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Coming down

In the third of our six-part series, our trader navigates a plan with deal-altering drugs

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

A cargo of gasoline is offered in the market with a five-day delivery window from June 20-25. We bid the offer, and end up getting filled on the trade. Knowing that we're going to take title of the product in the month of June we will be selling July futures to hedge it. We most likely won't sell the physical product until the month of September, so we buy July and sell October futures. This helps us manage the time lag between taking delivery and making a sale. Now the fun begins of managing these barrels through our logistical system, the majority of which are leased assets.

We decide that the best way to maximise the value of the barrel and share it with our customers is to bring the inventory to a variety of markets. This means that we're going to have to schedule barges to go out to the cargo, load the gasoline, and delivery it to storage facilities along the coastline. 

In addition to the barges, we will also have to schedule inspectors to go to the cargo and the facilities to confirm the specifications of the gasoline that we're purchasing.

Since we will be blending this gasoline with ethanol at these storage locations, we will have to buy ethanol and schedule rail cars to make delivery. ​

Some of the locations where we want to deliver the product are supplied by pipeline so we need to factor that in also.

By the time we get to June 15 everything is in place. The hedges are set in the futures market and all of the physical capabilities that we'll need to manage these barrels are good to go. On June 18, the telephone rings-and it's one of those calls you hope you never receive: not only is the cargo late, they don't know when it will arrive. From here it's important to get as much information as possible from the counterparty. International officials believed the cargo to be carrying illegal drugs along with the gasoline, and there's no time table as to when the cargo may be made available.

From that moment forward, all contingency plans are activated. It is a must to always know what to do in the physical oil business if something goes wrong. The first thing was to get more barrels off the pipeline and into the facilities where the cargo and barges were going to make delivery. The amount of ethanol off rail cars will have to be adjusted as the pipeline volume will be less than the cargo volume. Inspectors have to be cancelled, along with barges, and the storage operators no longer need personnel to offload the gasoline over the dock. At least not on the dates we originally planned.

Now a decision needs to be made about the hedge. We have a long July short October position we have to manage. The one fact that we do know is that the gasoline isn't coming in June so we roll that long from July into August.

Thankfully, the cargo was vetted by officials and there were no drugs on board. The barrels came fifteen days later and we had to do the whole thing all over again.

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