About Bunker oil trading
Bunker oil is generally any type of fuel oil used aboard ships. We can distinguish between two main types: distillate fuels and residual fuels.
Marine fuels are classified using the “Bunker ABC”:
Bunker A corresponds to the distillate fuel oil No. 2
Bunker B is a No. 4 or No. 5 fuel oil
Bunker C corresponds to the residual fuel oil No. 6
No. 6 is the most common oil, that's why "bunker fuel" is often used as a synonym for the No. 6 residual fuel oil which requires heating before the oil can be pumped. No. 5 fuel oil is also called “navy special”. No. 5 or No. 6 also furnace fuel oil (FFO).
In the maritime field another classification is used:
MGO (Marine Gas Oil): a distillate fuel oil (No. 2, Bunker A)
MDO (Marine Diesel Oil): a blend of MGO and HFO
IFO (Intermediate Fuel Oil): a blend of MGO and HFO, with less gasoil than MDO
MFO (Medium Fuel Oil): a blend of MGO and HFO, with less gasoil than IFO
HFO (Heavy Fuel Oil): a residual fuel oil (No. 6, Bunker C)
Marine fuels are traditionally classified according to their kinematic viscosity. This is a valid criterion for oil quality as long as the oil is produced by atmospheric distillation only. Today, almost all marine fuels are based on fractions from more advanced refinery processes and the viscosity itself says little about the oil's quality as fuel. Despite this, marine fuels are still quoted on the international bunker markets with their maximum viscosity set by ISO 8217 as marine engines are designed to use different viscosities of fuel. The density is also an important parameter for fuel oils since marine fuels are purified before use to remove water and dirt. Therefore, the oil must have a density which is sufficiently different from water.
The term “trading” simply means “exchanging one item for another”. We usually understand this to be the exchanging of goods for money or in other words, simply buying something.
When we talk about trading in the financial markets, it is the same principle. Think about someone who trades shares. What they are actually doing is buying shares (or a small part) of a company. If the value of those shares increases, then they make money by selling them again at a higher price. This is trading. You buy something for one price and sell it again for another — hopefully at a higher price, thus making a profit and vice versa.
Increase in demand means an increase in price
We can explain this using a simple everyday example of buying food. Let’s say you are in a market and there are only ten apples left on a stall. This is the only place where you can buy apples. If you are the only person and you only want a couple of apples, then the market stall owner will most likely sell them to you at a reasonable price.
Now let's say that fifteen people enter the market and they all want apples. To make sure that they will actually get them before the others do, they are willing to pay more for them. Hence, the market stall owner can put the price up, because he knows that there is more demand for the apples than supply of them.
Once the apples reach a price at which the customers think they are too expensive, they will then stop buying them. When the market stall owner realises that he is not selling his apples anymore because they are too expensive, he will stop raising the price and it may come back down to a level, at which customers will start to buy the apples again.
Increase in supply means a decrease in price
Let’s say that suddenly another market stall owner comes into the market and has even more apples to sell. The supply of apples has now increased dramatically. It stands to reason that the second market stall owner may want to sell apples at a cheaper price than the first stall owner to entice customers. It also stands to reason that the customers would probably want to buy at the lower price.
Seeing this, the first stall owner will most likely bring his prices down. The sudden increase in supply has therefore brought the price of the apples down.
The price at which demand matches supply is called the “market price”, i.e. the price level at which both the market stall owner and the customers agree on both a price and number of apples sold.
What is online trading ?
For a long time financial trading was purely conducted electronically between banks and financial institutions. This meant that trading in the financial markets was closed to anyone outside of these institutions. With the development of high speed Internet, anyone who wanted to become involved in trading was able to do so online.
Almost anything can be traded online: stocks, currencies, commodities, physical goods and a whole host of other things – at this stage, you do not need to worry about all of these. For now, just keep in mind that if something can be traded, it will be traded. Out of all of these markets, the forex market is the largest. Almost $4 trillion worth of currency is traded every single day – this is bigger than any stock exchange anywhere in the world.
