World’s economy is powered by trade. The largest trade deals are happening between the East and the West, and there are many different types of trades but the biggest of them all is energy. Petroleum product trading is the pearl of the energy trade. Products like diesel and aviation fuel are one of the most demanded products on the planet, considering all the transportation in the world is run on fuel. This article gives brief insights on wild oil trading in powerful global markets.
Who are the main leaders and controllers of the petroleum trading industry?
The most influential party to control the sector is government. Governments have the most buying power or selling power, depending on the region. Secondly, private sector large oil leading enterprises such as Shell, Neste, and Saudi Aramco. Some of the private sector companies might be semi-government-owned companies as well such as Saudi Aramco. Governments have a lot of influence over the supply chains in the oil and gas industry. Then there are private companies that purchase and resell oil products. Some of these private companies have more capital and they might also participate in the hedging depending on the industry they are in.
Trading companies are the difficult ones because they don’t have control
The most common party that one may discover in the oil and gas industry is a trading company. A trading company can be run by an individual or a small team. The trading company might have a connection to any of the above and previously stated industry-leading and controlling parties. A trading company might have a reseller or representation agreement directly from Shell or Saudi Aramco, or maybe even the government itself. The connections that trading companies have are usually based on personal relationships.
Note that trading companies do not actually own petroleum products or control the supply chain which at times can become difficult to manage the business or be a client of such trading company.
However, trading companies might also have a connection to other trading companies which know other trading companies that one of them has a connection to the upper-level party; that is where things can get a little bit complicated.
Issues in the industry
Doing business in oil and gas, most of the time one might experience difficulties in trust and transparency, and that is because most of the time the deals are going through the trading companies.
The reason for it is that the top layer of the industry including governments and leading oil production companies are just simply not accessible. The oil and gas industry has been in existence since the very beginning of civilization. The industry is very physical and is based on personal networking and connections. This is extremely traditional and perhaps the least digitalized industry ever. Just like banking is a traditional business, and to enter into traditional banking is extremely difficult due to regulations and very strict frameworks. Imagine trying to enter the banking industry without the existence of digital banks. That would be just beyond difficult.
If we look at the oil and gas industry, there is no digital. The industry has been traditional since the start and has not developed in any other way which means there are no means to enter the industry in any circumvention way. Decades and centuries ago, the oil and gas industry was already monopolized and ever since, the controllers of the industry have kept it very private, making it almost impossible for an average business to participate in the big deals.
That is the reason why trading companies exist, to simply facilitate the need of an average client. The big players of the industry talk directly and do business directly but the smaller businesses are still looking for solutions.
This brings to the difficulties that business parties may experience when trading petroleum products with trading companies. Fraud and bypass are the most commonly faced issues that are on the dark side of trading companies.
Some innovators are trying to create digital solutions to establish more serious connections and networking within the industry by various verification methods of authenticity but because the industry is very much based on physical business since the products are physical, the documentation is also physical and online contracting does not mean much. Also, some companies provide special due diligence services to help clients prevent fraud.
Is the headache worth the risk?
The money in oil and gas is big and can easily sum up to over a billion worth of annual contracts. The commissions that trading companies receive are also very alluring, and that is what makes people get into the industry in the first place. The greed of earning money quickly and a lot of it is one of the reasons why businesses internationally lose a lot of money for fraud every year. Simply by taking extreme risks and uncertain faith, businessmen, and owners of international companies lose hundreds of millions every year just because they ended up trusting a trading company.
Trading companies hold a lot of leverage. If presented well, a trading company as a broker can receive the full payment for the oil in regards to buying the product on behalf of the client and then later selling it and making a substantial profit in between. But some companies simply take the money and run.
In the Middle East, in Saudi Arabia, United Arab Emirates, and Qatar, petroleum trading is one of the primary sectors of business. The GCC area alone holds one of the largest numbers of trading companies in the world. China on the other hand is involved in the business as well. Chinese trading companies are one of the biggest buyers of commodities from Africa.
Yet every region in every continent has its own pros and cons and tricks that might be hard to notice for a novice industry participant. The oil and gas industry might seem an easy and quick way to make money but it’s a blurry road towards a very uncertain future of the so-called successful destination.