Crude Oil Futures Trading Basics

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Contents

The Ultimate Guide To Starting A Crude Oil Brokerage Business (Crude Oil Selling) In Nigeria And Africa

How To Start A Crude Oil Brokerage Business In Nigeria And Africa

The global demand for crude oil has only continued to climb over the years. From the 1800s till now, this commodity has been the major source of income for many nations, oil & gas organizations, and even crude oil brokers.

In Nigeria, it is the holy grail of the country’s economy. A shift in its global price sends the nation nose-diving into a recession. But despite this, the country has a crude oil production capacity of about 2.5 million barrels a day, leaving Nigeria as Africa’s largest producer of crude oil and the sixth largest producer in the world.

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The implication of these figures show that Nigeria’s excessive crude oil deposit and extraction activities have created a major business opportunity for people who intend to venture into the crude oil brokerage business in the country.

By far, crude oil brokerage is one of the most profitable oil and gas segments for entrepreneurs who have no money to venture into the trade. Since it involves arranging a transaction for a commission of about $1 per barrel, it makes it an excessively lucrative venture for crude oil brokers who land major crude oil supply contracts.

First, What Is Crude Oil Production About?

According to the oecd.org, “Crude oil production is defined as the quantities of oil extracted from the ground after the removal of inert matter or impurities.”

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This mineral oil is usually between yellow to black in colour, contains a mixture of hydrocarbons, and has a variable density and viscosity.

So What Is Crude Oil Brokerage About?

Crude oil brokerage is the arrangement of a transaction between a crude oil buyer and a crude oil seller for a commission when the deal is executed. A crude oil broker who acts as a seller or buyer becomes a principal party to the crude oil transaction.

Here, the broker initiates the deal between a crude oil buyer, which is mostly an oil trader or refinery, and the crude oil seller, which in this case, is the company buying from the Nigerian National Petroleum Corporation (NNPC) to resell to the international buyer, or the oil regulatory body of the country you reside in.

Facts Of Crude Oil Brokerage

  • You’re only brokering a transaction between a crude oil buyer (oil trader or refinery) and a crude oil seller (the company getting crude oil from the NNPC).
  • The buyer would be asked to show proof of finance before shipment is made.
  • The crude oil broker is paid about $1 per barrel sold by the crude oil seller.
  • You can venture into crude oil brokerage by partnering with a person who has an allocation from the government or that buys on OFF-OPEC basis.
  • As a crude oil broker, you can venture into this business with $0.
  • Nigeria produces one of the most demanded crude oil in the world: Bonny Light Crude Oil (BLCO).
  • Some other crude oil products in Nigeria include Qua Ibo, Escravos blend, Brass River, Forcados, Pennington Anfan, and over 15 more light crude oils.
  • Crude oil is measured in barrels.

Business Opportunities In Crude Oil Brokerage

Before venturing into the crude oil brokerage business in Nigeria or Africa, there are some terminologies you must know, which also defines the various opportunities within the petroleum sector with respect to crude oil trading. These includes:

1). Free On Board (F.O.B):

In this situation, the crude oil seller will load the vessel with the petroleum products and cover the cost of clearance, while the crude oil buyer will cover the cost of transportation after making payment. This is the model the Nigeria National Petroleum Corporation (NNPC) uses to handle crude oil sales from everyone.

2). Tanker Take Over (T.T.O):

In this situation, the crude oil buyer takes over the hiring of the vessel and all the products onboard.

3). Tanker to Tanker Transshipment (T.T.T):

In this situation, the crude oil buyer will hire their own vessel, then use it to tranship the products from the crude oil seller’s vessel.

Setting Up Your Crude Oil Brokerage Business

Step 1: Register A Company

Before you venture into the crude oil brokerage business, you should first register a company. By doing this, you form a legal structure that separates your personal liabilities from your business’s.

Step 2: Identify A Firm With Crude Oil Allocation Or That Purchases On PLR Basis

After registration, partner up as a broker with a company who already has a crude oil allocation from the NNPC. Having a crude oil allocation means you have a fixed allocation issued to you for a fixed amount of time. This could mean having 20 million barrels of crude oil allocated to a business for a period of one year.

The largest problem the industry faces is most allottees don’t have the funds to even fulfil their allocations, and as a result, are always welcoming crude oil brokers who are ready to trade through their allocations for a commission.

Another way is to broker for companies who sell on OFF-OPEC basis. Those who legitimately do this purchase the crude oil on Provisional Lifting Rights procedures, at a discount, and ship to the crude oil buyer at a discount.

Step 3: Find A Crude Oil Buyer

After forming a partnership with a crude oil seller, the next step is to find a crude oil buyer. Organizations who buy crude oil products are oil traders and refineries, and as a result, are constantly on the lookout for companies that can meet up to their supply needs.

