Standard Bank Group Energy Trading
Products
Commodity Descriptions
Both crude oil and products have certain
physical characteristics or specifications that not only give a guide to their
physical capabilities and usage but in comparison to the relevant marker
grades, can give an indication of their value.
Crude Oils
The specification of crude oils is normally accessed
from an assay performed under laboratory conditions. An assay will tell a
refiner or trader the type and specification of products it is likely to yield.
There are probably two specifications, which are the most important, firstly,
the specific gravity of the crude, which will give some indication of the
proportion of lighter, higher margin components, such as gasolines, that can be
obtained. This specification will give the crude oil the designation of light,
medium or heavy crude oil. Secondly, the sulphur content can be important from
an environmental standpoint, and a measure of this will give the crude the
designation of sweet (low sulphur) or sour (high sulphur). Of course to an
individual refinery, the setup of the refinery and the makeup of their
marketplace for products, are the main factors that will affect their choice of
crude oil as well as the market price.
Products
The issue in products is somewhat more complex, not least because of
the number of products and the far greater number of specifications) that will
effect the products market value. In addition, products as expressed by value,
will interact with each other and other outside factors such as seasonality, to
exhibit far more complex price characteristics. Physically there are a number
of important specifications that will effect the products value against a
marker grade for example;
| 1) Gasolines | Octane Number |
| |
Lead level |
| |
Aromatics Content |
| 2) Naphtha | Naphthenic/Parafinnic Content |
| 3) Gasoil | Sulphur Content |
| |
Cold Properties (in the case of Diesel) |
| 4) Fuel Oil | Sulphur Content |
| |
Viscosity |
| |
Cracked/Straight Run (Straight Run fuel oil still contains gasoline components) |
OTC derivative markets will tend to trade only against specific marker grades such
as Platts, so the physical specification element is somewhat removed. However,
it is very important for derivative traders to understand the underlying
physical market sentiment, and on an individual client basis to understand the
basis risk that a client may have between his physical product specification
and his derivative position.
What is
important for both physical and derivative markets is to understand how
physical products markets inter-relate with each other and outside factors. In
order to illustrate this
| Gasoline |
gasoline prices are generally led by demand in the USA, which has traditionally been
very seasonal with a high demand "driving season" in the summer months
|
| Naphtha |
naphtha's
main use is in the petrochemicals industry and naphtha prices will reflect the
petrochemical industries position in the economic cycle
|
| Jet |
jet fuel prices will increase dramatically in times of potential or real armed conflict
|
| Gasoil |
gasoil is used extensively for space heating in the winter, and hence demand will grow in
Europe and USA in the autumn months. Any spell of weather with colder
than the average temperatures, particularly in USA will herald increases in gasoil
prices. Conversely, warmer than expected winters depress gasoil prices. In addition, in certain
parts of the world harvesting of crops with extensive machinery usage will also effect prices
|
| Fuel Oil |
fuel oil can be partly used as refinery feedstock (straight run fuel oil) and hence in times
of crude oil cutbacks, demand will rise and with it prices
|
Products & Instruments
The products/crudes that we will trade are as follows:
|
Gasoline N.W.E
|
Gasoil .2 N.W.E
|
Fuel Oil 180 SING
|
|
Gasoline MED
|
Gasoil .2 MED
|
Fuel Oil 380 SING
|
|
Gasoline USG
|
Gasoil .5 SING
|
Fuel Oil 3.5% MED
|
|
Gasoline NYFI Gasoil .5 AG
|
|
|
| |
|
Naphtha N.W.E.
|
Heating Oil USG
|
Crudes:
|
|
Jet N.W.E.
|
Heating Oil NYFI
|
Brent (forward/futures)
|
|
Jet MED
|
Fuel Oil 1% N.W.E.
|
Brent (dated)
|
|
Jet USO
|
Fuel Oil 3.5% N.W.E.
|
WTI
|
|
Jet SING
|
Fuel Oil 1% NYH
|
Tapis
|
|
Jet AG
|
Fuel Oil 3%USG
|
Dubai
|
(N.W.E = Northwest Europe;
Med = Mediterranean; SING = Singapore; USG = US Gulf Coast; NYH = New York
Harbour; AG = Arab Gulf;)
Within each product there are up to 4 different quotations, which reflect delivery point
and delivery method. (e.g. CIF Med Basis Lavera vs FOB Med Basis Italy).
Clearly given the forward curves of each of these goes out approximately 3
years there are a huge amount of potential spreads to consider, hence anomalies
occur frequently.
The instruments that we will use are as follows:
|
Futures
|
Brent, WTI, Gasoil, Heating Oil NYH, Unleaded Gasoline NYH
|
|
Swaps
|
All crudes/products
|
|
Asian Options
|
All crudes/products
|
|
American/European Options
|
Futures based products only
|
|
Price Sources
|
Exchange traded
- IPE (London): Brent, Gas Oil (Reuters)
- Nymex: Crude, Heating Oil, Unleaded (Reuters)
|
|
|
All non-exchange traded - Platts daily mean of high and low (Reuters)
|
Minimum Trade Quantities
A typical economic minimum to justify doing a trade, covering costs etc, would be about 5,000 bbl of crude (or 1,000 metric tons of product) per month for a period of at least 3 months. This is not an absolute rule but is a good guideline.