Introduction to Supply, Trading, & Transportation
Lesson Overview
The Crude Oil and Product Supply, Trading and Transportation module consists of the following lessons:
- Introduction – What does this module cover?
- Crude and Products Supply Fundamentals – How do the key parts of the physical supply system work together?
- Derivative Contracts and Exchanges – What financial tools are available to help manage price volatility?
- Business Drivers – What tools are available and why do crude oil and products traders match the physical and hedging aspects of the business?
- Business Processes – What are the key business processes used to manage the S&T function?
- Industry Trends – What are the major factors affecting the future of the S&T function?
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History of Supply & Trading in Oil and Gas
Volatility and trading have always been an integral part of the oil business. Researchers point out that in 1859, crude oil was selling for $20/bbl and two years later for only 52 cents. Speculators would buy huge quantities of crude after an especially successful wildcat well had made the prices drop, store it in tanks and wait for the price to rise again.
Unlike the glamour associated with successful wildcatters, JD Rockefeller realized that control of supply was the key to success in the business. His initial focus was “cooperation” (later named a monopoly) between refining, transportation and sales. By 1879, Standard Oil controlled 95% of oil refining in the US. He also purchased plants, warehouses, tanker cars and wagon fleets to make his company totally self-sufficient.
Managing supply logistics was also a global challenge from the industry beginnings. In 1878 the son of a London businessman who sold seashells, named Marcus Samuel, discovered the the oil export business. He extended it to a huge developing market for kerosene for lighting in Japan. He ultimately had one of the first tankers built to move Russian kerosene through the Suez Canal to Asian markets. In the process Shell Oil Company was created. Internationally, Standard Oil competed fiercely with Shell to sell its blue kerosene tins, using Singapore as a distribution hub in the 1890’s.
To this day efficient supply movements of crude and products continue to be the heart of the downstream, called by a variety of names:
- Supply & Trading (S&T),
- Supply, Trading & Transportation (STT),
- Commercial, or
- simply Supply.
By the end of the 19th century, New York hosted a Petroleum Exchange for crude oil futures to allow hedging of supplies. Another one arose in California in the 1930’s. A new era of price instability came into being with the 1973 Arab oil embargo, and the subsequent nationalization of significant crude oil reserves. In 1978, the New York Mercantile Exchange (NYMEX) launched a heating oil futures contract, followed by a crude oil contract in 1983, which is now one of the most actively traded physical futures contracts in the world.
Crude and products hedging has now matured – with a complex variety of 24/7 global exchanges, futures contracts and options. They help stabilize the global pricing structure, and are considered a reliable index for the (often) less visible markets for the sale of physical barrels of crude oil and petroleum products.
To the outsider, the global oil supply chain is transparent and orderly. In reality, it is comprised of constant movement and adjustments by the daily decisions of thousands of players to:
- Move crude oils from where they are produced to where they are processed,
- Refine crude into a variety of products for the marketplace and
- Transport refined products from refineries to where they are consumed.
Three major risk factors considered in this module drive decision-making in managing supply & trading of crude oil and products: volume ratability, time and price volatility.
- First, neither crude oil nor refined products travel through the supply system at a ratable (steady-state) speed. Refineries do not process crude oil at the same rate that the crude arrives. The crude pipelines do not carry crude at the same rate at which crude oil is produced. Nor are product pipeline and marine shipments easily matched to demand patterns. Finally, consumers do not use gasoline (or any product) at the same rate at which refineries make it.
- Distances involved can be enormous, causing time lags in decision making and exposure to market fluctuations. Crude and products arriving from the Middle East to the US or Europe have already traveled thousands of miles, and may be shipped thousands more by pipeline once the cargos land. A cargo of Middle East crude oil takes 23 days to get to Japan and 40 days to get to the US Gulf Coast. A pipeline move from the major US Gulf Coast refineries to New York Harbor can take 14 days.
- Finally, of all commodities, wheat, sugar, orange juice, pork bellies, platinum, copper, gold, whatever – studies show that oil, gas and electricity prices are the most volatile. Their daily prices are tracked on the Intercontinental Exchange (ICE), New York Mercantile (NYMEX), and other global trading exchanges. Numerous industry hedging tools are used to dampen the impact of price fluctuations and help mitigate risk.
The term used in this module for the function managing the above risk factors, is Supply and Trading (S&T).
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I would like to thank you for a brilliant interactive 101 materials. I did use to prepare for the recruitment process is Royal Dutch Shell, and I managed to take a new role in a new oil and gas industry.:)
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