You can reach out to them via their company’s phone numbers, emails, LinkedIn, or even via recommendations.

Now you’d need to ensure they send a Letter of Intent based on what has been realistically agreed, and it should be addressed to the crude oil seller through your company. After which the crude oil seller could either send a Corporate Offer or send the final contract.

Step 5: Crude Oil Seller Ships The Oil To The Crude Oil Buyer

Now the crude oil seller would purchase the crude oil from the NNPC on FOB terms and ship the oil to the crude oil buyer anywhere they are in the world.

Step 6: You Are Paid About $1 Commission Per Barrel Sold

After shipment is complete and the crude oil seller has received payment, depending on your agreement with the crude oil seller, you could earn up to $1 per barrel, which the company would then credit your company’s bank account. If your banking coordinates were listed in the contract, the crude oil buyer would also pay your commissions directly.

The interesting part of the crude oil brokerage business is most supplies are always in millions of barrels. So if your transaction covered 1 million barrels of crude oil, for instance, the crude oil buyer would pay about $1 million Dollars in commissions, since commission could be around $1 per barrel. Since there’s usually a total commission of about $4 to be paid in every transaction, if you’re not in a long list of brokers, you could earn up to $1 per barrel, making it a full $1 million Dollars.

If you’re lucky enough, you could get a much larger contract that covers a monthly supply to the crude oil buyer for a period of time, possibly running into years.

The high returns from this venture make it one of the most profitable oil and gas business opportunities in the world because as a crude oil broker, you only require $0 to run your operations.

Challenges Of The Crude Oil Brokerage Business

1). It’s difficult to find real OFF-OPEC crude oil sellers that will agree to reasonable transaction procedures.

2). Your time could be wasted as a result of long-term conversations with refineries who have no real money to pay.

3). Getting a real crude oil buyer to show a Proof of Finance (POF) can be difficult because most of them can’t secure the credit facility they need to enable them to purchase crude oil

4). The large pool of fraudsters and illiterates posing as crude oil brokers makes it difficult for crude oil buyers to trust you.

5). You could easily get circumvented by the crude oil seller and crude oil buyer.

Conclusion

The crude oil brokerage business is an oil and gas business where success is heavily based on having a wide network, carrying out smart marketing, and being trustworthy & knowledgeable through the entire process. By building a strong reputation and always delivering on your promises to your clients, you’d succeed a whole lot easier.

What are your thoughts on this complete guide on how to start a crude oil brokerage business in Nigeria? Let me know by leaving a comment below.

This article has been updated for better clarity of content

An Important Point

Trying to buy crude oil from Nigeria through genuine sellers can lead to a lot of wasted time and efforts on the part of the crude oil buyers. They spend a lot of time vetting crude oil sellers in Nigeria, doubting their results even if positive, and going back and forth too many times than they can count, only to end up either cancelling their decision to buy or making a purchase after months or years have passed.

Since finding genuine crude oil sellers in Nigeria is a problem, it is always wise for a crude oil buyer to use a Nigerian organisation as its representative, so they can be on the ground and help the crude oil buyer make better calculative decisions.

To make this possible for crude oil buyers, Startup Tips Daily Media, through her sister company, Globexia, can help genuine crude oil buyers facilitate crude oil purchases from Nigeria.

Whatever position that helps crude oil buyers in Nigeria to close genuine crude oil transactions fast, transparently, and easier, we can make the process as stress-free as possible.

If you’re a genuine crude oil buyer, crude oil buyer mandate, crude oil seller, or crude oil seller mandate, you can reach out to us through the contact form below. If you’d like us instead to represent your interests as your crude oil seller mandate or crude oil buyer mandate, we’d be glad to do so.

We also offer a thorough in-depth due diligence service on exporters in Nigeria.

In addition to our crude oil facilitation business in Nigeria, we’re also AGO sellers in Nigeria (diesel suppliers in Lagos), and can supply AGO to tank farms, private or government organizations in Nigeria, or to countries like Cameroon, Ghana, and more, in the West African coast, while remaining willing to also represent your interests as your AGO buyer mandate or AGO seller mandate.

If you’re only a scam, don’t waste your time, as the conversation wouldn’t last too long after a few questions and demands to prove your authenticity have been made from our end.

Professional Due Diligence Checks In Nigeria By Globexia

International buyers are always wary of doing business with Nigerian based businesses because of the high risk of disappointments either in the form of time wasted or money lost, and as such, are highly sensitive of any organisation that presents them a trade offer.

