In the early 1980s, when I was working with a small E&P outfit we made a substantial discovery and had oil to sell. My vague recollection is that a junior employee was sent off to ‘negotiate’ a deal with a nearby refiner that settled our selling price for the foreseeable future. As Liz Bossley (CEO of UK based Consilience Energy Advisory Group) observes in her attractively produced and entertaining Guide to Trading Crude Oil* (GTCO), a lot has changed since then. Markets are more sophisticated and there are many opportunities to optimize sales and mitigate price risk. Some companies however may be stuck with the 1980s mentality, ‘celebrating the success of a 50 cent saving in operating costs while leaving sales revenue to the mercy of an oil price that may fluctuate by more than a dollar per day.’ Thus Bossley’s mission in the GTCO is to explain how modern trading can help companies ‘understand what is happening to revenue and manage it responsibly.’
The GTCO approach is rooted, not in obscure
options math, but on an understanding of the big picture. And a big
picture it is indeed. Bossley has a lot to say about the industry at
large, how oil is bought and sold and the plethora of contracts than
govern such activity.
Like any specialist field, terminology is both key to understanding and a potential stumbling block to the newcomer. Terms such as ‘contango,’ ‘backwardation,’ ‘demurrage’ are clearly explained (although an index would have been nice), as is Consilience’s own approach to trading—based on the absolute price (A), time (T) and grade (G) differentials. GTCO is packed full of information on the array of benchmarks that determine the oil price. Virtually no aspect of the above goes unquestioned in this detailed, informative and, I have to admit, hard to summarize analysis. One message is that the oil market today is at risk from new regulation (Dodd-Frank and Volker) whose good intentions may result in removing players from the market and limiting its efficacy.
There are some juicy titbits. Bossley describes the outcome of the 2011 report from IOSCO** into the activity of oil price benchmark reporting as ‘motherhood and apple pie.’ An appendix updates GTCO with breaking of news Shell’s re-jigging of its trading terms in the face of declining North Sea production and the ‘flawed benchmark’ that is Brent.
* ISBN 9780955083945. Available from Consilience.
** International organization of securities commissions.
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