Oil Traders Adapt to New Normal of Thinner Margins

摘要

Profits are shrinking for international oil traders now that they can no longer take advantage of the steep contango - the discount of spot prices to later deliveries - that inflated profits in recent years. The sea-change in market dynamics is forcing jet fuel traders to switch from playing the time arbitrage to trying to work the geographic arbitrage, which is not for the faint of heart since it requires more market knowledge and skill. Jet fuel's universal specification has long made it the best candidate for global trading. Aviation fuel already travels longer distances than other clean products and is transported in larger ships as traders try to eke out maximum arbitrage profits. The global jet market is also much more fluid than other product markets. Mideast cargoes can switch between East and West and barrels from South Korea between the US and Europe. Contrast that with fairly rigid arbitrages in other products such as European gasoline to the US and US diesel to Europe - where the window is either open or closed so that storage tanks end up acting as a buffer. A clear example is Rotterdam-Singapore fuel oil trade. It has nowhere else to go so when the arbitrage closes, Rotterdam tanks fill up and weigh on prices until the export window opens up again. Big differences in product specifications also complicate matters when it comes to diesel and gasoline markets. Russia, for example, is investing to make EU-spec diesel that it would struggle to sell anywhere else, and is also upgrading its plants to product Jet A-1 aviation fuel.