Commodities and trade

Transcription

1 Commodities and trade Crude oil Stig-Inge Gustafsson IEI-Energy Systems Commodities and trade p. 1/72

2 Important Hard facts about trading are not easily found. Your professor has tried hard to find such facts but nonetheless there probably are errors or dubious statements. The text in the lecture is therefore valid until better knowledge is found. Commodities and trade p. 2/72

3 Spot market If you want to buy a tanker with oil: Call an oil company and probably just buy it, i.e. if you have money. Oil money = spot market. No exchange. Perhaps no contract. Commodities and trade p. 3/72

4 Spot prices When real money real oil Spot price. Dated Brent crude. Platts. Subscription. Not found on the exchange. Exchange paper oil. Commodities and trade p. 4/72

5 Dated Brent A wet shipment of oil. Exact date of delivery is known. Earlier, only shipments from the Brent oil field. Such shipments declined. Other oil-fields in the region have been included. BFOE = Brent, Forties, Oseberg, Ekofisk Commodities and trade p. 5/72

6 Spot prices A spot price is calculated as the average of many real buy and sell occasions. So called forward contracts are, normally, not included. The spot price differs for different sites on Earth. Spot prices are different for different qualities. Commodities and trade p. 6/72

7 Forward contracts A personal agreement with, for example, an oil company to buy oil in the future, e.g. next year and for a certain price et cetera. Normally, no exchange is needed. Commodities and trade p. 7/72

8 Forward contracts When you sign a forward contract you promise to buy or sell real items in the future for a certain price. Normally you have a counterpart of flesh and blood who also signs the contract. You trade Over The Counter, OTC. Commodities and trade p. 8/72

9 Forward contract In this contract you can add or withdraw things as long as both of you agree to do that. Commodities and trade p. 9/72

10 Forward contracts When you sign the contract no money is normally transferred. Money is transferred on the settlement date Include a high risk of default, i.e. the other party cannot pay or deliver. Normally no clearing bank. (Explained later) Difficult to cancel the contract Mostly used for physical delivery Commodities and trade p. 10/72

11 Forward contracts Note that: Sometimes an exchange is involved and a clearing bank. (Explained later) Commodities and trade p. 11/72

12 Futures contracts Stricter rules. Commodity = Paper-oil Can escape if things go wrong Must use an exchange Commodities and trade p. 12/72

13 The exchange An exchange is a place, normally a building, where people trade under controlled forms and with highly standardized contracts. = Safer for everybody. Commodities and trade p. 13/72

14 The exchange The exchange is only a place where people, or members, meet. You are not buying, or selling, anything to the exchange. The members are those people who are allowed to be on the floor of the exchange, i.e. they can trade. Commodities and trade p. 14/72

15 The exchange The members are, sometimes, also so called brokers. They then work on behalf of the person who wants to trade, but who is not allowed to do that. The number of members is limited so it is difficult, or very expensive, to become a member. Often, only private persons can be members. A company must use one of their employees for its membership. Commodities and trade p. 15/72

16 The exchange All trading at the exchange is in open space. You are not allowed to hide what you are doing. There are certain regulations that all traders must follow. If not, perhaps they end up in jail. Because of this, everyone on the market can be fully informed. Commodities and trade p. 16/72

17 The exchange The exchange sets up the paragraphs in different contracts. These contracts must be followed by everybody. In a contract it is set a number of things e.g. the amount, the delivery point, the quality and of course the type of commodity which is traded. Commodities and trade p. 17/72

18 The exchange The members, or brokers, at the exchange charge you for the trade. The more they sell, the more they earn. Also the exchange takes a fee when you trade but the exchange is not in business for making money. The brokers must find another broker, or at least another customer to set up the trade with. Commodities and trade p. 18/72

19 The exchange Note that you do not buy a contract, or oil, from the exchange. You just use a contract made available by it. If your broker is a member, he or she can be the one to trade with, i.e. the one on the other side of the contract. Commodities and trade p. 19/72

20 The exchange If your broker is not allowed to trade, he/she must find another broker (= member) who in turn has a person who agrees to trade on your conditions. If so, this agreement is legally set. Commodities and trade p. 20/72

