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Some Questions on Oil Trading

Discussions about the economic and financial ramifications of PEAK OIL

Some Questions on Oil Trading

Unread postby Marklar » Mon 07 Nov 2005, 02:26:14

I'm not an oil trader, just a bystander watching in awe. I dont understand it completely. The closest I've done was some trading on intrade.com...which is gambling really...

When you buy a futures contract what are you buying? Are you paying $60 if oil is $60 a barrel? How does that work? I understand its sold in 1,000 barrel contracts but I find it hard to believe that you would have to pay $60,000...but that would be a good way to deter market manipulation, I suppose

And do the contracts expire at the end of the month?

What's the different between Nymex Crude and Emini?

And do people hate you for profiting off of high oil prices? :lol:
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Re: Some Questions on Oil Trading

Unread postby MrBill » Mon 07 Nov 2005, 04:48:07

Hello,

when you trade oil or gas futures you are trading either on the NYMEX in NYC or on the IPE in London. Both exchanges are in dollars. Basically you trade on the margin. That means that you put down between 8-10% of the value of the contract and then you can either buy or sell the future contract. For example, if one contract of December NYMEX WTI is trading at $60.00 you could pay for one contract worth $60.000 using about $4800 in margin with your local broker. I assume this Emini is a broker not an exchange.

In any case, this leverage allows you to profit substantially if the price moves in your direction, but can quickly work against you if you are wrong. For example, you only put down $4800 and pay a small brokerage fee, say $10 per contract round trade, but the accont will be marked to market each day on the close and you will have to pay maintenance margin in full. Say you bought at $60 and the price declined to $59. You would have to pay the market loss of 1000 barrels x $1 = $1000 at the end of the day or your position would be closed by your broker.

You always trade the future months. For example, the December futures month will expire in middle of November for delivery in December. If you do not want to make physical delivery than you need to close your December futures contract before it expires. You can trade NYMEX WTI, unleaded gasoline or heating oil for example. You can trade each calendar month for the coming year and then selected months going out further than one year. The nearby contract, say December right now, is usually the most liquid. That is the price you will most likely seen quoted on the evening news. It is sometimes called the spot price, but more accurately it is the nearby futures month. The spot price is actually for the cash market.

Options are different. With options, if you buy an option, you only pay the premium. The premium is the maximum you can lose, unlike futures where the loss is theoretically a fall to zero on the downside or an unlimited gain on the upside. If you sell options, you have the same risk as with futures. They are more risky for this reason. The disadvantage of options is time value. They are a wasting asset. If they do not mature in the money, they expire worthless. However, for low risk trading they are suitable for retail investors.

The New York Institute of Finance does an excellent series of books which are quite easy to read for non-professional investors. For example, How the Options Markets Work, by the NYIF.

Speculators play a vital role in price discovery by providing much needed volume to the futures market. Without this added volume the hedgers and commercial traders would see more volatile moves and it would be harder for them to execute deals quickly and efficiently. This added financial risk or uncertainty would mean that hedgers, like power companies and utilities, would have to pass these extra risks onto consumers or build extra margin into their calculations.

For every buyer there is a seller at every price. Therefore, speculators do not so much decide where prices are going in the end, but rather hold short term positions between when the hedger sells production and the end user buy their needs. This has been described as similar to placing bets on the outcome of a basketball game. The game is decided on the court by the players. The side bets should not effect that outcome.

Many people speculate on other assets like their house. Do they feel guilty that they purchased their house and it went up in value? If I bought their house from them and it went down in value, would they feel guilty and idemnify me for the loss? No, they would be thankful they sold the house before it went down in value. There is nothing immoral about trading futures & options anymore than there is taking out a mortgage or buying a government bond. They are simply financial transactions.

An efficient market means that prices quickly came down from $70.85 to $60 today after Katerina/Rita. That is a decrease of 15%. Without futures & options markets hedgers and commercial players would have to hold significantly more physical stocks just in case to meet their obligations in the physical markets. That may result in higher not lower prices.

Good luck with your trading. Cheers.
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Re: Some Questions on Oil Trading

Unread postby MrBill » Mon 07 Nov 2005, 05:41:19

Come join Trader's Corner for daily market commentary and will be happy to answer general questions you may have, too. Cheers.
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Re: Some Questions on Oil Trading

Unread postby SupaNova » Mon 07 Nov 2005, 11:51:39

Would just add that.... the E-mini is a product developed (with repsect to crude and nat gas anyway) by Nymex to make the market more accessible.

