Oil & Gas WBL
Effective trading and risk management
--Futures markets make the buying and selling of commodities more efficient by providing: Instantaneous access to global movements in prices Instruments to manage risk, allowing producers and consumers to focus on their core business Incentives for speculators, outside the industry, to enter the market with additional capital --Speculators operating especially in the OTC markets provide a valuable service to every commodity trading industry. They are willing, at a price, to accept and transfer a risk that cannot be accommodated with available futures and forward hedging instruments. --A key principle in managing the risk of an S&T function is to match all the physical and paper positions on a daily basis and measure their current effectiveness
forward contracts
A forward contract is an agreement made today for a trade that will take place at some point in the future. A forward is usually negotiated between two oil and gas companies or traders with similar interests. They are not traded on an organized exchange. The components outlined in a forward contract are specific to the underlying commodity, including: Quality and grade (for crude oil and products) Delivery price Location Notional amount (or quantity) Settlement date There is much more flexibility in structuring a forward agreement to a specific business, such as a refiner's situation, than use of the standard futures contracts.
contango
A market condition in which a futures or option contract is trading progressively higher for each forward-looking contract month. A market that is steeply backwardated often indicates a perception of a current shortage in the commodity. By the same token, a market that is deeply in contango may indicate a perception of a current supply surplus in the commodity.
pipeline batching
A pipeline company takes care of many shippers and their various products, so batching is a very important aspect of product pipeline movement. Pipeline operators ship different petroleum products, or grades of the same product, in sequence through a pipeline, with each product or "batch" distinct from the one preceding or following. One refined product or crude oil grade is injected and begins its journey, then another and another. A batch is a quantity of one product or grade that will be transported before the injection of a second product or grade. Pipeline operators establish the batch schedules sometimes months in advance. Note in the chart there is always a certain amount of intermixing between the products at the interface, which is the point where the two products meet. In some instances, the products are similar, such as the two grades of gasoline (super and mid-grade). In this case, the higher-grade product is added to the lower grade product. In other instances, the products are dissimilar, such as diesel and super gasoline. This creates transmix — the hybrid product created by intermixing of products at the interface. Transmix must be channeled to separate storage and be reprocessed.
swap
A swap is an agreement to exchange forward obligations. The most common arrangement is to swap floating prices for fixed prices.
Price services
Accurate, accessible pricing data is essential to an efficient commodity market. Of the various sources and types of news and price services, Platts and Argus are the most widely used sources for daily worldwide assessments of spot market transactions Reporting of prices for crude and products is not like the stock exchanges in New York or London. There is no global exchange or bulletin board where deal prices are posted. The published crude oil and product prices are more of an index of actual transactions. Platts, Argus and other publishers compile the data collected by teams of price reporters who spend their days contacting traders for the price, quantity and delivery terms of their latest deals. Today, use of electronic markets for both trades and reporting has significantly improved price index information
option contract
An option contract is the right, but not the obligation, to buy or sell a commodity at a fixed price (called the strike or exercise price) during a specified period. In simple terms: A call option is a right to buy the commodity. A put option is the right to sell the commodity. When used for crude and products, there are two common types of options that are both traded globally: European style, where the option can be exercised only on the expiration date American style, where the option can be exercised at any time up to the expiration date --Like stock trading, one advantage of an option (for the purchaser) is that the risk of the transaction is limited to the cost of the option, called the option premium. --Crude and product option trading is much more complex than futures trading. For any particular delivery month (called the expiration date) the options trader must make an assumption about: The direction of the market How fast the market will move up or down
Variations in commodity volatility
Analysts measure volatility by ranking past prices and determining an average variation from the price holding the middle position in the list, called the median price. For crude oil, products and natural gas, the volatility ranges are for low, high, average and "spike" or peak volatility throughout the year. Seasonal demand variations alone account for a large portion of the volatility. This data suggests that crude oil and product pricing variations most often move together. However, this is not always the case, especially because crude oil movements reflect global supply/demand and refined product pricing often reflects the refining status in the host country. Natural gas is much more volatile than crude oil, because it very quickly reflects market forces. Since natural gas has limited storage capability, and a tighter regional supply connection from wellhead to consumer, a sudden unexpected cold snap can send prices soaring. Conversely, an unexpected decline in the price of competing fuels, such as oil, can cause industrial customers to use much less gas than expected, and the price of natural gas can decline precipitously.