To curb this problem and help international buyers make comfortable and confident trade decisions, Startup Tips Daily, through her sister company, Globexia, has set up an in-depth due diligence check consulting service that will help international buyers get in-depth information on any organisation looking to do business with them. Some of the information the international buyers stand to gain from the in-depth due diligence exercise that will be carried out by Globexia’s team of experienced lawyers in Nigeria are:

  • Verification of Company Registration
  • Verification of Export Licence
  • Verification of Export Activity
  • Verification of Past Certificates of Origin
  • Verification of Past & Present Bill of Ladings
  • Verification of International Passport / Driver’s Licence of The Exporter
  • Verification of Bank Verification Number (BVN)
  • Verification of Tax Documents
  • Verification of Financial Health of The Company
  • Verification of Mining Licence
  • Physical Verification of Office Address With Pictures & Videos
  • Physical Verification of Mining Site With Pictures & Videos
  • Full List of Registered Company Directors

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If you simply want general commodity trade consulting in Nigeria spanning through Due diligence & proper verifications of both parties, understanding the entire Nigerian commodity trading industry, identifying and completing all due trade registrations, clearing & forwarding of the commodities, market research/feasibility study reports, and much more, Globexia Limited is the right partner to talk to.

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What Are Crude Oil Futures and How Do They Work?

Some investors bet on oil prices by buying energy company stocks, but you can also buy the delivery rights to barrels of WTI or Brent crude. Here’s a basic guide on how this key commodity market operates.

Energy prices are important for everyone, and the plunge in crude oil prices in 2020 showed just how important changes in the values of key commodities can be for consumers and investors alike. But for investors, there’s more to consider than the price of oil today. Crude oil futures offer you an opportunity to profit from fluctuations in the price of a barrel of WTI or Brent crude, but they work a lot differently from just buying oil and gas company stocks. Below, you’ll learn the basics of crude oil futures, and the impact that they can have on your portfolio.

Image source: Getty Images.

Crude oil futures defined

Crude oil futures are futures contracts in which buyers and sellers of oil coordinate and agree to deliver specific amounts of physical crude oil on a given date in the future. The benchmark futures contract for crude oil in the U.S. involves West Texas Intermediate, a particular grade of oil that has fairly low density and sulfur content that makes it relatively easy to refine. It has historically traded on the New York Mercantile Exchange, and therefore many traders refer to the contracts as NYMEX WTI crude oil futures. Trading is also common globally for what are called Brent crude oil futures, which involve a different grade of oil found in the North Sea off the European continent.

The specifications for crude oil futures contracts are set in a way that allow market participants to trade them uniformly. Each contract covers 1,000 barrels, and dates for delivery are available up to nine years into the future. At some point during the delivery month, the seller must deliver the oil to the buyer at a pipeline or storage facility in the energy hub of Cushing, Oklahoma, with official transfer of title accompanying the actual physical movement of oil.

How to invest using crude oil futures

As you can see, the primary purpose of crude oil futures is to connect producers of oil with consumers of oil. Oil producers can sell futures contracts that match up to their expected future production, and by doing so, they can effectively lock in current prices. Although futures contract prices change every day, a seller receives financial credit when futures prices go down, offsetting the drop in oil’s market price. For instance, if a contract falls from $50 per barrel to $49, then the seller will get a $1,000 credit, corresponding to the $1 decline multiplied by the 1,000 barrels covered by the contract. Conversely, if the contract rises from $50 to $51, the seller takes a $1,000 loss, offsetting the eventual gain the seller will get in future by having a higher price.

Buyers who need crude oil as a raw material, on the other hand, such as refinery companies, can ensure they have adequate future supplies and lock in favorable pricing. For buyers, the finances of futures work in the opposite direction. Rising prices give them a financial credit, while falling prices cost them. The net effect, though, is to set the price actually paid for the oil at the level at which the buyer entered into the futures contract in the first place.

Image source: Getty Images.

Crude oil futures and speculation

Investors generally aren’t interested in taking possession of thousands of barrels of crude oil. Many traders participate in futures markets without ever dealing with actual physical delivery. As long as you close out your futures position before the expiration date of the contract, then you can experience the same financial gains and losses as other participants from the daily movements of futures prices.

In order to trade futures, however, you have to set up a margin account with a broker that handles futures trading. In order to cover potential losses, you also have to maintain a certain amount of equity in the account. For NYMEX crude oil futures, the current margin maintenance requirements range from $2,900 to $3,400 depending on the date of the contract. If losses push the available capital in your margin account below that level, then you’ll have to deposit more money in order to keep your futures position.

Even if you never trade in futures yourself, keep in mind that any energy companies in which you invest likely use futures for their own account. Therefore, understanding how crude oil futures work can give you a lot of insight into how companies’ share prices should react to changing oil prices. For instance, a producer that has already sold futures on most of its future production shouldn’t react much when oil prices change. Those that don’t participate in the futures markets, however, are largely unhedged and can see a lot of volatility when oil prices move sharply.

