How Not to Sell Crude Oil

What do you do when the world is awash with oil, your biggest customer has suddenly become almost self-sufficient and your nearest competitor is producing a more suitable quality of oil for your remaining market? You ban 113 crude tankers from entering your territorial waters with immediate effect, of course- simples!

This is the curious action taken by the Nigerian National Petroleum Corporation (NNPC) in a letter of 15th July to all Nigerian loading terminal operators. The letter and list of banned tankers, which circulated quickly on the internet and which is reproduced below, claims to have been prompted by a directive from President Muhammadu Buhari. It does not detail the reason for the ban, fuelling speculation that it is an attempt to tighten the country’s grip on its oil trade and to reconcile the quantities claimed on bills of lading with quantities eventually reported as discharged at the ultimate destination.

A bold move from NNPC at a time when it is struggling to find new markets for its light, sweet oil, which used to find an outlet in the US Gulf Coast, but which has been largely displaced by US shale oil. This shale oil blends better with heavier, cheaper Angolan oil than with Nigerian light, sweet oil, robbing Nigeria of even the crumbs from the US table of imported oil. Nigerian Bonny Light, which was priced at a healthy average $2.25/bbl over Angolan Girassol in 2013, has languished $0.20/bbl below Girassol so far this year.

Source: OPEC

The news landed like a depth charge into the economics of voyage charters and arbitrage deals. As buyers of Nigerian crude in Europe and the Far East, especially India, scrambled to re-arrange their shipping programmes the market remained mystified as the why the particular vessels named have been singled out. Traders are questioning if the list is a complete one or if there are likely to be any additions to the roll call of banned tankers.

Way to sell oil, Nigeria!

Please click on appendices to enlarge.

Appendix 1

Appendix 2

Appendix 3

More with a Whimper than a Bang!

A few last minute regulatory hitches further delayed the end of open outcry trading in Chicago and New York, but if all went according to plan, the delayed closure of the CME NYMEX pits happened on 6^th July 2015.

For any young traders reading this, “open outcry” trading was where the traders and brokers gather in a pit dedicated to a particular commodity and yelled bids and offers at each other to complete their deals. There were hand signals to represent buying or selling and for identifying the contract type, delivery month, quantity and price etc. This was because when the market was busy the noise in the pit was deafening and it was impossible to distinguish who wanted to trade what just by listening.

You will find an interesting documentary on the History Channel called “Trading Places” told by Dan Ackroyd and Eddie Murphy and showing how open outcry worked in practice. It purported to take place in an orange juice futures pit, but in reality it was filmed in the WTI pit of the New York Mercantile Exchange, then in the twin towers, with real day traders and brokers, dressed in their distinctively coloured jackets hamming it up for the cameras. If I tell you the Rafferty jacket was emerald green with big white shamrocks, you get the idea.

Apart from a natural flamboyance, the jackets served a purpose- in a fast moving pit you had to be absolutely sure of which company the guy into whose face you yelled “dealt!” at the top of your lungs, worked for. You then scribbled down the details on a deal ticket. You threw the ticket at, or shoved it into the hand of, a sweaty junior whose job it was to scuttle it over to another set of guys typing the deal into a highly sophisticated (not!) computer system for transmission to the waiting world. This maintained the illusion that the poor schmos sitting in offices around the world understood what was happening in the market before phoning their broker to get them to leap (literally) into the melee and grab them a slice of the action.

And action there certainly was, at times bordering on hysteria. I recall the day when the Saudi oil minister, Sheikh Yamani, resigned. The market went limit up then limit down in the space of about 10 minutes before settling back to where it started and wondering what just happened. Sitting in an office in Singapore or London and screaming at their broker to explain the apparently random numbers appearing on the Telerate or Reuters screen, companies sweated in fear that the floor had heard something they hadn’t and they should get in there and deal before it was too late.

Sometimes there was inside information behind a quantum jump in prices, but as often as not someone was spoofing the market and relying on mob rule to push prices one way or the other. The same piece of information could be taken as wildly bearish or wildly bullish depending on the mood in the pit and who was long or short when the news hit. Any fool that leapt on the bandwagon took what was coming to them and would be scorned if they even thought of complaining to a regulator.

In 1986 I was privileged to be allowed to visit the Nymex WTI pit as a new trading manager and guest of my then broker, the late and not very lamented, Drexel Burnham and Lambert. It was the era of Dallas and Dynasty. [These were weekly televised training courses for oil traders.] As a young Scottish hick in the big apple I teetered into the pit on my spiky heels, like Bambi on ice, with my obligatory fashion accessory, the big shoulder pads, and the hair in a Farrah Fawcett “flick”. Half an hour later I re-emerged with my shoulder pads facing north and south instead of east and west and my Farrah Fawcett hairdo totally flicked. Think rugby scrum, or football huddle, and you get the picture.