Refined product transportation
As discussed, crude and product are moved by marine, pipeline, rail or road. On a volume basis, pipeline and marine are dominant. Both rail tank cars and tanker trucks are also needed for the final leg of distribution to customers The industry measures refined product movements in "barrel miles," which is not the number of barrels moved, but how many miles the barrels moved. In the US, pipelines account for about 62% of the total movements based on barrel miles. From a cost per mile standpoint, pipelines are the most effective means of refined product transportation and pipelines are safer than the other types of transportation. Marine accounts for 28% of the total movements with road 6% and rail 4%.
broker markets
Broker markets match anonymous sellers and buyers and serve as the transaction counterparties. They actually manage a portfolio of sale and purchase obligations
historical perspective 3
By the end of the 19th century, New York hosted a Petroleum Exchange for crude oil futures to allow hedging of supplies. Another one arose in California in the 1930s. A new era of price instability came into being with the 1973 Arab oil embargo and the subsequent nationalization of significant crude oil reserves. In 1978, the New York Mercantile Exchange (NYMEX) launched a heating oil futures contract, followed by a crude oil contract in 1983, which is now one of the most actively traded physical futures contracts in the world. Crude and product hedging has now matured with a complex variety of global exchanges, futures contracts and options. They help stabilize the global pricing structure and are considered a reliable index for the often less visible markets for the sale of physical barrels of crude oil and petroleum products.
crack spreads
Crack spreads are different for each market region and are highly dependent on crude sources and refinery location. Trading the crack spread on an exchange allows for the execution of both the crude and the product hedge as a single transaction.
crack spread trades
Crack spreads typically trade as a one-to-one ratio between crude and the underlying product. However, different ratios can be used to better reflect the trader's or refiner's position.
worldscale
Crude and product, clean and dirty freight rates are published daily for important regional moves. Worldscale (WS) is the standard system for assessing freight rates. Once a year, a set of base voyage costs, including bunker fuel, port costs and so on for both laden and return voyages, is published for a theoretical standard vessel moving between each of the world's main loading and discharging ports. This is called the WS Flat Rate. The spot freight rate varies widely and is driven by four major supply/demand factors: How old is the ship? How much demand is there for a particular movement? How many ships of a particular size and type are available? (Ships are being scrapped and new ships are constantly being built.) What are the prevailing contracting terms and methods? Are ship owners looking for term or spot contracts?
Global marker crudes
Crude pricing market information services do not attempt to report prices for every type or quality of crude traded. They cover the crudes that are considered representative of particular sources and refining centers, termed marker crudes. For example: At Rotterdam in the Netherlands, Brent crude from the North Sea is the normal benchmark. Brent also is quoted on the US Gulf Coast, along with West Texas Intermediate (WTI) and Alaskan North Slope (ANS). In Europe, Ural crude serves as a marker crude for the Russian exported crudes
electronic trading
Electronic trading forums are internet-based marketplaces that trade futures and over-the-counter (OTC) energy and commodity contracts, as well as derivative financial products.
