Fundamentals of Petroleum Trading

Fundamentals of Petroleum Trading

Fundamentals of Petroleum Trading

Fundamentals of Petroleum Trading

Synopsis

Razavi and Fesharaki provide a detailed look at the workings of and issues surrounding today's oil trading market as applied to all parties involved in the production, distribution, and consumption of petroleum. They present a complete description of petroleum spot markets, futures, and options trading, as well as their interlinkages with contract sales, and challenge the generally accepted view that spot and futures trading have wrested the power of price setting away from OPEC.

Excerpt

Until as recently as the early 1970s, the main channel for oil supply was the integrated system of the major oil companies. Each company had its own source of crude oil supply as well as the capacity to refine it. Petroleum products outside this closed system, either released from it due to imbalances between refinery output and market demand, or refined independently of it, constituted the basis for spot trading. The volume of spot trading was limited to around 5 percent of the total oil trade, while the remaining 95 percent was based on contracts specifying prices and quantities over relatively long periods of time. Even that limited amount of spot trading was conducted in a very simple manner. Most of the trade was in the form of uninvoiced exchanges and based on personal trust, characterizing an era that many oil company executives remember as the "good old days."

Today, spot and spot-related trades comprise some 80 percent to 85 percent of internationally traded petroleum. Petroleum trading has not only developed into one of the largest worldwide commodity markets but has turned into an increasingly complex business. A spot trade involves millions of dollars and is carried out by sale and purchase agreements containing numerous safeguard measures. A cargo of oil may be bought and sold more than thirty times before reaching its final destination. Still, each seller or buyer may utilize "petroleum futures," "options on futures," and other financial instruments to hedge against the risk of possible price fluctuations. The interlinkages among spot trading, futures markets, and contract sales have changed the nature of the petroleum business from its traditional straightforward production-oriented approach to a complex portfolio management environment.

Within this new environment, all parties involved in the production, distribution, and consumption of petroleum need to acquire a fundamental understanding of the workings and the issues involved in the new era of petroleum trading. This book is intended to provide such understanding. It provides a detailed description of petroleum spot markets, futures and options trading, and their interlinkages with contract sales.

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