ICANDO Oil Trading

ICANDO Oil Trading

ICANDO Oil Trading Oil trading is a major activity for any oil company. Crude oil is mostly transferred by tankers that can exceed a million barrels of oil capacity.5 With crude oil normally exceeding €20 a barrel, the tankers are carrying huge amounts of stock. An oil company needs to keep a continuous stream of crude oil into a refinery. Unfortunately, crude oils are very different in characteristics, depending on where they are sourced. Some oils have highly corrosive constituents and need special treatment. Thus a refinery can usually only process a restricted set of oil types. Often the oil that a company recovers is inappropriate for its own refineries.

5 A barrel of oil is 42 US gallons, and a gallon is 3.8 litres
The primary role of the trading arm of an oil company is to keep its refineries functioning with the cheapest available crude. Oil is bought and sold in commodity exchanges, much like shares. Oil can be bought and sold before it is extracted through to when it is in transport. It is not unknown for a tanker full of oil to be traded on route to a refinery and redirected to another refinery

The trading arm often has a secondary role: to make money by trading. If oil is bought that is surplus to processing needs, then the oil can be sold if the price improves. There might also be bargains that arise because, say, a refinery is offline, and if your company has sufficient storage it may make sense to buy excess crude at low prices. Crude bought at a low price might be sold later at a higher price.

The market is complicated by two features. First, there is the notion of futures. A deal can be struck for oil to be delivered on some date in the future, and for the trade to take place then. Thus the trader is not buying something now, but prom- ising to buy something weeks or months ahead. All this is straightforward until traders start to sell futures. If a future trade is for €20 a barrel and the market price on delivery is €25 a barrel, then the future has a value of €5 a barrel, which means that another trader might buy the future at up to 65. (Equally, the value of the

barrel may be lower than the future says, so the future has a negative market value.) The second complication is the future options market. You buy an option to buy. Thus a trader might pay €2 for the option to buy a barrel of oil at €20 some time in the future. If the oil price is above €20 at the time the option reaches its settlement date, it is worth buying the oil. However, if the oil price is below €20, the trader would let the option go and lose the original €2 Options can be bought and sold. If a barrel of oil looks to be going to sell for €25 and a trader has an option for €20, the value of the option would be £5.

A trader takes risk. The risk is the amount of money the trader could lose if all the deals took place under the worst conditions (all the futures and options contracts were above the market price at the time of delivery, say). The trader tries to minimize risk by balancing promises to buy with promises to sell, and provided the value of the promises to sell are on balance more than the value of the promises to buy, the risk is low

ICANDO Oil has a substantial trading group. The trading floor has dozens of information feeds. The current commodity market trades are shown, with the prices. The futures market trades and prices are shown. News feeds are shown, and any major event such as a refinery fire or a world event like a terrorist attack or war declaration can have a rapid effect on trade.

ICANDO Oil would like a fully integrated system that allows a trader to sit at a desk and see all the information feeds, see all the portfolio contracts that are held, enter new trades, and show the risk that the portfolio represents. The managers want to be able to see the portfolios of all the traders, and to assess and control the overall risk of the trading floor. If a trader takes on too much risk, the manage- ment need to be advised immediately..

Traders also have lists of contacts they use regularly. They deal directly with traders in other companies over the phone, and they need to keep the details of Metalwho traders available. Also, traders pick up useful bits of information as they talk, and they share that with other traders. An internal bulletin board is needed so that a trader can type in some information that will be seen by other traders.

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