freight rates
Freight rates for marine movements vary widely by: -Ship size -Ship type (Tankers are divided by whether they are providing "clean" or "dirty" service. Dirty tankers carry loads of crude oil and residual fuels, while clean tankers carry lighter products such as gasoline. Light products cannot be carried in dirty tankers because they will become contaminated and no longer meet product specifications.) -The region of the world in which the voyage will take place
crack spread hedge
Increasingly in crude oil and product, it is also possible to hedge with contracts that cover the price spread between two or more commodities. For example, the crack spread hedge contract is available for the differential between the price of crude oil and the price of a specific set of refined products. A common indicator or refinery margins in the 3-2-1 crack spread, which assumes that 3 barrels of crude oil can be used to produce 2 barrels of gasoline and 1 barrel of distillate (diesel or fuel oil.) Crack spreads are different for each market region and are highly dependent on crude sources and refinery location. Trading the crack spread on an exchange allows for the execution of both the crude and the product hedge as a single transaction. The two main crack spreads traded in crude and products are these: Heat crack (heating oil - crude) Gas crack (RBOB - crude), where RBOB is the term for Reformulated Gasoline Blend Stock for oxygenated gasoline Crack spreads typically trade as a one-to-one ratio between crude and the underlying product. However, different ratios can be used to better reflect the trader's or refiner's position. If a refiner felt that the plant profitability was going to decrease because the price of products was not increasing at the same rate as the cost of crude, a 3-2-1 crack spread hedge could be purchased to guarantee or lock in a range of profitability. So-called "paper refiners" can approximate refining margins in the physical market with futures contract portfolios proportionate to average refining yields. Template Options Center Title Text Swap Layout Please wait for media to finish
Futures trading drives the US market
It is very important to understand the futures market not only because of its impact on supply and trading operations, but also because of its impact on wholesale product prices. The wholesale pricing for the US and other global markets is first driven by perceptions of future price from the futures markets, such as NYMEX and ICE, then by the bulk price and finally the rack price. Petroleum prices respond to changes in supply and demand, not to changes in the cost of manufacturing or distribution Wholesale pricing generally takes one of two forms: The bulk price is the price paid for purchases of 40,000 gallons or more. Generally, these are based on spot, called auction, prices at a specific producing or import center. The rack price is the daily posted price paid for a tanker truck load of product at a refiner's loading rack, for example 8,000 to 9,000 gallons. Rack prices are based on spot prices but also include the cost of transporting the product from the refinery to the terminal, a premium for smaller loads and additives input at the terminal. The reason that futures prices have such a dominant impact on wholesale prices is that every day thousands of NYMEX and ICE market participants can trade contracts that equal multiple times the annual global refined product volumes actually sold.
Liquid markets
Liquidity, in general, is defined as the ease with which an asset can be converted into cash. The liquidity, or lack thereof, in a market can greatly affect the perceived risk of a given position or portfolio. A liquid financial market is one with many diverse participants, price transparency and enough volume on quoted instruments to move in and out of positions without greatly moving the market price. Liquid markets include those of US Treasury Bonds, major currencies, S&P futures, most listed stocks and some crude and product futures contracts. Conversely, an illiquid market exists when few participants, low levels of transparency and small volumes make adjusting positions difficult. Illiquid markets would include art, real estate and exotic financial products. Click Next to continue. Liquidity affects risk in that a large position in a liquid market could be more accurately marked and easily adjusted than a small position in an illiquid market or contract. There can be a big variation in the liquidity of contracts, depending on their relativity to the prompt month that is traded. For example: For NYMEX crude contracts, the first few months, called front months, generally will be considered very liquid with hundreds of thousands of contracts traded, while the contracts out three years or more, called the back months, could be very illiquid.
historical perspective 2
Managing supply logistics was also a global challenge from the industry's beginning. In 1878, the son of a London businessman who sold seashells, named Marcus Samuel, discovered the oil export business. He extended it to a huge developing market for kerosene used for lighting in Japan. He ultimately had one of the first barges built to move Russian kerosene through the Suez Canal to Asian markets. In the process, Shell Oil Company was created. Internationally, Standard Oil competed fiercely with Shell to sell its blue kerosene tins, using Singapore as a distribution hub in the 1890s.
OTC markets
OTC transactions are executed where oil companies and traders simply pick up the phone and transact business directly with a counterparty.