Trade is a basic economic concept involving the buying and selling of goods and services, with compensation paid by a buyer to a seller, or the exchange of goods or services between parties. The most common medium of exchange for these transactions is money, but trade may also be executed with the exchange of goods or services between both parties, referred to as a barter, or payment with virtual currency, the most popular of which is bitcoin. In financial markets, trading refers to the buying and selling of securities, such as the purchase of stock on the floor of the New York Stock Exchange (NYSE).
BREAKING DOWN 'Trade'
Trade refers to transactions ranging in complexity from the exchange of baseball cards between collectors to multinational policies setting protocols for imports and exports between countries. Regardless of the complexity of the transaction, trading is facilitated through three primary types of exchanges. Trades are executed with the payment of sovereign currency, the exchange of goods and services, or payment with a virtual currency.
Currency as a Medium of Exchange
Money, which also functions as a unit of account and a store of value, is the most common medium of exchange, providing a variety of methods for fund transfers between buyers and sellers, including cash, ACH transfers, credit cards and wired funds. Money’s attribute as a store of value also provides assurance that funds received by sellers as payment for goods or services can be used to make purchases of equivalent value in the future.
As the newest medium of exchange, virtual currencies do not expose holders to foreign exchange risks, provide anonymity between trading partners if desired and avoid the often-significant processing fee for credit cards. The most popular virtual currency is bitcoin, which was introduced in 2009. Bitcoins are held in virtual wallets and can be used with a growing number of merchants, including WordPress.com and Overstock.com. The virtual currency is also popular with small businesses, due in part to the lack of processing fees.
As a bunker trader you are dealing in bunker (ship) fuel. Your tasks include locating clients, primarily shipowners, negotiating and closing your deals. You are also in charge of consulting clients on the different fuels and where in the world they are available.
In the case of crude oil, the main futures exchanges are the New York Mercantile Exchange (NYMEX) and the Intercontinental Exchange (ICE) where West Texas Intermediate (WTI) and North Sea Brent crude oil are traded respectively.
Bunker futures are financial contracts, almost like an insurance that allow ship owners, charterers, suppliers and traders a means of protecting themselves against the inherent volatility in the bunker market.
They are a cash-settled contract with no physical delivery, where both the buyer and seller agree on a price, which is settled against a neutral index.
As bunkers are tied so directly to volatile crude oil prices, price risk management has become a crucial issue in recent years.
Using Fuel Oil Single Swaps (FOSS) can help owners to cheaply and simply fix the price of future bunker fuel purchases.
FOSS can also be used by a wider range of market stakeholders, including charterers, traders, physical suppliers and financial institutions.
Following are the Bunkers Market Indices
The Benefits Of Bunkers Or Fuel Oil Hedging are:
Stabilize cash flows and secure margins by protecting from price volatility
Reduce the risk of financial distress and non-performance
Secure competitive edge by stabilizing prices along the supply chain, thus giving the company control over its pricing structure
No upfront premium
Improve the profile of the company towards its trading partners by assuring tight control over bunker risks.
Purchases and sales of oil in the marine industry are, roughly speaking, to a large extent driven by a microeconomical, basic human behaviour of profit maximization. As oftentimes seen, some oil traders have a preference for fuel quantity tampering, however usually only to an extent where the trader remains “accepted as a part of the group” and thus continuously enabled to do business with his counterparts.
Obviously, when it comes to trading of oil between two professional companies, there will be a set of contractual rules and official standards regulating the price of the oil being traded. There are large sums at stake every time a deal is made, and a number of different stakeholders are seeking to make a profit on the deal. Since the oil trading industry is a system where everyone knows the cost price of the oil being traded, the rules of supply and demand can contribute to explaining the trading pattern. This means that the sales price ends up being equal to the cost price because no one wants to suffer a loss. Hence, if someone pursues profit in this system, few options are left – one being fraudulently exploiting the amount of oil being traded. It is not unusual for a bunker to be traded up to five times before reaching its end-buyer who then actually takes it into use.
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