Physical Trading - Energy Commodity Preferences

globalmacro's picture
globalmacro - Certified Professional
Rank: Orangutan | banana points 315

Saw some threads on this but most were a few years old. Wanted to revisit which energy commodities are the preferred commodities to trade among the experts here. There seemed to be a strong preference for NGL / LPGs relative to others such as crude or refined products. Do you still feel the same way or which commodity do you prefer going forward? Do you think some have a brighter path ahead than others and why? Would you consider a marketing or supply role significantly different than a trading role in those commodities? Presumably trading is more speculative, but you are still optimizing assets and logistics at best pricing, just maybe less directional bets on price...

Thoughts?

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Comments (32)

Apr 3, 2018

LNG over here.

Personally sticking to deal origination until the market gets more liquid and some direction starts to define itself in terms of global market dynamics and relationships. As that occurs I may decide to push for a transition into trading, either optimizing an origination book or spec.

Apr 3, 2018

Everyone seems to agree nat gas is soon to pass up oil in terms of volume %. But, I constantly hear that NGLs is the place to be

Apr 3, 2018

Nat gas basis is good times.

Crude basis and diffs starting to get some financial volume.

Basis is where its at...

Apr 4, 2018

What is the basis in Nat Gas/Crude? Is this like trading basis in ags or premiums in metals?

Apr 4, 2018

It is trading the regional price differences..much more focused on micro supply/demand. For example Permian oil and associated gas production are beginning to overwhelm transportation capacity out of the basin, so natural sellers have to discount their production more and more to either create more takeaway options at a higher cost (like rail or trucks for oil), or to the point of pain where producers shut in. The real trading here is about understanding the logistics and supply/demand of each pipe or basin and as it grows it plays out regionally.

For gas, for example, Canada is growing, Permian and Midcon is growing and the NE is growing...what are the affects on pricing in the regional markets to deliver the supply to the demand growth in the Gulf Coast? Somebody here said LNG is going to be great trading, which I agree, but its a lot more fun trying to figure out how all of that US LNG export demand growth is going to actually get their supply and speculate on what the market has right...

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Apr 4, 2018

Cool yeah, same thing as in metals. Much more interesting imo than punting on futures but I guess to each they're own.

If anyone is interested, there is a book called the Art of Grain Merchandising that is kind of expensive but that does a good job of explaining the very basic mechanics behind physical trading and can be applied to any hedgeable commodity you can think of.

Apr 5, 2018

How simplistic is the book?

I spent roughly a year on the energy side of trading before making the switch to grains about a week ago so I have a firm understanding of futures, basis, trading in general but I don't have much knowledge of grain specific details. Would the book be worth it for me?

Apr 5, 2018

Hmm, I mean it's not super advanced but there are some interesting things about calculating your premium position etc..

I mainly like it because there are things that are conceptualized that you rarely see put on paper when at an actual firm.

Apr 5, 2018

How have you found the switch from energy to grain so far? And why did you make this switch? I am curious because I am currently in grains and considering opps in energy.

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Apr 7, 2018

I would say it really depends on what you're looking for.

I took a slight pay cut to make the move but to me it has been worth it because of the better lifestyle, moved to a city I enjoy more, I have been given more responsibility, etc.

On the other side of that, if you are after the money and enjoy a fast paced cut throat atmosphere then energy is the way to go. It is all shop dependent obviously but in my experience I have found energy to be much more fast paced, much more technologically advanced, data driven, etc. Grains to me seems much more like old school trading from a physical perspective. For example, at the energy shop I was at a big part of my job was building out and maintaining models analyzing basis and basis vol for multiple locations across various commodities and things like that. At the shop I am at now we don't even have the add-in in excel to pull historical data in and we are the largest player in the country in the space we are in.

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Apr 7, 2018

Thanks for the response. How has the learning curve been so far? Were you trading at your last job in energy or in another trading related role?

I can relate a lot to what you are saying about the grains side being old school. Interesting to hear you say that though, as it is always something I have suspected but never had confirmed. My theory is that part if this has to with how opaque certain areas of the grain industry are, and the primary way of gathering information is still from talking to ppl in the mkt. For instance the primary ag. commodity that I trade, has no direct futures on the commodity exchange, and there is no way to find its historical basis or basis vol unless your company has been keeping pvt records. Compared to my peers in energy trading, I've also been given more responsibility a lot faster than other entry level graduates at the top oil shops. Now, this is by no means due to my ability but I think its more likely due to "old school" mentality still pervasive in grain trading. This combined with the ability to hand a fresh grad a small book of clients (say via a lesser traded ag. comm) and know that if they mess up a trade they are losing tens of thousands of dollars instead of tens of millions.