Derivative contract types
Oil companies, oil traders and speculators hedge their activities with energy derivatives. Energy derivative is the term used for financial contract instruments, often called paper, that derive their value from the underlying commodity, most often crude oil, natural gas or refined products. "Speculative trading," also called spec trading, is the term used for those who take a position in financial derivatives with no offsetting position, either physical or financial. Spec traders have no intention of delivering or accepting the physical commodities. This lesson presents an overview of the basic building blocks of the derivatives most applicable to crude oil and refined products, including: Futures: contracts traded on an exchange or electronic forum, which provide for the sale or purchase of an asset on a specified date in the future Forwards: contracts usually negotiated between two oil and gas companies or traders with similar interests. Forwards are not traded on an organized exchange. Options: contracts that give a company the right, but not the obligation, to buy or sell a commodity at a fixed price during a specified period
middle office S&T
One key role of the middle office is to help provide needed controls and measurement of the front office. The middle office manages the systems that can provide operational and control reports to the traders and management. --Deal valuation
organized exchanges
Organized exchanges allow commodity buyers and sellers to make a market for a certain product. Similar to other stock and financial markets, crude and product trading occurs on organized global commodity and derivative exchanges. An organized exchange allows commodity buyers and sellers to make a market for a certain product. You must be a member of the exchange to process transactions on an exchange, as an exchange member firm. The key benefit of organized exchanges is that company transactions are with the exchange itself, which mitigates counterparty credit risk.
tonnage
Refined product tonnage is another major component of marine movements, with: Large movements between refining centers such as Europe and the US to balance supply and demand The construction of more export refineries, especially in the Middle East and Southeast Asia
paper refiners
So-called "paper refiners" can approximate refining margins in the physical market with futures contract portfolios proportionate to average refining yields.
collar
Some middlemen who match buyers and sellers simply want predictable prices. To lock in a specified price range, they purchase a collar. A collar is the combination of a cap and a floor. Other traders purchase collars to reduce or eliminate the transaction costs of a cap or floor.
volatility
Suppose a call option on crude oil is actively quoted. The option price is readily obtainable, and by applying a suitable option pricing formula, the volatility can be derived or "back-calculated."
WTI-Brent Arbitrage
The WTI-Brent Arbitrage, commonly termed Arb, is defined as the differential between these two crude contracts (WTI and ICE), measured in the same time period. This price differential is not a stable relationship. The calculation of the differential takes into account the cost of the crude, shipping, insurance, interest cost, taxes and tariffs and any premiums for delivering Brent on a NYMEX contract. In this case, an open Arb market exists. The Arb contract can be traded as a future or swap in the OTC market. The Arb is calculated by using a straight differential between the two contracts in the same time period Example Arb: Second quarter WTI (NYMEX) contract price minus the second quarter Brent (ICE) contract price equals second quarter Arb
back office S&T
The back office keeps track of the deals as they go through the physical and financial systems. A key back office function is to prepare invoices, collect payments and settle accounts. --Deal settlement A finance function, which is not part of the core trading operation, provides credit control and recording of transactions in the general ledger
front office S&T
The front office structures the deals and generates the revenue. Here the traders negotiate deals with a counterparty and enter into contracts for purchase and sale of commodities or financial instruments. With this initial step, the trader has the responsibility for ownership of and the risk in the commodity, as well as for the accuracy of the way the deal is entered into the computer systems. --Deal initiation, Deal Capture, Deal execution
implied volatility
The implied volatility can then be used to price other, similar options such as options that are not actively traded or those for which prices are not readily available.
Trading and hedging definitions
The key objective of physical trading is to keep the physical crude and product supply movements in balance. Companies are constantly buying and selling to keep their supply networks and refineries operating efficiently and smoothly. The system works well because of the breadth of the global spot market. To mitigate price risk, hedging instruments or financial agreements are used. A hedge involves two simultaneous and offsetting transactions, a purchase and a sale with a timing difference between the associated delivery obligations Hedging, or forward trading, brings in another important distinction, the difference between physical or "wet" barrels and futures traded "paper" barrels
exchange
The most commonly occurring physical trade in the downstream is called an exchange. The primary purposes for an exchange are to allow companies to reposition supplies, reduce transportation costs and sell product to customers where they do not have refineries. As an example, in this chart, a refined product exchange along the US Colonial pipeline is examined. In this case, BP has a refinery on the Gulf Coast and the terminal where the product is needed is in Baltimore, Maryland. Shell needs product in the Gulf Coast and has it available in Baltimore. In an exchange, BP delivers product to Shell in the Gulf Coast and Shell delivers product to BP in Baltimore. The regulated pipeline tariff, or cost, to move product along the Colonial pipeline is about 2 cents per gallon (CPG). Often, companies would make this type of exchange without a charge for transportation. Over time, "I'll give you barrels now and you'll give me barrels later" works well. It is also called a barrel-for-barrel exchange because the transportation cost washes out. The only way in which money would change hands would be if there were any price differential agreed to in the exchange contract. Exchanges are a major reason the US distribution system is one of the most efficient in the world. A significant issue with exchanges is called reconciliation. Monthly reconciliation must be performed to keep the barrels in balance: what a company owes vs. what a company is paid.