21 The exchange Note that you do not know the person on the other side of the contract! You have an agreement but do not know each-other. Commodities and trade p. 21/72

22 Position With this agreement in hand you are said to have an open position. An open position might be lethal for your bank account!! Check very carefully where the market is heading If you face a disaster. Get out! Commodities and trade p. 22/72

23 The clearing bank One large problem would occur if your contract opponent cannot pay or deliver the oil according to the contract. In order to eliminate this risk the members agreement is immediately taken over by another company, a clearing bank. Commodities and trade p. 23/72

24 The clearing bank The clearing bank only works with members of the exchange who are allowed to clear contracts. Commodities and trade p. 24/72

25 The clearing bank All of a sudden, the involved member has an agreement with the clearing bank and the same is valid for your opponent member. The clearing bank works only with clearing members. If the broker is not such a member, he must do business via a member. Commodities and trade p. 25/72

26 Clearing Buying client Selling client Buying broker Exchange Selling broker Trading information Buying clearing member Sell short Clearing house Buy long Selling clearing member Clearing process Source:Thai Clearing House Co., Ltd Commodities and trade p. 26/72

27 The clearing bank The clearing bank is not the same as the exchange but without the clearing bank trading would be very hazardous. It is enough risky as is. As a private person you must trade via brokers and members even if you use computers Commodities and trade p. 27/72

28 Eurex clearing AG Things are actually even more complex and in reality there are different kinds of members. For example, at Eurex clearing in Germany you can find at least three types of members: General Clearing Members. Members of the exchange who can clear everything. Direct Clearing Members. These cannot clear for non-clearing members. Only for their own trade. Commodities and trade p. 28/72

29 Eurex Clearing AG Derivatives Clearing Members. Cannot clear their own derivatives transactions because they are not part of the exchange. There are also non-clearing members at the exchange. Commodities and trade p. 29/72

30 The exchange Escape from your contract = an offsetting transaction. If you earlier promised to buy oil, you now want to sell it. All other details equal Commodities and trade p. 30/72

31 The exchange Your broker, the exchange and the clearing bank see that you want to get out of this business and hence the clearing bank closes your position. Your agreement is now killed and you can hopefully collect money, or unfortunately, you must pay. This depends on your two trades. Commodities and trade p. 31/72

32 The exchange The other half of the original agreement is still valid, and safe, because of the high financial strength of the clearing bank. Commodities and trade p. 32/72

33 Futures contracts When you sign the contract no money is normally transferred. Money is transferred each day according to the settlement price that day Always include clearing banks. Mostly used for speculation Sometimes you can change your futures into physical = real things. Commodities and trade p. 33/72

34 Futures contracts You must have a certain amount of money on a special account where the broker, member, can put or take money. The member must have an account where the clearing bank can take and put money. Each day money is sent to or taken from these accounts Commodities and trade p. 34/72

35 Futures contracts If money is lower than a special level you must send in more money If you cannot do that your position is closed = you will probably lose all your money Commodities and trade p. 35/72

36 Futures contracts Note that the clearing bank has an agreement with its clearing member. The member has an agreement with you, perhaps via a broker. Different accounts! The required margin can be higher between you and the broker/member than is needed between the member and clearing bank. Commodities and trade p. 36/72

37 Margin The exchange sets a minimum level for the margin also between the broker and you, but the broker is allowed to apply even higher margins. If too high, try to find another broker. Commodities and trade p. 37/72

38 Contracts When you make an agreement, you have an open position If you have promised to buy something you have a long position If you have promised to sell something you have a short position Commodities and trade p. 38/72

39 Contracts In futures trading almost all open positions are closed before the expiration date. Trading is cash-settled. You get money instead of oil. If you trade on a large exchange you have good liquidity, i.e. you can always close your position. Poor liquidity = you go bankruptcy Commodities and trade p. 39/72

40 Some facts about oil In Sweden, all oil is imported. Normally it is delivered in ships to a harbor. Commodities and trade p. 40/72

41 Some facts about oil Oil, when found, is almost always buried below the earth surface Oil has, probably, its origin in living organisms such as plants and animals. Commodities and trade p. 41/72

