This book is the companion volume to the “Trading Crude Oil: the Consilience Guide”. The principal author of this book, “Trading Refined Oil Products: the Consilience Guide”, is Catherine Jago. By necessity, there is some overlap in content between the crude oil and the products books because both address the trading and shipping of hydrocarbons.
There are a number of common features in the contractual and logistical processes involved in moving both crude oil and refined products around the world and in managing the price risks associated with trading. So Liz Bossley, the author of “Trading Crude Oil: the Consilience Guide”, is also a contributing author to this book as well as being its editor.
The book is designed to be accessible to both those who are directly involved in the trading discipline and those who are not. The latter category includes directors with responsibility for overseeing the trading function, lawyers that get involved in drafting contracts or litigating trading disputes, accountants that have to report or audit trading activities and regulators tasked with the responsibility of ensuring that the market is free from manipulation. It will provide refinery engineers with a reference manual to help understand how the oil market and traders operate. New traders will find within these pages a comprehensive guide to oil product markets and where to find the information they need to become effective traders.
The purpose of this book is not only to inform new refined oil product traders and those that have to manage or work with them, but also to fill in any blanks in the minds of crude oil traders about what their product trading colleagues get up to. The most effective crude oil traders understand the market for petroleum products and vice versa, because it is difficult to consider the market for the raw material that is crude oil without also considering the market for the refined products that are derived from it.
For those who have already read the “Consilience Guide to Trading Crude Oil”, two distinguishing aspects of this book will become apparent very quickly:
• First, whereas crude oil traders, by and large, have to deal with the quality of the oil that comes out of the ground and find a market for whatever the reservoir delivers, the life of the refined products trader is much more proscribed by the quality that the consumer demands in different regions of the world and at different times of the year. The products trader is engrossed by detailed quality specifications and with treating, upgrading and blending material to meet the specifications for the use of The Consilience Guide to which each product will be put. Increasingly stringent and regionally disparate environmental regulations also keep products traders on their toes and requires them to be up to date on these matters;
• Secondly, although cargoes of refined products tend to be smaller than those of crude oil, the trading risk associated with oil products is equally challenging. Oil product price volatility is no less than for crude oil, but the financial instruments available to manage that risk cannot cover every quality of oil product. With hundreds of different product specifications being traded in the market, the limited number of risk management tools available exposes the products trader to considerable basis risk. Whereas the crude oil trader may be forced to hedge the price of apples wit a contract in oranges, the oil product trader may have to fall back on a contract in carrots.
The book starts with an overview of the issues of relevance to the products trader by introducing the market actors, the basic processes involved in refining crude oil and blending products, the pricing concepts and the transportation and storage logistics.
We then examine in more detail what happens inside a refinery and the separation, treatment, upgrading and blending activities that transform crude oil into the products that industry and the end-user need.
The contracts that are associated with the buying, selling and transportation of refined products are explored thoroughly. Refined product prices are de-constructed and scrutinized using the Consilience A +/- T +/- G analytical tool. This unbundles oil prices into their three component parts – the Absolute, or benchmark, price (A), the Time differential (T) and the Grade Differential (G). The forward price curve is analysed to explain the anatomy of pricing.
We evaluate the product benchmark prices used in the market and look at the futures and swaps markets used for operational hedging of the absolute price and the time differential.
In analysing the value of the grade differential, we investigate each of the main combustible products and the speciality products in turn, considering their specification limits and how these are tested in practice. We finish up with an in depth look at the range of risk management instruments available to the hedger with practical examples of how they are applied in action to manage price risk.
In this book we attempt to arm those interested in the market for refined oil product prices with the tool kit they need to fully appreciate the subtleties of this constantly evolving market. A thorough appreciation of the concepts will, we hope, help the reader understand market events and grasp the implications of new market regulation as it occurs.
Finally, in the words of Thomas Carlyle, “the best effect of any book is that it excites the reader to self activity”. If we manage with this book to at least inform the reader we are confident that the business of trading will provide all the excitement that anyone needs.
John Walmsley, Executive Chairman