Oil and gas
Trading Oil and Gas
07/08/2010Traders carry out transactions, the primary aim of which is to cover the crude oil needs of their oil company. They also buy and sell cargos of crude or refined oil to make profits. These traders have to be pretty skillful at anticipating the stock market risks linked to these transactions in order to limit financial losses.
Trading crude oil in the Total trading room in Geneva (Swiss, March 2009)
What Is the Trader's Role?
Oil trading refers to all financial transactions related to the trading of hydrocarbon cargos. Organizing these transactions is complex because it takes place at global level and is subject to supply and demand.
All the major oil companies have trading subsidiaries. Traders are the people who are responsible for buying and selling hydrocarbons on their behalf. The aim of the transactions they carry out is threefold:
• They need to ensure that the group's refineries have a regular supply of crude oil. To do this, they compare the demand of refineries with the supply of crude produced by the company. If there is not enough crude, the traderscan buy some in advance. This ensures that refineries won't have to shut down for several days because they don't have the right amount and type of oil.
• If the company holds crude oil that it doesn't need for its refineries, the traders sell this surplus.
• Finally, they also handle the sale of finished products from refineries (fuel, etc.).
A Sometimes Unpredictable Trade
Traders buy and sell cargos of hydrocarbons throughout the world on a real stock market, also called a spot market. On this type of market, quantities of oil already in existence are exchanged to meet immediate demand.
Traders try to make profits in their day-to-day transactions by:
• selling their oil to the highest bidder
• buying cargos at low prices and turning them around at a higher price. In this case, the buyer often needs the oil quickly and is prepared to spend money to get it.
Therefore, a cargo of crude can often change hands several times,even while it is being transported by ship! For example, if the oil is already on its way to the US, it may be bought during transit by a Dutchrefinery in Rotterdam and end up in a French refinery with a more pressing need in Fos-sur-Mer.
Similarly, traders can buy crude to supply their oil company's refineries if necessary.
The crude oil delivered to the refinery may come from the company's own deposits or from an external provider. Wherever its origin, it has to be refined into a finished product to meet consumer demand (fuel and raw materials for the petrochemicalsindustry). However, several months can pass between when a cargo of crude arrives at the refinery and when it is resold in the form of finished products. During this time, the price of crude oil can vary and this has an impact on the resale price of the finished products.
• If the price goes up, the company makes a profit by selling its finished products at a higher price.
• On the other hand, if the price of crude falls, the value of refined products also falls. If this happens, the trader takes a financial loss because the profit from the resale of the products does not cover crude purchase or production costs.
To protect against this risk, traders can buy and sell oil on futures markets.These are markets where the buyer and the vendor sign a contract where they commit to exchanging a specific amount of oil at a given date and at a previously arranged price.
By entering into this type of contract, traders protect their companiesfrom falling oil prices. Before the crude is even refined, they know how much the finished products will make and price fluctuations will have no effect on profits.
