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The gains and pains of an oil trader

In the first of a six-part series from our man overlooking the bullpen, we follow the trials and tribulations of following the markets

This article is the first of a six-part series, "A day in the life… of an oil trader"

AFTER being involved in the market for 15 years it’s instinctive to wake up at a certain time of the night and check where oil-futures markets are trading and scan the newswires. I normally wake early to go to the gym, which helps clear my mind and I can focus on what needs to happen over the next 12-14 hours.

I get to my office and fire up my screens. The operations group will report how much inventory actually moved overnight versus what was forecasted. Today, it comes in above forecast. I have to buy back futures contracts in four different accounts, all refined products. Futures are up on the day which means that if I buy the contracts right here we will have a reduction in margin. I need to check the charts again. It’s not overly bullish. We’ll wait.

A marketer calls in asking for a market for an 18-month deal for an end user. I notify a junior trader to work the deal with the basis levels we’ve been discussing for that region. He’ll mark the forward futures strip and communicate it accordingly.

My Yahoo Messenger starts to wake up with the rest of the physical world, or at least the brokers. They’re trying to make markets but nothing’s working just yet. I get back to the futures market charts but it doesn’t look like I’m going to get hit. I move the orders, buy 55% at unchanged on the day and the other 45% down .0050/gallon on the day. I’ll check back later as futures aren’t racing away from me.

Back to the newswires and Twitter to see if anything material has come out. There’s a lot of chatter about the dollar getting bid, which is good for our futures bid. It’s mid-morning which means it’s time for the daily market call. I discuss how volume is offered on all refined products in northwest Europe as arbitrage windows are closing from New York Harbor and the US Gulf Coast. This could weaken US basis levels.

After the call, the internal futures position report is published – clearly I’m short intermonth spreads as our inventory levels are increasing. I already have my targets in place electronically, so I just adjust the volume.

It looks like brokers are getting more traction in the physical market as my instant messenger is lighting up. I need to buy some gasoline, especially in the Gulf coast, and have to sell diesel fuel or move it forward to make delivery at a different time. My junior trader says we’re getting filled on spreads, so we kill the balance of the order as it’s moving our way quickly and get to the next target level.

A physical broker I’ve known for years calls my cell. “Hey, I’m hearing that we’ve got a refinery issue looming at Lemont.” I ask where the gasoline market is, he provides a good offer just above my target so I buy it but I need more. I’ll wait it out since I have some covered and need to confirm that rumour.

I don’t like that futures are still not moving lower so I pay up to cover the 55% up .0050 on the day instead of down or unchanged. I’ll keep the other 45% in at unchanged.

A broker calls, the counterparty on the gasoline deal is a new trading company but a subsidiary of a known commodity house. Since we sold them diesel fuel the day before instead of exchanging millions of dollars in payment, they’d like to net out the two deals. I call our credit department and get the ball rolling.

Market making

The physical market is getting bid and I have that “refinery issue” in the back of my mind. I call a close friend that trades the Midwest US market, who confirms that he’s hearing of problems from a trusted source but we don’t have confirmation… yet. This thing feels like it wants to go higher so I low ball bid the market through five brokers as I don’t want people to know I need to buy barrels. Two small volume offers come lower by just .0010 and the other three brokers have nothing. I hit the firm offer with one broker, and counter the other to tighten the bid/offer. One of them comes back with more volume and I take it so my exposure is much more manageable. I’m down to just one piece left to buy and no offers, but I’m not too worried because the diesel market might well move higher and I have to sell in that market.

The marketer calls back in to tell me he’s got the end-user deal done so I tell the junior trader to work the futures since we’ve been through it many times. The spreads are lower than we bought earlier but not yet at our targets, so with basis moving higher I just hit the offers. If I’m bullish on the spread, I better cover the other 45% of the futures, so I buy those at up .0025 on the day. Not too bad.

Everything, futures and physical are starting to move higher − the dollar has reversed which helps futures get bid. A hedge fund friend calls the cell and I know he wants to know what’s going on so I text that I can’t talk right now. A couple of journalists are hitting me on instant messenger trying to confirm the refinery story, but things are too crazy. Credit calls and says there’s no issue on the net out so that will save capital costs. Good.

Since our inventory has gone up, my ethanol trader reports that he has to buy more rail cars, so I direct the junior trader to work with him on hedging the exposure.

An old refinery contact calls me direct, saying he’s looking to move production next month and wants to work out a ratable offtake for 30-45 days. I say we’re interested and yell over to the analyst that we need to look at some data.

A physical broker pings up over instant message saying he’s got gasoline, so I just take it. It was expensive but at least it was for only one piece.

I call the first broker that gave me the heads up on the refinery issue and give him the deal to move the physical diesel to the next cycle. I owed him one.

I check in on the junior trader, the marketing deal is done and all settlement orders have been placed and filled. I watch the futures settlement and prepare for the physical market close. Futures finished unchanged on the day, so I should have been more patient on the first 55%. A major refinery in the Midwest has a crude unit down, which hits the wires and the physical market moves higher through the close.

Now it’s time to work in the conference room with the group to go through some longer-term strategy and then onto dinner with a strategic-storage partner. Looking forward to the work out in the morning.

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