Do you think with this gap in data and data driven decisions in ag there are more lucrative trading opportunities, and opportunities to improve in the future?

Interesting conversation nonetheless. @GMG ...any input on this??

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Apr 7, 2018

I was a trade analyst in my previous role. Running PnL, deal entry, dealing with all the hedging, and then market analysis like I discuss below.

Learning curve has been steep to start just from learning the small details of the market. S & D drivers, blending details, railroad logistics and ops compared to pipelines, stuff like that. Fortunately my background of being at a physical shop before has made catching onto the details pretty easy. Phys trading is phys trading and the same ideas apply to all commodities.

I agree with your theory 100%. Coming from energy my first day in I was expecting to learn where the data came in from the companies like Platts, Argus, etc. and was quite surprised to hear that a lot of data just isn't published anywhere, and like you said, if there is any data on basis or anything it is just from the companies private records. Markets are much more opaque than energy.

To your second point though about lucrative trading, the opaque nature of the market is where the money is made. In my limited exposure so far it appears that margins are much higher in ag than energy but volume is much, much smaller as well.

Biggest ops to improve in the future to me would be one of the big shops compiling that historical data together and using it to make trading decisions. It is all there, it just isn't in a place to be used efficiently. For example, the data exists for crop quality, yield, etc by year. Combine that with the data the company has for what basis has been doing year-over-year and you can build out some models to get an idea of what basis "should" be doing given expected yield, quality and the historical basis data. Same thing could be done on protein spreads in the hard wheat market. Same thing could be done with cash time spreads. You get the idea. Having that type of info when no one else does would be a game changer.

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Apr 7, 2018

Hmm interesting. Def agree with where you see the industry going and the improvements that could be made. Off the top of my head I can think of a couple companies in the industry working towards what you are describing with the historical pvt data & basis models. What are your thoughts on the compensation gap between ags and energy? Seems like it is fairly steep from what I have seen. Any comments on this? Is the work/life balance in energy trading that much worse?

haha do you work for ABCD?

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Best Response
Apr 10, 2018

You're hit the nail on the head here with regards to responsibilities in Ags vs. Energies. It's a much simpler process to move up the ranks if you show the right attitude.

The gap in data availability is huge, and the speed of uptake in new technology is painfully slow. I personally find commodities tech a really interesting space and would love to get more involved in the field.

Honestly - you can survey a bunch of farmers, who are not obligated to tell the truth, about their planted area and create a USDA report with planted acreage for crops, or you can use satellite imagery overlaid with the unique photosynthetic output for a specific crop and calculate planted area that way.. To me it's a no brainer - to CTO's at the largest Ag commodity traders it's like talking to a brick wall.

The compensation gap in my opinion is big but not huge, and work life balance more than makes up for it. In a good year in energy you will earn more than in Ags, but in an average year the spread narrows. Work life balance in my experience varies massively, but on the whole is considerably better in Ags. Average 50 hours a week vs' my opposite in energy on 60.

Also, the art of grain merchandising is a good book, however I found it a bit heavy/slow and a little old school. Good theory though. I had a good training programme at my first role which reduced the need from it, worth a read if you can pick up a copy. I would push for your work place (if Ags) to get a copy of it to share with new starters and grads.

Apr 4, 2018

Yes, it is the exact same thing.

What physical trading doesn't revolve around trading basis is the real question here.

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Apr 4, 2018

Truth.

Jun 13, 2018

Could you give a compensation range for junior traders?

Apr 13, 2018

I actually cannot. I am based in the States. @GMG would be able to give you more guidance there.

Apr 15, 2018

It's tricky to compare London/Geneva/Elsewhere, but some rough data points, bonus ranges are technically unlimited upside but I have not heard of higher. There is a huge range of possibilities in practice.

UK Graduate/Entry Level:
Yr 1-3: Basic PS 30-75, Bonus 0-50%

Europe (Not Swiss) Graduate/Entry Level:
Yr 1-3: Basic EUR 35-50, Bonus 0-50%

UK Experienced
Basic - 75-150k, Bonus ???

EU Experienced
Basic - 50-120k, Bonus 0-5x

Swiss Early Experienc
Basic CHF >100k, Bonus ?