42 Some facts about oil When looking for oil, you use a seismic survey Oil is almost always accompanied with natural gas Oil is normally found in porous rock Commodities and trade p. 42/72

43 Environment and oil Even finding oil can be harmful. Seismic surveys on the ocean is common practice. According to New Scientist, 2004 : One of the oceans most mysterious animals, the giant squid, may be being killed by human noises. Unusually high numbers of dead giant squid, washed up on Spanish shores, have led scientists to believe that loud, low-frequency sounds made by oil companies charting the sea bed are killing the creatures. Commodities and trade p. 43/72

44 Environment and oil Oil fields are potential environmental bombs: Military targets, e.g. in the Kuwait war where a number of oil sources were put to fire. Normal oil field activities also pollute the surroundings Commodities and trade p. 44/72

45 Environment and oil Crude oil transport are likewise potential environmental bombs: Accidents like Exxon Valdez. Only the 32nd largest. 470 miles of coastland were polluted. Ships in the Baltic Sea must normally have double shells. Some boats, i.e. their captains, rinse their oil containers with sea water. This is not allowed but hard to prove. Difficult with legal actions. Commodities and trade p. 45/72

46 Environment and oil Two major disasters during 2010 Deepwater horizon. A platform built in the sea outside of U.S.A. caught fire and the long pipe to the well broke. No one knows how much oil that was spilled into the gulf. BP thinks that the accident will cost them 40 billion dollars according to Svenska Dagbladet. Commodities and trade p. 46/72

47 Environment and oil In the Xingang terminal in Dalian an explosion resulted in a big spillage of crude oil. The leak is not as large as for BP but China lacks proper equipment for dealing with oil in the sea. (The Independent) Commodities and trade p. 47/72

48 Environment and oil A tanker, Prestige, sank Many beaches in Spain, Portugal and France were polluted. Tourism, and fishing industry made big losses. Commodities and trade p. 48/72

49 Environment and oil Nowadays much crude oil comes from oil fields at sea. Brent oil comes from many oil fields, e.g.: Brent, Shell, Esso Ekofisk, ConocoPhillips Forties, British Petroleum Oseberg, StatoilHydro, ConocoPhillips, ExxonMobil, Total, Petoro Commodities and trade p. 49/72

50 Environment and oil Some oil contains much sulphur, i.e. sour oil. Oil from the Middle east is normally sour. Other oil has less sulphur, i.e. sweet oil. Oil from the US and Europe is normally sweet. Brent is one type and West Texas Intermediate, WTI, is another. When you sell, and buy, crude oil as a commodity, you talk about WTI, Brent, Dubai and Opec basket. Perhaps there are some more. Commodities and trade p. 50/72

51 Refinery Cars cannot use crude oil as a fuel. Hence you must take your crude to a refinery where it can be processed into other petroleum products, such as gasoline, kerosene or diesel oil. Commodities and trade p. 51/72

52 Crude gasoline Crude oil is split up in different parts in a destillation process. The oil is heated and changed into a gas, oil steam by using a furnace. At different parts in the destiller different products condensate, i.e. turn into liquid again. Commodities and trade p. 52/72

53 Destiller Some products from this destillation, i.e. those with shorter molecules, are more valuable than others. Hence, people has invented a device, a cracker, where long molecules brake apart and by this, the amount of valuable products are increased. In order to achieve this, the temperature must be increased to 800 C and the pressure to 700 kpa. Commodities and trade p. 53/72

54 Cracker/Destiller Source: Kittiwake web page Commodities and trade p. 54/72

55 Oil Gasoline for cars has a rather low gasification temperature Asphalt cannot, normally, be changed into a gas. This is called the residual. Commodities and trade p. 55/72

56 Crackers continued 10 different methods for making the molecules smaller. Cat cracking. A catalyst is added to the oil steam. Cat cracking is Important when making gasoline. Part of the residual could be cracked and profitability increased. Commodities and trade p. 56/72

57 Poor oil is cheap Some boats use an oil type called Bunker C. This type is used as a fuel for the ship. It is almost a residual Bunker C must often be burnt and the ship then uses a steam engine It contains 2,000 times as much sulphur as normal Diesel. Can be used because no one owns the ocean. 800,000 premature deaths according to thestar.com. Commodities and trade p. 57/72

