The complex world of commodities
Commodity traders buy various resources, such as petroleum, gold, or even maize.
Astron Energy’s Trading Manager Atang Loate and his team of commodity traders specialise in the trading of petroleum products. Their primary responsibilities include sourcing refined products such as diesel and petrol, as well as supplying crude oil to the company’s refinery for the production of petrol, diesel, and other fuels.
“The refinery comes to us with various requirements, and that’s where I start my day. In manufacturing fuel, they require crude, which we will source in the market. One of my objectives is to make sure that as an organisation, we are able to meet our customer’s supply requirements,” explains Loate.
The commodity traders source around two million barrels of crude oil on average per month. This may increase if the futures market structure finances the cost of carry.
Another critical function of the team is to source fuel, such as diesel, petrol, or jet fuel.
But it’s not as simple as making a phone call to a supplier – there is a myriad of risk and logistics Loate and his team need to navigate.
Crude oil is sourced from both the Middle East and West Africa and is purchased against a moving price benchmark called Dated Brent. This creates a challenge for his team of commodity traders: They need to buy crude oil at the best price possible but are open to the risk that the price may change between the date of the deal and pricing period.
A risky business
Managing risk is a big part of a commodity trader’s work
The financial and logistical risk associated with sourcing refined products is no less than crude oil, Loate explains, and the process can at times be even more complex. Each refined product needs to meet prescribed industry standards.
For example, importing jet fuel requires a rigorous testing process to ensure it meets key specifications. This testing process ensures, among others, that the fuel can withstand the temperature drop to -10/20 degrees when the plane is at around 37 000 feet above sea level.
“Each product – be it gas oil, gasoline, low-sulphur fuel and so on – will have its silent features which we need to ensure meet the industry requirements while we navigated the logistics of a trade,” says Loate.
Aside from the fluctuating prices, the team has to negotiate the logistics around transporting refined products and crude oil. Shipping from the Middle East, for instance, could take three weeks. And when the responsibility of supplying the fuel numerous industries rely on, there’s no room for miscalculating how long stock will take to arrive or signing on a contractor who doesn’t deliver.
And there’s no margin for error in calculating pricing either. One shipment consists of millions of barrels of refined product or crude oil and could be valued at over half a billion rand, making even a one-cent miscalculation on each barrel a very costly mistake.
Learn more about the fundamental drivers behind the fuel price.
Should Astron Energy be unable to supply fuel, it could trigger shortages in the market. This could see trucks unable to transport goods to consumers, leaving shortages on shop shelves; as well as a halt in economic activities such as mining and construction.
“If we don’t have fuel, it has a far-reaching ripple effect. For instance, just one day in which Astron Energy is unable to supply fuel could see filling stations run out. If filling stations run out, cars and trucks are unable to operate,” Loate says.
Not only does a commodity trader’s work come with the pressure of juggling international logistics, but he or she also carries the pressure of filling an integral role in society.
“I take pride in my work. As a commodity trader, I like creating value. My work makes me feel like I’m making my mark because I’m facilitating the economic activity that has the potential to transform our country,” Loate concludes.