For WTI
It's half the size of a stanard futures contract (i.e 500bbls)
it's electonically traded
It is cash settled on expiry against the settlement of the primary futures contract (i.e. the big brother 100bbl jobbie)

I don't have much to do with it personally and know little about who prices it/supports the screed or what liquidity is like
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Re: Some Questions on Oil Trading

Unread postby PWALPOCO » Mon 07 Nov 2005, 13:44:52

Hi guys,

Ive asked this question in a few places but a reply never seems to come .....

VOLUMES !!!

There , I said it ....

Are traded volumes a potebtial indicator of PO ??

As a layperson , Id naively assume as there iss less oil in the system as the peak passes by (whenever that may be) , the less oil is available to be traded ??

If in theory that is possible, is there any volume history to be analysed ?

Paul
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Re: Some Questions on Oil Trading

Unread postby MrBill » Tue 08 Nov 2005, 05:06:25

Exchange traded volume measures the number of contracts that change hands on any given day. Peak Oil related volumes would have to be inferred by global supply volumes. Certain oilfields are maturing and therefore volumes from those fields is definately falling. Unless more oil is found elsewhere and new fields come on stream then you have your classic definition of peak oil. Declining production. However, I think it would be very dangerous to extrapolate this from exchange traded volumes. It does not measure the volume of oil in the system as 90% of the contracts that change hands will be closed before maturity and before physical delivery, whereas much physical oil will be delivered to supply hubs without every being traded on an exchange.
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Re: Some Questions on Oil Trading

Unread postby Doly » Fri 11 Nov 2005, 10:36:35

Mr Bill, I'm still trying to understand futures here. Be patient with me.

Let's say I believe oil will be 65$ a barrel by the end of December. Let's say oil is 60$ a barrel now. Let's say that I have 5000$ and I spend it in oil futures. What happens if:

a) Oil is 65$ a barrel by the end of December?
b) Oil is 70$ a barrel by the end of December?
c) Oil is 60$ a barrel by the end of December?
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Re: Some Questions on Oil Trading

Unread postby fossil_fuel » Fri 11 Nov 2005, 11:25:18

a. you make money
b. you make money
c. nothing happens

how much you make or lose depend on how many futures contracts you buy, which will depend on your own risk tolerance and your broker's margin requirements.

if you only have $5000, i'd say that one e-mini crude contract would probably be good. this is a contract for 500 barrels, with a margin requirement of about $2500. therefore, in case:

a. you make $2500
b. you make $5000
c. nothing happens
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Re: Some Questions on Oil Trading

Unread postby MrBill » Fri 11 Nov 2005, 12:15:51

Of course, as you're trading futures the close on DEC 31st will not be the DEC contract.

The DEC contract matures next week on NOV 15th
The JAN contract matures on or before DEC 15th
and by year end the front month will be the FEB contract.

Therefore, the close on DEC 31st will be for FEB delivery. The nearest unexpired contract.
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Re: Some Questions on Oil Trading

Unread postby donshan » Fri 11 Nov 2005, 12:34:56

MrBill,

Nice explanation. We see these issues in the financial news everyday, but they are never explained.

Is it correct that if you go long and buy an oil contract, you better sell before the settlement date OR you better have a very big tank some where to take delivery? What happens if you forget to sell before settlement date?
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Re: Some Questions on Oil Trading

Unread postby MrBill » Mon 14 Nov 2005, 09:05:05

donshan wrote:MrBill,

Nice explanation. We see these issues in the financial news everyday, but they are never explained.

Is it correct that if you go long and buy an oil contract, you better sell before the settlement date OR you better have a very big tank some where to take delivery? What happens if you forget to sell before settlement date?
:-D


Your broker would likely remind you. You could also sell the nearby product to another physical player who needed the product. The market would likely be liquid, but you might take a loss on the basis risk. Basis risk is the difference between the futures price and the cash price. Technically, the oldest open contract gets delivered on first with the last open contract delivered on in that order. If you are short and cannot deliver you have to buy it in. Hence the terms the shorts always have to come to the longs. The risk is quite small. DEC matures tomorrow and physical delivery starts in DEC, you would have two weeks to either find a buyer for your open interest or buy it in.
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Re: Some Questions on Oil Trading

Unread postby donshan » Mon 14 Nov 2005, 17:45:20

MrBiil,

Thanks, still learning everyday! :)
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Re: Some Questions on Oil Trading

