018

Why arent you bullish on the ag space? How different is it to the energy space in this sense?

Feb 3, 2018

I'd support the point on biofuels. With China's 2020 ethanol policy, I'd be interested to see how far they push an E10 mandate. Some interesting arbs in the space as well. I heard Pakistan is a growing player in exporting to SE Asia.

In contrast, I consider myself an eternal optimist when it comes to physical ag. I think right now, merchants have the best opportunity they've had in a while to help grow demand for their products by taking additional risk in emerging market supply chains. When you think about how far we've come in developing the supply chains and food security in North America and Western Europe, we still have the ability to do the same in the rest of the world. The same can be said for all three major commodity groups though...

    • 1
Apr 12, 2018

Agree with GoodBread. Depends on many factors from macroeconomic ones to the asset concentration of your firm on that particular product which will impacts the margin and therefore your bonus.

Moreover the path to trader differs from product to product. Some young alumnis of my school are junior trader at the biggest trading houses but only in agri. I think it's harder or at least longer for oil, metals and such.

I don't know how you found your internships, I bet you are in the US because in Europe there are only graduate programs

Apr 12, 2018

Your little list prioritizing types of commodities made me chuckle.

Go w/ whichever shop has most prestige within the particular sector their in / whichever shop has most financial firepower. Also, if you know which particular traders you will be working under, this should influence your decision; they will be your mentor during your formative years, and thus an important factor in determing what kind of trader you will be. Learn from the best, etc.

Apr 12, 2018
contagoman:

Your little list prioritizing types of commodities made me chuckle.

Agree with that comment. Also, I've never seen a path to trader in ags the way you've laid it out. You can actually start in a front office role in ags without waiting for the 3-4 year development track that you have in other commodities.

Go with wherever you can get an offer, and if you really want to move to a different product group down the road, stay in touch with all of your contacts from your internships and you'll be able to move as long as you've had success and learned well in the product group you start in.

Apr 12, 2018

Simple, start by getting a job offer.

Apr 12, 2018
marcellus_wallace:

Simple, start by getting a job offer.

Truth.

Start with the desks that give you job offers and go from there.

Jan 19, 2018

I happen to fall in a very strong power trading group as they were growing and not because of anything I did. Lot of factors out of your control to get you into a trader seat - pick the best route and work hard. Good things tend to come if you put yourself in a good place from the start. Do traders come from the mid office or from another firm? If from another firm - I may not want to start my career there but if they come from within - get in line and work hard

Apr 12, 2018

thinking about rankings in commodities trading is just the wrong way to think about it

    • 1
Apr 12, 2018

Trade in what you love to research about.

Apr 12, 2018

Assuming you get 5 job offers for the 5 groups of commodities you've mentioned, I strongly recommend you pick one based on
- the actual content of the job (function x product, you must have some preferences),
- the management style (who'd be your boss?) and
- the corporate culture (supermajors vs. producers/customers vs. banks vs. trading houses).
- lastly, if all things equal (impossible), the package

IMHO, early in your career, your priority is to learn, learn and learn.

In terms of products, there probably are significant differences between mature ones like crude and less structured but fast growing as iron ore, etc. You've probably gotten a sense of all this with your previous experiences, challenge your opinion with insider's insights.
But at the end of the day, it's about so much more than just the product you're trading.

    • 3
Jan 26, 2018

Power if you are interested in being able to trade both fundamentals (fuel spreads) and cross-commodity (relationships between fuels, carbon etc).

Apr 11, 2018

I am into Platinum Commodities. What made me choose it is because it's considered to be one of the world's most precious metals, which is 30x rarer than Gold. Its properties make it a highly demanded metal with various industries. From Jewelry to cars to health sciences and many more.

    • 1