QUESTION TO PHYSICAL OIL TRADERS/ COMMODITY TRADERS

papertiger's picture
Rank: Orangutan | banana points 355

Just a question fellas.

Why exactly does a physical oil trader exist and how do they capture profit in the grand chain ?

I noticed that

crude oil -> refinery -> refinery sells to commodity traders (Glencore, Trafigura, Gunvor, Vitol, etc). -> trader sell to someone else

How exactly does a Glencore profit when the refinery can sell directly to whoever the true end customer is ?

I don't understand the job of traders if refineries can just cut them out. It amuses me that refineries don't just sell to the true end customer.

Comments (5)

Jul 19, 2018

The "->" is not free of capital commitments or risk. Glencore does "->" better than your imaginary refinery. Its a lot more complicated than your little chain there.

Jul 19, 2018

They own the function of intermediation, and to your point, some players aren't interested in selling to traders and instead go further downstream to develop the end user relationships (think supermajors) while others prefer to simply sell to them and keep their value chain short and tight. It just depends.

Jul 19, 2018
papertiger:

Just a question fellas.

Why exactly does a physical oil trader exist and how do they capture profit in the grand chain ?

I noticed that

crude oil -> refinery -> refinery sells to commodity traders (Glencore, Trafigura, Gunvor, Vitol, etc). -> trader sell to someone else

How exactly does a Glencore profit when the refinery can sell directly to whoever the true end customer is ?

I don't understand the job of traders if refineries can just cut them out. It amuses me that refineries don't just sell to the true end customer.

they sell to the end users all the time

Most Helpful
Jul 19, 2018

The same reason Apple doesn't own the railroad and trucking companies that ship their products to their stores. It isn't there specialty and their capital and time is better focused elsewhere.

There are a couple reasons they exist but one of the big ones is that at the end of the day traders off a service to their counter parties (wearing risk being a very, very large one) and then use this place in the market to carve out some profits for themselves.

An upstream company will enter into a contract to sell their oil to a trade shop because they trust the guy they enter into the deal with, know he will pay them on time, know he will show up when he says he will, can guarantee a certain price for their product in the future, etc. Then on the other side of that, the refiner likes to deal with the trader that is supplying them oil because they know he will deliver on time and on spec (this is huge for a refiner that needs their refinery to keep running), will bear the counter party risk from the crude supplier in less than ideal countries or small producers, is knowledgeable of the general market and can supply market information, provides liquidity out forward and takes on the risk for them (refiner may want to lock in X number of barrels 3 months from now, producer isn't sure if they will have those barrels available at that time or not so won't enter into a deal for delivery 3 months from now, refiner must go to trader to guarantee X supply in 3 months since they are the only ones entering into the deal), etc.

Other reasons are infrastructure issues such as shipping capacity and pipeline capacity. For example, Colonial pipeline has most of the shipping capacity for gasoline and diesel from the US Gulf to the US northeast. There is only so much space on this pipeline and the traders are the ones that own that space. If they want to ship supply up to New York they are going to need to sell it to a trader that can actually ship it as the refiner does not have the ability to do so unless they go build their own pipeline.

Lastly, another part of it is that traders typically end up dealing a lot with smaller refiners and smaller producers. Shops like BP, Shell, and P66 do spend the money to have their own traders on staff to do the things you mentioned but places like HollyFrontier, Tesoro, Delek, Flint Hills, PBF, Suncor, NuStar, and Coffeyville have decided their limited capital is better spent on actual refining instead of a trading arm. On the producer side companies like EOG, Apache, Pioneer, Chesapeake, Energen, Southwestern, Oasis, Diamonback, Jagged Peak, Noble, Anadarko, and QEP have decided their money is better spent on drilling and producing than funding a trading team to always find the best market for their crude production (whether it be domestic or international).

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Jul 19, 2018
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