Unread postby MrBill » Tue 15 Nov 2005, 06:51:01

Me too. I am long & wrong here. :oops:

The market is grinding relentlessly lower here and colder weather be darned :!:

Lesson number one. Don't get married to your position. There is nothing magical about $40, $50, $6o or $70 on the way up and there is nothing magical about those even numbers on the way down either? The market will sell-off until buyers decide to start buying again. :)
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The World’s Largest Oil Traders Are Shifting Strategy

Unread postby AdamB » Thu 22 Mar 2018, 15:43:49


The world’s largest independent oil trader, Vitol, is looking to secure long-term deals with some of the biggest oil-producing countries in the Middle East, in what has become a challenging wider oil-trading market. Vitol is in discussions to seal either joint venture, or long-term offtake and supply agreements with Abu Dhabi, Bahrain, and Kuwait, Ian Taylor, who stepped down as CEO last week to become chairman at the oil trading group, told Bloomberg in an interview on the sidelines of the FT Global Commodities Summit in Lausanne, Switzerland. “I am going to be visiting Africa and the Middle East and trying to promote Vitol and do some structural deals,” Taylor said, adding that he couldn’t be certain that any deal would be completed because they are “bloody tough to do and bloody tough to find.”


The World’s Largest Oil Traders Are Shifting Strategy
Plant Thu 27 Jul 2023 "Personally I think the IEA is exactly right when they predict peak oil in the 2020s, especially because it matches my own predictions."

Plant Wed 11 Apr 2007 "I think Deffeyes might have nailed it, and we are just past the overall peak in oil production. (Thanksgiving 2005)"
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Re: Some Questions on Oil Trading

Unread postby ROCKMAN » Fri 23 Mar 2018, 16:08:27

Dealings of the oil traders is definitely an insider’s game that 99.9% of the consuming public is not aware. Just like some folks here. LOL. For instance, consider all the focus here on the amount of oil in storage and changes in those numbers. Depending on whose storage numbers you read the vast majority is not owned by producers, refineries or speculators: it’s owned by the oil trading companies. It is those companies that buy oil from producers and haul it to their terminals where it becomes part of the oil storage statistic. Folks should think of them as oil “clearing houses” or whole sellers. These are the companies that sell the vast majority of oil the refineries buy. And guess what: the “price” of oil (really the oil futures contracts) tossed around is presumed to be the price refineries pay. It isn’t: almost all the oil refineries buy is sold for “second” or “third” purchase prices. IOW even if that futures price really was the “first sales price” paid to us producers IT IS NOT THE PRICE the refineries pay for the oil they buy. First, as explained, they buy blended oil and not WTI, Canadian oil sands, Arabian light, etc. And that purchased oil is blended by the oil traders or sold to blending companies. And second, the price paid by the refineries is set by the trading or blending companies: not the oil producers.

There’s a huge world of the oil market that the public (and many here) are completely oblivious. Consider if a trading company, like Vitol, controls a significant % of the US light oil/condensate. Not only do the Alberta oil sands producers require it but also US and Canadian refineries as wells as the Venezuelan national oil company. Venezuela? Yes: same reason the Canadians need it…to blend with their heavy crap. And Venezuela had been frozen out of that market to some degree which is why last year it had to import light oil/condensate half way around the world from north Africa to make blended oil that could be pumped.

Imagine the negotiation power these oil trading companies have on not just the price but the availability of oil the refineries have to purchase. ExxonMobil et al don’t call the shots…Vitol et al do. For instance Vitol supplies over 3.4 million barrels per day of crude oil and feedstocks to the refining industry globally. A company that does not own a single oil well. And how many bbls does XOM produce? I don’t know: all can find is the # of bbls EQUIVALENT. IOW converting daily NG to bbls. And that was 4.1 million bopd’e’. And then add to the fact that XOM sells an unknown amount of oil to oil trading companies and not to refineries. So then it’s safe to assume Vitol, a company very few consumers (and some here) ever heard of, sells more oil directly to refineries then one of the largest oil producing companies on the planet…ExxonMobil. Also not all the oil XOM refines comes from XOM wells: it also buys an unknown amount from oil trading companies. And not all XOM oil production is refined at XOM refineries.

