Beginners guide to crude oil trading business

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Published: 24th January 2011
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Trading in crude oil and its derivative products has always been a lucrative business as it is a sellerís market. This means that the market is dominated and dictated by the sellerís lobby rather than buyers. So selling the product is not always the difficult part when it comes to trading crude oil. At the same time getting allocation of the products still remains most tricky part with high entry barriers.

Most of the oil traded in open market is from OPEC (Organization of Oil Producing & Exporting Countries). More specifically the Nigeria National Petroleum Corporation, commonly known as NNPC, sells most of its stocks in the open market. Now the big question is how to get allocation from NNPC? You need to have following in order to stand a chance of getting allocation from this government owned agency:

1.Funds: You must have funds in excess of $ 100 Million and present Proof of these funds (POF) to NNPC.

2.Performance Bond: Apart from the above funds you should also furnish a performance bond of at least 1% ($ 1 million) of the above amount.

3.Apart from the above two, you are expected to be a local or an international oil refinery. If you are none of these then you must be at least a renowned trader in Oil business.

In case you canít qualify under the above criteriaís, there another way to procure Oil. You can now choose to buy from the people who get the allocation from NNPC, however you will to pay a premium above the NNPCís sale price.

Once you have identified the procurement source of the oil you can move further to take the ownership of the cargo. The two most common ways to buy crude oil is either through TTO (Tanker Take Over) or TTT (Tanker To Tanker) basis. At times deals are also made on CIF (Carriage Insurance & Freight) and FOB (Free on Board) basis, but TTT and TTO remain the two most widely accepted ways to trade crude oil.

Having taken the ownership of the cargo you are presented by two choices. You can decide to store the cargo at a tank terminal and later sell it as a break bulk cargo if a price hike is anticipated. To keep your risk to minimum, you can also choose to sell the entire cargo in a single go; however your profits margins in this case will be reduced. Once can also choose a combination of these two to balance out risk and profit levels.

Hope the above gives you a brief overview of crude oil trading business.

Click to know more about Crude Oil & Crude Oil Trading

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