The Intricacies of Oil Trading

Rusneftegaz regularly receives inquiries from those who want to purchase large quantities of crude oil or refined products from those who lack understanding of how transactions in the petroleum industry are conducted. For instance, it is often assumed that the purchase of these commodities can be arranged on a business-to-business basis, as most other commercial dealings are finalized. However, in this industry, virtually all sales in large quantities of these goods are completed via commodities exchanges, with the only exceptions being over-the-counter deals between entities with long-standing and established relationships. For example, this may occur between two international trading companies, or from a refiner direct to an airport or marine port, but in modern times these contracts are exceedingly rare. In fact, these types of settlements are so uncommon that Rusneftegaz does not conduct any business in this manner, finalizing all of our oil sales through exchanges. This is primarily due to the guarantees and legal protections offered by these organizations, with the body acting as a central counterparty to both the buyer and seller. In context, this means that the exchange will accept payment for the product from the customer, and withhold this from the retailer until the commodity has been transferred into the custody of the exchange. At which point, the funds will then be simultaneously released to one party, and the goods purchased to the other. Such an arrangement mitigates the opportunities for fraud and abuse on both sides; remittance of funds cannot be fraudulently avoided, nor can the quality or quantity of the supplied merchandise be compromised. In recent years, one of the most common scams perpetuated by criminals operating in the petroleum sector is to place exceedingly large orders in return for a financial instrument, such a letter of credit. Thus, by exclusively utilizing an exchange to facilitate business, these poor attempts at deception are easily avoided.
 
At present, the largest commodity exchanges in the world are the Chicago Mercantile Exchange, abbreviated to CME, and the Intercontinental Exchange, shortened to ICE. Despite the formers' misnomer, these bodies service the entire globe, with trading based around hubs. These locations act as settlement points for contracts, but also act more broadly as key sites for the refining, storage and wider distribution of these goods. The largest of these centers is Cushing, a city in the American state of Oklahoma, where the price of the West Texas Intermediate oil blend, or WTI, is determined. Owing to the size of their market, the United States also conducts significant business in the ports of New Orleans and New York, where large volumes of petroleum are both imported and exported accordingly. Internationally, there are major hubs located in Fujairah, a city in the United Arab Emirates, and the city-state of Singapore, but the most relevant location to Rusneftegaz is known as the ARA region, an abridgment of the Amsterdam-Rotterdam-Antwerp area. This expanse serves as the focal point of the European oil trade, at the juncture between the North Sea and the Rhine, and is therefore easily accessible to the majority of countries in the northwest of the continent. However, although both the Chicago Mercantile Exchange and the Intercontinental Exchange utilize multiple delivery points spanning the globe, the remit of the majority of commodity exchanges extends only beyond a designated regional or national geographical area. In this regard, the largest such organization in Russia, the Saint Petersburg International Mercantile Exchange, otherwise known as SPIMEX, is no exception, and is the primary conduit for all our hydrocarbon revenues. The body serves as the largest and most accessible source of petroleum products of Russian origin, including Urals-blend crude and refined products, such as fuel oil, jet fuel and diesel, through both the railways and the pipeline system operated by Transneft.  These networks are then able to transfer the acquired goods to all major international ports in the Russian Federation, including Primorsk, Ust-Luga and Vladivostok, for export. In some instances, the products can also be transported to terminals in neighboring countries, namely Ventspils in Latvia, and Klaipėda in Lithuania, where it can then be loaded onto vessels or cargo trains.
 
The contracts listed by commodity exchanges are divided into two types, spot and futures. The former entails the immediate availability of the product for the buyer, or within the days after the deal is agreed, whilst the latter involves the shipment of the purchased good during a specified month thereafter. The difference in delivery dates ultimately leads to price differentials between the trading arrangements, with the value of spots usually exceeding that of futures. Nevertheless, to access these products, it is fundamentally necessary to employ the services of a recognized and regulated broker in order to commence trading on the petroleum market. These particular entities serve as clearing members of an exchange, ultimately approving transactions and bearing full responsibility for the conduct of the companies who operate within its rules and regulations. Clearing members include large multinational investment banks, such as Goldman Sachs and Morgan Stanley, in addition to dedicated derivative brokers, such as ADM Investor Services and RJ O'Brien.  In general, there is a greater quantity of American and European firms acting in this capacity than Russian and Asian enterprises, principally for historical reasons, but also due to the fact that until recently the former maintained far higher standards of service for their clients. Likewise, potential buyers also have the option of employing the assistance of market makers, such as Onyx Advisory, to fulfill their requirements. These corporations have access to the market via their own arrangements with brokers, which allow them to trade on behalf of others. In this case, the intermediary will quote prices to their customers at a nominal premium above the going rate, chiefly to guarantee a slender profit for themselves from each transaction. However, it should be noted that not all of these organizations are capable of providing contracts for the physical delivery of the desired goods, referred to as “Exchange for Physical”, or “EFP”. Instead, brokers will only provide financial settlement, which is designed for speculative purposes only, such as through the use of options. These arrangements will then be finalized in cash, with the yield being the difference between the strike price and the value of the commodity on the day the contract ends. Most importantly, any prospective commodities purchaser should refrain from using the internet to find sellers of crude and refined products, especially anyone claiming to act as an “agent” or "mandate" for an oil company or a refinery. These offers frequently appear on business-to-business websites and social media platforms, such as Alibaba, Facebook and LinkedIn, but are always fraudulent. These proposals routinely facilitate advanced-fee frauds against their victims, and are frequently perpetuated by scammers located in and or of African origin.
 
Oil transactions are considered complete when the purchased product has the left the flange of the seller, with ownership then being transferred immediately to the buyer. Thus, it is paramount that the latter is prepared to take custody of the product immediately, such as onto a modicum of transportation, or into another storage tank within the same terminal complex. This can be on a short or long term arrangement, ranging from days to years, unless of course the facility itself is owned by the acquirer. For export, the customer will need to transfer the petroleum to a major international port, except for cases where the contract has been fulfilled there, where it can then be loaded onto a suitable vessel.  At larger harbors, it is common for oil to be stored away from the busiest locations within the site, and is therefore transferred onto tankers and other ships via barges. Whilst the shipping company will not take ownership of the hydrocarbons at this point, it will bear significant responsibility for its safe transportation. Cargoes can take many weeks or months, depending on the distance from the final destination and any additional stops that may be necessary on the journey. At the end of the itinerary, the holder will be required to coordinate between both the controllers of the vessel, and the management of the oil and gas tank storage terminal, this is to ultimately ensure the fuel reaches its intended destination. Once this is complete, the goods will be processed by customs and transferred to its terminus, where it can be used or sold. Whilst this can be accomplished using any of the aforementioned means of transportation, it can also be completed by loading small quantities onto trucks, which remains the preferred method of shipment for the majority of the worlds’ fuel needs, including to both rural settlements and gas stations in major metropolises. In most commodity contracts, it is necessary to also consult with legal representatives not only for advice, but to manage certain phases of the broader transaction process which require oversight and high standards of corporate governance. It is important to note that this article has been written to provide general information about the process of acquiring oil, and should not be considered as formal, binding guidance. Rusneftegaz bears no responsibility for the actions of anyone who uses this piece when researching how to purchase crude or refined petroleum products, and does not endorse or condemn any of the companies mentioned in this editorial.