And you’ll never see the details of these transactions: they are some of the more tightly held proprietary information.
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Re: Some Questions on Oil Trading

Unread postby ROCKMAN » Sun 25 Mar 2018, 16:53:33

Here’s couple of stories that probably won’t get much attention. Especially from the MSM which should be alerting the public to events that will impact oil consuming importers. It’s easy to understand: two countries that export oil will reduce that volume by instead processing that oil themselves. Not only does this capture more of the profit stream of the oil production dynamic but will also reduce the amount of oil entering the export market and thus putting some amount of upward pressure on oil prices. Of course, the amount of that pressure as a result of just these two projects won’t be very great. But they do highlight the trend more and more oil exporters are considering: to offset the eventual decline of revenue from selling a diminishing asset the goal is to capture more of the profit stream then just selling raw crude oil. Additionally, such projects might consume a significant amount of NG that currently has little domestic marketability.

And as you read these stories keep in mind what I just posted about the companies (which few of the public ever heard of) that actually buy and resell to refineries much of the oil in the global market. As exporters digest more oil internally think about the growing leverage the oil trading companies will have.

From: https://www.rigzone.com/news/wire/ceo_a ... 8-article/

Reuters – “State oil giant Abu Dhabi National Oil Co (ADNOC) plans to build the world's largest integrated refining and chemical site in Ruwais, United Arab Emirates, ADNOC's chief executive officer said. Sultan al-Jaber, head of ADNOC, said investments like refining and chemicals represent the company's biggest future opportunity. The company plans on tripling petrochemical production to 14.4 million tonnes annually by 2025, he said. "Our goal by 2025 is to transform Ruwais into the largest integrated refining and chemicals site in the world - doubling our refining capacity and tripling our petrochemicals production," said al-Jaber.”

And from: https://www.rigzone.com/news/wood_to_de ... 1-article/

“Wood has been selected to develop the world’s largest fully integrated crude oil to chemicals complex in the Kingdom of Saudi Arabia, on behalf of Saudi Aramco and SABIC. The company will provide front end engineering design and project management services during the engineering, procurement and construction phase, supporting the development of the complex which is expected to process 400,000 barrels per day and approximately nine million tons of chemicals and base oils annually.”

And similarly from: https://www.rigzone.com/news/wire/iran_ ... 2-article/

Reuters – “Iran has sharply reduced its gasoline imports in recent weeks after starting up a new refinery, trade sources said, bringing the oil-rich country closer to its goal of fuel self-sufficiency. Iran, despite being OPEC's third-largest crude oil producer, has for years struggled to meet its domestic fuel needs due to a lack of refining capacity and international sanctions that limited the supply of spare parts for plant maintenance.”
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Re: Some Questions on Oil Trading

Unread postby ROCKMAN » Mon 26 Mar 2018, 14:21:14

And here’s an indication how little many folks understand about the companies that actually buy physical oil from producers. Companies that 99.9% of the public never heard of. Companies that will then resell the oil to other trading companies, to blending companies or directly to refineries after they've blended the oils themselves. Many are local buyers that resell to larger oil traders.

But first think about the entire system. As of 2015 there were 1.7 million oil and gas wells in just the US. Consider just the oil wells: they produce into a “stock tank” on the lease. Then what? Refineries don’t send out tank trucks to pick up the oil they need. And in 40 years I’ve never seen a producer haul oil to a refinery. This is what the oil trading companies do. And an oil trader isn’t going to send a tank truck from Alabama to pick up a load of oil in south Texas. Oil is essentially consolidated along the system: local companies buy from producers. Larger traders buy from smaller traders. Eventually enough volume is consolidated so that the oil is moved by pipeline to major hubs, such as Cushing, OK . Cushing is not only the largest oil storage facility world in the it’s also the largest oil blending facility in the world.

Here is a list of just some of US oil trading companies. And remember the US only produces a small % of the total global oil production. Think about how many foreign oil trading companies there are…both domestic and international. There are a huge number of oil transactions that take place before that gasoline reaches his vehicle about which the typical US consumer is completely unaware. And it is those monies that change hands with every transaction that determines what that ultimate price per gallon will be.

American Exports Consortia
BML
Big Tex Crude Oil
Eighty-Eight Oil
EOTT
Fasulo Marco SDF
Gela
Gateway Gathering & Marketing
JDC International
Koch Industries
OilTrader Limited
B'Bugia
Pride Refining
Plain American, L.P.
Sable Petroleum
Springbok Oil
Tempo
Texaco Trading & Transportation
Texaco Trading & Transportation
World Enterprises Norway
WorldWide Oil
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