The refined product distribution network
The movements and scheduling of refined products such as gasoline and diesel are very complex. Once they are produced in a refinery, the term bulk network is used to define large movements of refined products by marine and pipeline. This includes third-party, common carrier pipelines and the bulk tanks along the pipeline network. Refineries make product to common carrier pipeline specifications because most pipelines have their individual set of product specifications and grades. Refined products are often moved by smaller marine vessels or barges. In Germany's Rhine River and the US Mississippi River system, inland barges are used to supply terminals. Smaller, coastal tankers move products from the Singapore refineries to markets along the coast of Malaysia and from the refineries along the California coast in the US. The rack network is defined as movements beyond a terminal, primarily by tanker truck or rail tank car. The S&T function manages the bulk network. The marketing-distribution function of an oil and gas company handles the rack network portion of the distribution system.
The crude oil distribution system
The scheduling of crude to the refinery is very complex. For host country or domestic crude sources, it starts with wellheads, pumping units and gathering systems in onshore or offshore production fields. Most inland refineries are fed by pipeline. Typically, US lease production is first moved by tanker truck or tank car to get to a crude oil pipeline. Many countries have large, diverse sources of crude oil, where an elaborate crude oil pipeline system feeds the refineries, such as the North Sea supplies to the UK and Scandinavia, Russia exports to Eastern and Western Europe and US domestic crude oil from Texas and the Gulf of Mexico to other US refining centers. Imported crude arrives by marine vessel, and marine receiving terminals do exist at many refineries. This is especially true in the major global refining centers. Another common practice for large crude marine vessels is to offload it in deep water and move the crude oil onshore through a pipeline or by lightering the cargo to smaller ships. For example, in the US Gulf Coast, the Louisiana Offshore Oil Port (LOOP) offshore facility is 25 miles from the coast. Crude is offloaded in the Gulf of Mexico, using a single buoy mooring (SBM) unloading facility. This enables LOOP to receive very large crude carriers (VLCCs), which are too big to come into shallow water to unload. Crude is then brought into the Louisiana shoreline and fed into the crude pipeline network, which connects to over 50% of the US refineries. A similar VLCC offshore crude oil facility has existed since the late 1960s in Bantry Bay, Ireland.
worldwide spot markets
The term spot market describes a refining or market location where a wide variety of prompt, auction-type trades are available, such as where crude or product can be bought and sold openly and very frequently. A spot sale is made on a cargo-by-cargo basis. Spot trades occur in various quantities, including pipeline batches, bulk volumes of 25,000 or more barrels and ship cargos
main crack spreads
The two main crack spreads traded in crude and products are these: Heat crack (heating oil - crude) Gas crack (RBOB - crude), where RBOB is the term for Reformulated Gasoline Blend Stock for oxygenated gasoline
derived factor
This derived factor is what is called the "implied volatility" for the crude oil.
