OIL 101

INTRODUCTION TO
SUPPLY & TRADING

EKTINTERACTIVE.COM
 SUPPLY & TRADING
This Intro to Supply & Trading overview includes:

What is S&T

Major Trade Risks

Historical Perspective

EKTINTERACTIVE.COM
 Learn More
Complete Supply & Trading Module includes:

Crude Oil and Product Supply Fundamentals

Derivative Contracts and Exchanges

Drivers in Physical Trading and Financial Hedging

EKTINTERACTIVE.COM
What is Supply and Trading?

EKTINTERACTIVE.COM
 Chevron Defines S&T

“Chevron Supply and Trading (S&T) provides a critical link

between the market and Chevron's upstream, downstream
and chemicals companies.

S&T provides commercial support to Chevron's crude oil

and natural gas production operations as well as to the
company's refining and marketing network.”

EKTINTERACTIVE.COM
 Focus On Downstream

As Chevron noted, S&T supports many operations

within an integrated company.

EKTINTERACTIVE.COM
 S&T in Europe

In Europe, a major oil company may have to manage over 25

different supply networks across the continent.

EKTINTERACTIVE.COM
 Major US Hubs
In the US, many S&T functions are organized by the major
geographic refining and supply centers, including:
• US Gulf Coast
• East Coast and New York harbor
• West Coast and Alaska
• The Midcontinent – Chicago Market

EKTINTERACTIVE.COM
 The Role of Logistics Hubs

To understand the importance of crude oil and product

transport, one must understand the role of logistics hubs.

EKTINTERACTIVE.COM
 Gateways of Regional Supply

Logistics hubs serve as gateways for regional supply of

crude and products. Hubs are at the core of oil markets’
efficiency, providing an ability to quickly respond to
changes in supply and demand.

EKTINTERACTIVE.COM
 Risk Management in
Crude Oil and Product Trading

EKTINTERACTIVE.COM
 Transactions in any commodity market come with a
variety of risks.

The most common risks addressed in crude and products

trading are as follows...

EKTINTERACTIVE.COM
 Market Risk

The risk that a change in market dynamics, especially

price, will change the financial position of an oil
company or trader.

EKTINTERACTIVE.COM
 Basis Risk

The risk that the differential between prices of the same

commodity in different markets – for example, due to
differences in delivery location or delivery time – will affect
the financial position of the oil company or trader.

EKTINTERACTIVE.COM
 Credit Risk

The risk that a counterparty will not perform in accordance

with the contract terms, either by failing to deliver the agreed
upon commodity or to pay the agreed upon price.

EKTINTERACTIVE.COM
 Operational Risk

The risk that losses will be incurred due to errors or

inadequacies in the multiple systems or processes needed
to structure, price, trade and manage physical positions
within the Commercial organization.

EKTINTERACTIVE.COM
 Liquidity Risk

The risk that there is no available counterparty to accept an

offsetting position. Then the organization may be saddled with
assets or commitments – physical or financial – that it had not
intended to keep.

EKTINTERACTIVE.COM
Join now for access to free eBooks,
members only forums, and a growing
body of digital learning content.

Free eBooks include:

 History of Oil
 Upstream Fundamentals
 Midstream Fundamentals
 Downstream Fundamentals
 Business Processes/Risk Management
 Industry Trends

Learn More!

EKTINTERACTIVE.COM
 Major “Physical” Risks

Three major risk factors

considered associated with the
Volume Ratability
physical commodity drive
decision-making in managing
Time
supply & trading of crude oil and
products.
Price Volatility

EKTINTERACTIVE.COM
 Volume Ratability

Neither crude oil nor refined products travel through the

supply system at a ratable, steady-state speed.

EKTINTERACTIVE.COM
 Refineries do not Crude pipelines do not
process crude oil carry crude at
at the same rate the same rate at which
that the crude arrives. crude oil is produced.

Product pipeline and Consumers do not use

marine shipments are gasoline (or any
not easily product) at the same
matched to demand rate at which refineries
patterns. make it.

EKTINTERACTIVE.COM
 Effect Of Time

Supply network distances can be enormous, causing

time lags in decision making and exposure to market
fluctuation.

EKTINTERACTIVE.COM
 A Global Supply Chain

Crude and products arriving from the Middle East to

the US or Europe have already traveled thousands of
miles and maybe ship thousands more by pipeline once
cargo lands.

EKTINTERACTIVE.COM
 Volatility

Studies show that oil, natural gas and electricity prices

are the most volatile commodity prices.

EKTINTERACTIVE.COM
Historical Perspective

EKTINTERACTIVE.COM
History of Supply & Trading in Crude and
Products

Volatility and trading have always been an integral

part of the oil business.

EKTINTERACTIVE.COM
 Rockefeller’s ‘Cooperation’

JD Rockefeller realized that control of supply was the key to

success in the business.

His initial focus was “cooperation” (later named monopoly)

between refining, transportation and marketing.

EKTINTERACTIVE.COM
 A Global Industry

Managing supply logistics was also a global challenge from

the early days of the industry.

EKTINTERACTIVE.COM
 Marcus Samuel –
The Shell Oil Company

In 1878 the son of a London businessman who traded

seashells, named Marcus Samuel, discovered the oil
export business.

EKTINTERACTIVE.COM
 S&T – Critical To Downstream

To this day efficient supply movements of crude and

products continue to be the heart of the downstream.

EKTINTERACTIVE.COM
The First Petroleum “Paper” Exchanges

By the end of the 19th century, New York hosted a Petroleum

Exchange for crude oil futures contracts to allow hedging of
supplies.

EKTINTERACTIVE.COM
 Financial Hedging

Hedging allowed traders to match a paper contract with

their physical barrels to offset market and basis risk.

EKTINTERACTIVE.COM
 Era Of Instability

Another exchange was started in California in the 1930s.

EKTINTERACTIVE.COM
 Birth Of The NYMEX

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.

EKTINTERACTIVE.COM
 24/7 Global Marketplace

Crude and products hedging has now matured – with a

complex variety of 24/7 global exchanges, brokers, futures
contracts and options.

EKTINTERACTIVE.COM
 Complex Global Supply Chain

Daily decisions of thousands of participants to:

• Move crude oils from production to processing
• Refine crude into a variety of products for the marketplace
• Transport refined products from refineries to consumers

EKTINTERACTIVE.COM
 There’s More?

This Intro to Supply & Trading material was taken from our free
Oil 101: Introduction to Oil & Gas
course.

EKTINTERACTIVE.COM
 Who are we?
EKT Interactive staff have provided oil and gas training
since 1986.

Visit us at www.ektinteractive.com to learn more.

EKTINTERACTIVE.COM