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I suppose they had them lined up just raring to go...and I wouldn't be surprised if there were certain people dealing with Iranian oil this whole time anyway - it's been done before - just this time it's on the books.
DELIVERY/SETTLEMENT BASIS
The ICE Brent Crude futures contract is a deliverable contract based on EFP delivery with an option to cash settle against the ICE Brent Index price for the last trading day of the futures contract. The Exchange shall publish a cash settlement price (the ICE Brent Index price) on the next trading day following the last trading day for the contract month.
Trading: Primarily Energy but also a little Equities, Fixed Income, Metals and Crypto.
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Also calling it Brent is really a misnomer. What we call Brent is not actually Brent any more. Brent production has declined to the point that have had to include other similar North Sea crudes. The Brent Index is now actually a BFOE index representing Brent, Forties, Oseberg & Ekofisk. (Brent in itself is actually 'Brent Blend' as it's a mixture of several different close proximity North Sea Fields.). All 4 of those crude's load at different ports.
Yes but then they mention the EFP deliverable. Is that basically just a private contract between two parties that is then recorded on the exchange? I wonder though what would be the point/benefit of even recording the trade?
I knew that about Brent but not WTI - interesting. This leads me to have a new Q then that I was thinking about. Would I be able to deliver other sweet light crude oils to Cushing then - such as a Bonny Light?
Thanks for answering all these Qs, I'm just trying to learn more about the physical aspect of the business and was wondering how futures were used effectively to hedge a physical cargo. For example, if I get hold of a cargo of 1m bbls of Forties at spot and use the Brent future to hedge it - then how do I realise the profit of sale at the future date? Do I need to source my own buyer such as a refinery and agree on a seperate price? When do I close the hedge?
Sorry for all the Qs - but this has bothered me for the past few weeks and I don't know enough physical traders to ask.
Trading: Primarily Energy but also a little Equities, Fixed Income, Metals and Crypto.
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Posts: 5,049 since Dec 2013
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EFP - Exchange For Physical - it's a way to convert OTC and/or physical positions to futures.
ie I give you a 500kb Physical Brent Cargo and you give me 500 Brent Futures. Let's say we agree a 10c physical premium. Current Brent prices are $55.15 so we agree to 'post' the 500 futures at $55.15 and price the physical cargo ar $55.25.
There are also EFS (for-swap) EFO (for-option) or as the are more commonly called now EFRP, Exchange for Related Product
If you take a look at the document i linked you would see that you can deliver any of the following :-
Domestic Crudes (Deliverable at Par): -
West Texas Intermediate
Low Sweet Mix (Scurry Snyder)
New Mexican Sweet
North Texas Sweet
Oklahoma Sweet
South Texas Sweet
International Crudes :-
U.K.: Brent Blend (for which the seller shall be paid a 30 cent per barrel discount below the last settlement price)
Nigeria: Bonny Light (15 cent per barrel premium)
Nigeria: Qua Iboe (15 cent per barrel premium)
Norway: Oseberg Blend (55 cent per barrel discount)
Colombia: Cusiana (15 cent per barrel premium)
It was always very rare for international crudes to be delivered into the contract because they would have to be shipped by pipe from the Gulf Coast to the Midwest. With a) Brent trading at a premium to WTI and b) Crude now flowing south from the Midwest to The Gulf Coast, I assume that it's now unheard of.
You would hedge your cargo when you acquire it/the price becomes fixed. You would unhedge your cargo when you sell it/the price becomes fixed. Your profit on the deal would be (Physical Sale - Physical Cost + Hedge Profit or Loss - Costs)
I mention "when the price becomes fixed" because that is when your price exposure actually starts.
Example A :- I agree to sell you 1kkb of Forties at the ICE Brent Settlement on August 1st plus 10c. Today, July 24th, that cargo has no fixed price exposure (it does have basis exposure but ignore that for now) meaning that you do not make money based upon the price of Brent going up and down). On July 31st it still has no fixed price exposure. At breakfast on Aug 1st, still no exposure. But when the settlement on Aug 1st occurs you would then have exposure meaning you now make money based upon whether the market goes up or down. You could (and many people do) mitigate this risk by selling an equal number of futures (leaving you with basis risk again). Note this is one reasons EFPs are popular - it eliminates the hedging risk for both the buyer and seller since your transferring a hedged cargo.
Example B :- I agree to sell you 1kkb of Forties at the ICE Brent Settlement on B/L +/-2. (in reality it would be probably be Platts Dated Brent but that's another discussion). B/L +/-2 means Bill of Lading +/-2 days, or the 5 business days around the day that your ship loads. Hence you show up with your vessel on Sat 1st August and it loads 1kkb of Forties and finishes loading on Mon 3rd August. Since it finished loading on the 3rd, the Bill of Lading date would be the 3rd. Hence your cargo would price the average of Jul 30, Jul 31, Aug 3, Aug 4, Aug 5. To efficiently hedge your cargo you would have needed to hedge 200 lots each day as close as possible to the settlement price. While this sounds easy, imagine that they actually don't finish loading until the 4th. Your pricing window now becomes Jul 31, Aug 3, Aug 4, Aug 5, Aug 6. Did you hedge 200 lots on Jul 30th expecting the B/L date to be the 3rd? If you did you've had a 200 lot position for 4 days you didn't realize you had!
It should be noted that ICE and WTI both have a "Trade at Settlement" or TAS feature/contract. (Right now, 7:27am, CLT which is the TT symbol for the WTI TAS is 0 bid for 6,979 lots and offered at 1 for 11,175 lots). if I were to buy 100 lots of the CLT at 1, what would hit my account would be 100 lots of CL futures with a price of todays settlement price +1c/tick.
On Basis Risk ... Everything we have talked about so far is what we refer to as Fixed Price Risk, meaning the risk associated with the underlying Benchmark price (in this case ICE Brent) going up or down. Basis Risk is a locational/quality/spread risk not related to the outright benchmark price. In example A I sold you 1kkb of Forties at ICE Brent +10c. Imagine that for some reason half the Forties cargoes suddenly get cancelled for next month. The price of Forties relevant to Brent, may increase, to say Brent +25c. This is Basis risk, and in this example you would have made 15c/bbl. Note that you have Basis risk from the moment you agree to the deal, because at that time you are locking in the basis. You could now resell this cargo (before it even loads) to somebody else at ICE Brent +25 and make your 15c. Brent-WTI would be considered a Basis Risk as would DFL (Dated vs Front Line) and all grade spreads. In the US Natural Gas markets ICE trade (on screen) 'Basis Spreads' on about 50 different locations, where the Basis Spread represents the locational price difference between that location and Henry Hub in Louisiana which is the delivery point for the NG futures contract.
Would I be right in thinking that many of these traders are just following methods that have worked well in the past but are not guaranteed to work in the future? What are your thougts on this type of trade this time round? Or do they always just pile up stores this much during contango?
I think oil prices could remain low for quite some time, especially if the Iranian deal remains intact. Surely that's going to start puting the squeeze on a lot of these positions as the cost of storage and continued softening in price eats away at potential profits - Or is it not quite so simple?