Measuring risk
To control the operation of firms engaged in complex trading activities, the risk manager will often divide the organization into a series of similar positions, called a book. At the lowest level, the book consists of all of the positions under the scope of a particular trader's responsibility. For a crude and product trader, this includes both physical trades as well as all of the financial positions put on as hedges in the physical transaction. For a risk manager, the company's book includes the aggregate of all individual trader books, such as Book 1: Crude mark-to-market reporting; Book 2: Products mark-to-market reporting; and Book 3: Spec mark-to-market reporting, along with their positions as shown in the chart. Another measurement term often used in measuring risk is Value at Risk (VAR). VAR is the maximum potential loss in a portfolio over a specific period of time given a certain probability. An important feature of VAR is that the technique works across asset classes. It is most often used to asses the risk of a portfolio of assets
floor
To limit exposure to decreases in the price of crude, the producer selling to the refiner can purchase a floor. A floor is a put option, giving the producer a right to sell crude oil at the specified strike price, regardless of how much the market price decreases.
cap
To limit exposure to increases in the price of crude oil, a refiner can purchase a cap covering a specified period. A cap is a call option, giving the refiner a right to purchase crude oil at the specified strike price, regardless of how much the market price increases.
Why is a supply and trading function important?
To the outsider, the global oil supply chain is transparent and orderly. In reality, it comprises constant movement and adjustments by the daily decisions of thousands of players to: - Move crude oils from where they are produced to the refineries where they are processed - Refine crude into a variety of products for the marketplace - Transport refined products to where they are consumed Three major risk factors considered in this module drive decision-making in managing supply and trading of crude oil and product: volume ratability, time and price volatility. The term used in this module for the function managing these three risk factors is Supply and Trading (S&T).
historical perspective 1
Unlike the glamour associated with successful wildcatters who drilled for oil and gas, J.D. Rockefeller realized that control of supply was the key to success in the business. His initial focus was "cooperation," later named a monopoly, between refining, transportation and sales, which resulted in the formation of Standard Oil. By 1879, Standard Oil controlled 95% of oil refining in the US. Rockefeller also purchased plants, warehouses, tanker cars and wagon fleets to make his company totally self-sufficient.
movements
also called moves, are most often thought of from an oil company's perspective as a receipt or a delivery. Every physical pipeline or vessel movement consists of two movements: one to load the oil into the pipeline and another to discharge at the destination
paper barrels
are financial agreements to buy or deliver batches or cargos, often sometime in the future. Paper barrels are needed because oil is very high priced and exists in a highly volatile pricing environment. Paper trading becomes possible when at least one month transpires between the sales/purchase agreement and the delivery of crude
Futures contracts
are standardized agreements, traded on an exchange or electronic forum, which provide for the sale or purchase of an asset on a specified date in the future. The specified terms of the transaction are volume, price, delivery location, delivery period and settlement date. The purchaser of a futures contract has a long position, which is an agreement to buy in the future, and the seller of a futures contact has a short position, which is an agreement to sell in the future. A standard energy contract can take the form of a monthly, quarterly or calendar-year contract. Futures contracts trade with monthly expirations. In order to price longer-term deals at a single price with a single execution, traders often employ quarterly or annual "strips." A "strip" is quoted as an average price for equal contracts per month of all of the months within the quoted time period. Strips can be customized in the over-the-counter (OTC) market to match the hedging needs of a particular physical deal.
wet barrels
are the actual physical pipeline batches or vessel cargos.
backwardation
condition in which spot price of commodity exceeds price of future. There is nothing "normal" about a backwardated market. Backwardation is an incentive not to hold inventory. Note that when market conditions are in flux, for a time there may be no clear pattern.
upstream
functions consist of the exploration, drilling and production activities for oil and natural gas.
downstream
functions include the gathering and transportation of crude oil, refining and distribution and marketing of petroleum products. To this day, efficient supply movements of crude and products continue to be the heart of the downstream segment of the oil and gas industry. This function is called by a variety of names depending on each company's preference: Supply and Trading (S&T) Supply, Trading and Transportation (STT) Commercial Supply
midstream
functions include the gathering, processing, transmission, storage and distribution activities for natural gas and natural gas liquids.