Crude oil futures are an integral part of how the energy industry operates. The futures markets can be a risky place for individual investors, but energy companies that use futures well can often boost their profits or avoid losses that their peers end up suffering.

How oil speculators may be driving up prices

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WASHINGTON — Almost all the economists who are studying today’s high oil prices think that financial speculators are helping to drive up those prices, but hard data are lacking as to whether they’re a major factor, and if so, how big a factor.

Michael Greenberger thinks that speculation is a major factor, and he knows a lot about the complex global oil market. He directed the division of trading and markets for the Commodity Futures Trading Commission from 1997 to 1999. That body regulates the trading of contracts for future deliveries of commodities, including crude oil, called futures, which drive oil prices. Now a law professor at the University of Maryland, Greenberger told McClatchy why he thinks that financial speculation is driving up oil prices.

Question: How do speculators drive up oil prices?

Answer: Speculators are able to drive up crude oil prices today because they’re allowed to trade in the U.S. in futures markets not overseen by U.S. regulators. Therefore, they are free to dominate these markets by taking huge positions within them to dominate them. And there is an additional fear that, because of a lack of oversight, they may be engaging in manipulative practices — i.e. wash sales and false reporting that would be barred in a regulated environment.

Question: What is a “wash sale” and how does it work?

Answer: That’s a prearranged trade between two or more parties in which there is no economic risk and the sole purpose of which is to give the appearance that the price of a commodity is going higher or lower in a way that does not reflect supply-and-demand fundamentals.

Question:Who are these speculators? Do they have names and addresses?

Answer: I really cannot answer that with certainty, because these unregulated markets are so opaque. Many say that Goldman Sachs & Co. and Morgan Stanley are primary traders on the principal market outside of direct U.S. supervision, the Intercontinental Exchange, otherwise known as ICE.

The whole point here is that we need transparency through a thorough investigation to determine precisely what is happening on the Intercontinental Exchange, including who key traders are and the positions they are taking in these markets. That transparency is provided regularly for those exchanges regulated directly by the CFTC.

Question:How much of today’s record oil price is attributable to speculation?

Answer: There are many estimates being made by observers of these markets, economists and industrial energy consumers suggesting that the price of a barrel of crude oil could be anywhere from 25 percent to 100 percent in excess of what supply-demand market fundamentals would dictate. For example, OPEC has recently said that a barrel of crude should not be in excess of $70, and it has opened its own investigation into excessive speculation in these markets to find out what interests are causing the price to be almost double that.

Question:What about supply and demand fundamentals? Aren’t they behind oil’s rising price to some degree?

Answer: There can be no doubt that there is a supply-and-demand problem at work here. But many believe, including me, that there’s a speculative premium that goes beyond what supply and demand factors dictate. And that’s what could be drained with aggressive United States regulation.

Question:Can the Commodity Futures Trading Commission do something, and if so why hasn’t it?

Answer: Thirty percent of the U.S. futures trading in United States-delivered West Texas Intermediate crude oil contracts is conducted by the Intercontinental Exchange. Despite the fact that that exchange is owned by an Atlanta-based corporation with trade-matching engines in Chicago, the CFTC insists that it (ICE) should be regulated by the United Kingdom. It takes this position because of the historical fact that the Intercontinental Exchange in 2001 bought a British petroleum exchange (the International Petroleum Exchange.)

The CFTC has the power to terminate its deference to British regulation of that Atlanta-based institution trading in the U.S. and controlling 30 percent of the major U.S. crude-oil contracts. They have authority to do so immediately and to bring ICE under full United States regulatory oversight.

(The CFTC announced Tuesday that it will condition ICE’s access to U.S. contracts on its adoption of the same contract size limitations and accountability measures as apply within the United States. This is only a partial step toward the stiffer regulation that Greenberger calls for; it leaves overall regulation of the ICE under British oversight, which is less rigorous than U.S. regulation.)

Question:How does the absence of effective regulation of commodity trading compare to the stock-market excesses of the 1920s?

Answer: To the extent that the Intercontinental Exchange operates outside of U.S. limits and controls on speculation, there is very substantial evidence suggesting that United States futures trading on that exchange is akin to the unregulated trading in U.S. stocks in the 1920s. That comparison is aided by the fact that huge positions in these markets can be obtained by speculators with less than 10 percent margin.

(Margin is a requirement that a buyer of a security or commodity put down a certain percentage of the price of the transaction when executing a trade. A low margin requirement invites speculation, since an investor puts less of his own money at stake.

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