After that experience I only dealt through tall brokers with loud voices and sharp elbows who could fight their way through the stramash in the pit to get the best price for me.

These were the good old, bad old days before the introduction of palm pilots in the pit put the open outcry traders on the relentless path towards today’s clinical electronic trading.

Don’t get me wrong. Electronic trading is much faster, fairer and more efficient. But allow an old war horse a moment’s nostalgia for the anarchy of open outcry.

Calling Oil Lawyers- There is Something Fishy about Bills of Lading!

At last! An answer of sorts to a question that has been bothering me for more than thirty years: where does title to a cargo of oil pass from seller to buyer on a CIF or CFR deal? Don’t nod off yet before you have read a very welcome article in today’s Shipping Oil News entitled “Bills of lading – who is the owner of the cargo?”, written by the law firm Ince & Co. http://www.hellenicshippingnews.com/bills-of-lading-who-is-the-owner-of-the-cargo/

This reported on the outcome of a case where a cargo of frozen swordfish was traded several times down a chain of supply in which the contracts were not back to back. Half way down the chain there was a contractual right to reject the cargo if the fish were off. That right, I understand, was not passed on to the receiver at the end of the chain who was in receipt of a properly endorsed bill of lading in its favour. The cargo was rejected half way up the chain and suit was brought by the end-receiver who had paid for a load of dodgy fish because it reckoned that, being in possession of a B/L endorsed in its favour, it was the title holder of the cargo and the only party with a legitimate right to bring suit.

The court’s decision makes my non-legal head ache. But as I understand it the court said that the end receiver was the legitimate owner of the fish the minute it had its hands on the B/Ls. Irrespective of what else happened further up the chain of supply the end receiver had a legitimate claim against the carrier in whose custody the fish went off.

The Relevance to Oil Trading

Where title in oil passes from seller to buyer in oil contracts has been open to question throughout my disturbingly lengthy career in the oil industry. Despite this there are many training course providers who still insist that, in the case of a tanker of oil, risk and title in a cargo passes from the seller to the buyer at the load port in an FOB sale and at the discharge port in the case of a CFR (cost of freight), CIF (cost of insurance and freight) or DES (delivered ex-ship) sale. Wrong! This confuses the transfer of custody with the transfer of title.

In the case of an FOB (free on board) sale risk and title to oil pass at the load port and the buyer charters the tanker. In the case of a CFR, CIF or DES sale the seller charters the tanker and passes over custody of the oil to the buyer at the discharge port. But the discharge port is not necessarily where title passes, except in the case of a DES sale. Terms such as FOB, CFR, CIF and DES are defined by the international chamber of commerce in its “INCO” terms. But INCO is silent on the passage of title.

For example, most contracts agree that in the case of an FOB sale the quantity paid for by the buyer is the bill of lading quantity at the load port. This is suggestive, but not conclusive, of the fact that traders believe that the load port is where title passes. Similarly most contracts agree that in the case of a DES sale the quantity paid for by the buyer is the out-turn quantity at the discharge port. But when it comes to CFR and CIF sales there is quite a divergence: some buyers pay for the B/L quantity and some for the out-turn quantity. You have to make sure the contract spells out what the invoice quantity will be in a CFR or CIF deal.

According to INCE: “The Court pointed out that, under a CFR contract, the question of when property passes is one of “actual intention”. However, the Court also noted that, whilst transfer of a bill of lading is prima facie evidence of intention to pass property, it is not determinative.” At last a court has agreed that this whole issue is open to interpretation and you have to be extremely careful that your contract spells out where title passes and consequently what quantity you should pay for, because industry custom and practice is schizophrenic on this point.

I don’t know what the correct answer is objectively, but I am very careful to find out how my clients’ counterparties regard this issue and to ensure that there is no room for doubt left in the contract.

Suggested Action

Like the contract for suspect swordfish referred to above, cargoes of crude oil and refined products frequently pass down a chain of contracts, which may turn out not to be back-to-back. My suggestion would be that possession of the full set of B/Ls endorsed in your favour is a necessary, but not a sufficient, condition for “enjoying quiet title to” a cargo of oil. To protect your position to the full extent possible a buyer should ask for letters of indemnity in its favour against claims from third parties, issued by its supplier and secured by a first class bank capable financially of honouring any claims that it is forced to bring or defend.

"The Emir Has No Clothes!”

The European Market Infrastructure Regulation does not fit the market for commodity derivatives. Yet diverse commodity players are being corseted by the regulations, which at the very least require reporting, and for larger companies require clearing or collateralisation of deals. But there are loopholes…..

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Source: Petroleum Review

First published in Petroleum Review in June 2015

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