58 Acid rain When using the oil as a fuel sulphur is coupled to oxygen. The result is sulphur dioxide, SO 2 The SO 2 changes into sulphuric acid Plants and fungi do not like such acid Trees die, the soil is contaminated All statues in our towns are destroyed In Scandinavia we already have sour soils. Forests were dying, especially on our West coast Commodities and trade p. 58/72

59 Acid rain When using oil, also nitrogen dioxide is emitted From cars and combustion The NO 2 changes into nitric acid Plants and fungi do not like such acid The gases are transported in the atmosphere. When raining they are washed out in the form of acids. The polluting country is not always the damaged one. If you emit SO 2 in England, Scandinavia gets the acid rain. Commodities and trade p. 59/72

60 Crude oil About 160 different traded crude oils. No one can be fully informed. you compare these real oils with the bench-mark oils. WTI is a high quality light sweet oil suitable for making gasoline. Mostly used in the U.S. API (relative density to water) 40 degrees. If it is over 10 it floats on water. API = American Petroleum Institute. Commodities and trade p. 60/72

61 Crude oil Brent is not as sweet, i.e. it contains more sulphur, and is not as light, as WTI. WTI was mostly priced $1-2 per barrel higher than Brent. One barrel = 159 litres. This has changed!! Brent was more expensive 2012 and still is. OPEC basket price. An average of 7 different crudes. Priced about $5 less than WTI. Heavier and more sour than Brent and WTI Commodities and trade p. 61/72

62 Crude oil WTI is mostly sold at the exchange in New York, i.e. NYMEX or New York Mercantile Exchange. Now called CME Group! The futures contract is called CL, Crude Light? Brent is mostly sold at the exchange in London, the ICE. ICE = InterContinentalExchange. Changed name from IPE = International Petroleum Exchange. Commodities and trade p. 62/72

63 Crude oil Also ICE has WTI contracts and likewise NYMEX has Brent contracts They are hopefully almost the same as their counterparts but perhaps not exactly equal They are however used for WTI and Brent at both locations so the prices should be equal. Commodities and trade p. 63/72

64 Oil trading Nymex has merged with the CME group. When we talk about Nymex it is actually CME group Five contracts for crude oil CL, Light Sweet Crude oil, WTI. For physical delivery. Also options WS, Light Sweet Crude oil, WTI. Financial Commodities and trade p. 64/72

65 Oil trading QM, E-mini Light Sweet Crude oil, WTI. Financial BZ, Brent Crude oil Last-day, Financial. Also options R2, Russian Export Blend Crude oil, REBCO. Financial. Commodities and trade p. 65/72

66 CL, Crude Light? Contract unit, 1,000 U.S. barrels Pricing quotation, U.S. dollars and cents per gallon Minimum price increment, $0.01 = 10 $ per contract For physical delivery Commodities and trade p. 66/72

67 WS, Financial Crude WTI Contract unit, 1,000 U.S. barrels Pricing quotation, U.S. dollars and cents per gallon Minimum price increment, $0.01 = 10 $ per contract Financial settlement Commodities and trade p. 67/72

68 QM, Financial Crude, WTI Contract unit, 500 U.S. barrels Pricing quotation, U.S. dollars and cents per gallon Minimum price increment, $0.025 = 12.5 $ per contract Financial settlement Commodities and trade p. 68/72

69 BZ, Financial Brent Contract unit, 1,000 U.S. barrels Pricing quotation, U.S. dollars and cents per gallon Minimum price increment, $0.01 = 10 $ per contract Financial settlement Commodities and trade p. 69/72

70 Brent Last day The ICE Brent Crude futures contract is a deliverable contract based on EFP, Exchange Futures for Physical, delivery with an option to cash settle, i.e the ICE Brent Index price for the day following the last trading day of the futures contract. Commodities and trade p. 70/72

71 R2, Financial Russian... Contract unit, 1,000 U.S. barrels Pricing quotation, U.S. dollars and cents per gallon Minimum price increment, $0.01 = 10 $ per contract Financial settlement Delivery point Primorsk, Finnish Gulf Commodities and trade p. 71/72