EFP (exchange for physical)
is an off-exchange transaction that allows holders of a futures position to exchange the futures for a physical position of equal volume by submitting notice to the exchange. There are several advantages to using an EFP to initiate and liquidate positions on both the futures and physical sides of the transaction. First, there is flexibility in the negotiation of timing, delivery location and grade of product on the physical side of the transaction, as opposed to adhering to NYMEX or ICE contract delivery rules Additionally, posting of an EFP allows for a futures position to be either initiated or liquidated in a single transaction and at a single, predetermined price Finally, executing an equivalent transaction on the open market could involve many smaller transactions at various prices; loss of value is a risk in any/all of those related transactions
Common petroleum risk types
market risk: The risk that a change in market dynamics, especially price, will change the financial position of an oil company or trader. basis risk: The risk that the differential between prices of the same commodity in different markets, such as differences in delivery location or delivery time, will affect the financial position of the oil company or trader credit risk: The risk that a counterparty will not perform in accordance with the contract terms, either by failing to deliver the agreed-upon commodity or by failing to pay the agreed-upon price operational risk: The risk that losses will be incurred due to errors or inadequacies in the various systems or processes necessary to structure, price, trade and manage positions within the organization liquidity risk: The risk there is no counterparty quickly identified to accept an offsetting position. If this occurs, the organization may be saddled with assets or commitments, physical or financial, that it had not intended to keep
operation
pipeline operation aspect; Most pipelines operate round the clock, 365 days a year. Modern instrumentation returns real-time information about certain specifications of each product being shipped, including the specific gravity, flash point and density, which is important information needed to maintain the product quality as it moves.
oil flow
pipeline operation aspect; Oil moves through pipelines at speeds of three to eight miles per hour. Pipeline transport speed is dependent upon the: Diameter of the pipe Line pressure under which the oil is being transported Terrain topography Viscosity of the oil being transported
effective hedging
steps: 1) understand your physical position 2) assess future direction 3) select appropriate hedging instrument 4) execute the deal and monitor
Organizing a supply function
to effectively manage the crude and product supply, trading, scheduling and logistics function, S&T functions are often organized by what is called a tributary supply network or hub. Click here to learn more about the role of hubs. All key personnel associated with crude scheduling, refinery planning, trading and product scheduling are usually located adjacent to each other on a trading floor to streamline decision-making and shorten communication lines in the rapidly changing day-to-day supply environment. Most oil company S&T functions focus attention on a supply network around a refinery. In Europe, one major oil company could have over 25 different supply networks across the continent. In the US, many S&T functions are organized by the major geographic refining and supply centers, such as: US Gulf Coast East Coast and New York harbor West Coast and Alaska supplies The Midwest - Chicago market In major trading houses that do not have refineries, S&T functions are organized around either bulk terminal assets, major pipeline connections or marine supply points.
segregated
type of pipeline; Other pipelines move segregated crude oils or refined products. In this case, the identity and specification of the crudes or products remain intact. This requires a "transit" time. For example, in the US it takes 14 days to transport a batch from the US Gulf Coast to New York Harbor
fungible
type of pipeline; Some pipelines move fungible crude oils or refined products. In these lines, the crude or product can be mixed together without downgrading their quality. This results in no transit time associated with the movement; you can put product in today at a refinery and take out the same product today at a market.
spot sale
type of sale; is a crude or product transaction made under a contract which is a one-time event, often accomplished in what is considered to be an auction market. Most term contracts use spot prices as the pricing mechanism. Early in the industry, there was little price volatility, and a fixed price, term contract had little risk. Today, with the volatility in prices, all term contracts use a spot pricing index. Term contracts can have very complicated pricing formulas that can create accounting issues related to invoicing for a particular cargo.
term sale
type of sale; is often a contracted delivery, such as an annual contract with a delivery schedule of every 30, 60 or 90 days. For example, to transport crude from the Arabian Gulf to the US Gulf Coast takes 40 days. A term crude agreement can have each cargo priced with two indexes (for example, two industry standard pricing indexes such as Platts plus Argus, divided by two to get an average). Timing of the cargo price could be 20 days after the ship leaves the loading port for the 40-day voyage, which is done so that the risk between the producer and the buyer is balanced.