Jun 13, 2018

.

Apr 15, 2018

All gross salaries.

The 30k is Pre Tax, and it's PS: Pound Sterling. So tax would be pretty low on that in the UK - it's worth noting this is above the average salary for a graduate of any difference in the UK but well below the average for a pure finance job. Same for 35k EUR - that represents the lowest paying grad scheme I have heard of in Europe from a well sized trading house - it is in a relatively low tax part of Europe. Obviously tax varies massively depending on where you are, wether you are an expat, etc. etc.

These are starting salaries straight from Uni, across Energies/Metals/Softs/Ags - so they represent a range.

Some things to consider:
1) A lot of commodities jobs are not in major hubs (although many are).
2) There is a clear expectation that you will need to work hard for a few years to progress, but if you do the reward will come. (That's how these companies hook you in and earn loyalty).

Apr 23, 2018

I can confirm the first two salary estimations. I believe that the bonus % is too high for continental Europe.

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Apr 3, 2018

Residuals and fuel oil. I'd aim to get in a good resid seat right around 2020 if I were you

Apr 5, 2018

Fuel oil? Really? Even with the new environmental regs coming online soon? Ships are either going to have to switch to more expensive, cleaner, fuel or pay out the ass for scrubbers.

Apr 6, 2018

I think especially due to the environmental regulations. In my experience the higher the degree of complexity the more space there is for a traders to add value.

Apr 6, 2018

Yeah, my comment was a little tongue in cheek since the market will be mostly regulated away and the idea of one of these young monkeys busting ass to get a resid trading seat in a few years made me chuckle. That being said Index is right 2020 should be incredibly interesting and there will be huge opportunities for savy players to make money.

Overall though I agree with Alphabet, ship owners won't want to pay for those scrubbers and we'll see a move to increased disty demand. I think distillate teams will absorb the market share and we'll ultimately have less heavies trading seats out there. By 2022, net impact will be fewer physical trading opportunities unfortunately.

Apr 3, 2018

I will repost something I posted at the beginning of the year (with a few edits).

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 - strong demand growth. 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 due to lack of storage in some areas, abundant supply in others, pipeline constraints, etc. Immature markets tend to be more volatile than mature ones which gives rise to many more trading/arb opportunities.

In reality though, get a job at any shop that will take you and make the best of the desk you end up on because finding a seat anywhere is hard enough. Once you get in you will gain a better idea of where you want to eventually end up at some point and you can start shooting for it then.

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Apr 5, 2018

I work at a large integrated O&G company. I initially thought I would go into those marketing/supply/trading type roles. The opportunities didn't materialize during the market downturn and I moved out of the trading environment into other commercial roles (not quite BD but close enough for this discussion)

Long story short, the marketing/supply opportunities are coming up again and I would have a shot at landing a crude role internally (ie refinery supply) sometime next year as I've positioned myself for that to be my next developmental role. But I may also have an NGL opportunity in the next few weeks at another firm (midstream but fairly strong footprint in the NGL space). So there are multiple angles to consider as I debate where to put my focus over the next year or so. It feels like it will become a defining decision as the career paths seem to diverge fairly significantly.

Thoughts? Is it as simple as going with 'bird in hand' opportunities?

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Apr 7, 2018

I for one am not a total believer that NGL's are necessarily going to be such a great place to build a trading career. My reason for thinking this is because, despite massive market growth and huge infrastructure developments, I feel that producers and consumers in that space are too sophisticated for traders to add much value - particularly given the transport constraints and requirements of moving NGL's compared to atmospheric liquids.

I think that there is no doubt that there are fortunes to be made in NGL's, but I feel they will come from savvy asset development and ownership (gathering, processing, transport, storage, etc.). What I mean by this is that it seems like it could be difficult to attribute profitability to anything but asset ownership and access. That is not to say that the seat won't generate massive profits, but I am not convinced that the seat will be compensated the same as someone who needs to move in and out of positions to make money.

I am by no means an expert and could easily be wrong, if someone with more NGL exposure could paint a more correct picture I would be extremely appreciative.

Apr 9, 2018
index:

I feel that producers and consumers in that space are too sophisticated for traders to add much value - particularly given the transport constraints and requirements of moving NGL's compared to atmospheric liquids.

Could you explain a bit more about why traders can add value in some commodities but in others (and why you need a good base of assets in these)?

Jun 26, 2018