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Trading Physical Oil: The Art of the Deal

By : Ziad K. Abdelnour| 23 September 2013
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As part of Blackhawk’s close group of family and friends; and to set the record straight, I thought I’d share with you those important tips you need to know if you’re actively involved in oil derivatives transactions in the physical commodities trading world.

As you may or may not know, the reality today is that oil buyers are a dime a dozen, real fuel is the issue. The secondary market is for the most part composed of “fake offers” around the world doing a circle jerk on the Internet as people who have the real oil already know where to sell it.

By the same token, no Major or legitimate buyer will issue a LOI, ICPO, nor will they issue any POF or pre advise of any kind, ever before seeing POP. Hence, our Modus Operandi is and has always been very simple: Prove the product, send an invoice, we will close it! Very simple…..We will also sell under the exact same circumstances. The exception is an unknown buyer to us where we’ll have to Swift an RWA to prove financial capability.

Just FYI, and to address the above challenges, we at Blackhawk are today securing our own financing at the tune of $2 billion from a syndicate of hedge funds to continue taking down our own product so that we do not have to be in a position without complete control of the cargoes. We are dealing with people that have been around a long time and have ongoing contracts with the Russian and other Refineries. This will only get our oil trading business to move at a much higher velocity.

You can just imagine the number of people who have “allocation contracts” that never get a drop of oil because they don’t pay the people they have to pay to get oil. Allocation holders are not title holders no matter how loudly they protest.

Bottom line:

If you’re real serious about dealing in this market and transacting business with us, here are my basic tips for you:

1. Broker Chains: Do not get involved with broker chains. The key is to have access to principals. I do NOT work any offer in which I do NOT have access to BOTH SELLER and BUYER. Worst are the people who do nothing but forward Emails without even reading them. They for sure will never get you to the “finish line” as they are just ignorant messengers good for nothing. No transparency no deal. This is business not the CIA. Work with a small group of trusted colleagues rather than chasing every deal.

2. Ego/Respect: Work with those who are willing to put their ego aside (difficult with buyers and sellers) and are fair minded. Short of that, you are just wasting your time and I have no time to stroke anyone’s ego. On that same note, any buyer/seller who disappears out of the blue in the middle of a transaction due to travel, funerals of a family member or hospital is in most cases full of crap and a non-performer. Real players have staff to take care of multi-million dollar deals whatever the circumstances are and you can rest assured of that.

3. Soft Offers: There is no such thing as a “SOFT OFFER”. A “Quote/Offer” is a soft offer. A quote need only to be confirmed. Once confirmed, a full offer is advised. Once accepted the contract is advised.

4. Secure buyer or seller first? Not understanding why the supplier needs to be secured first can get an intermediary in a lot of trouble. So secure the supplier first, find the buyer second. Once you get a quote from the person who is in actual possession of the product (supplier) then seek the buyer.

5. About Mandates. A mandate to a supplier is an “agent” who acts on behalf of a disclosed principal. A mandate is not just given to a person; (as implied so often). It has to be earned, after a strong relationship has been built from many years of dealing with a “principle supplier”. The mandate agent can only act under the instructions of their principle (supplier) who must disclose to end buyer immediately when the offer is made to an end buyer; and in closing the deal, the “mandate agent” would be paid by the supplier.

The mandate agent gets no commission from the buyer’s side of the deal. A mandate agent has to close many deals in order to get any reasonable commission amount from the supplier. Many intermediaries claim mandate ship because they think being next to the supplier as a mandate agent is putting them in a great position. This is incorrect. An intermediary in a chain deal will make a great deal more money than a mandate agent. The best position in a deal is the “controlling buyer/seller intermediary”.

The buyer/seller must know procedures really well and act in the best interest of all parities on both sides of the deal. Forget about becoming a mandate holder of a principal as it is not a feasible position to hold if you are looking to make the big money. Learn the proper procedures, rules and policies and become the legally defined Buyer/seller.

6. About NCND or NDAs. NCNDA stands for (Non Circumvention, Non Disclosure Agreement.) This document is not worth the paper it is written on. If you have your name on this document and get circumvented, do you have hundreds of thousands of dollars to pay to take this through the international courts? This is a document that is very hard to enforce. Only a misinformed or unskilled intermediary/broker would send you a NCNDA. Is the NCNDA any protection for an intermediary? Not even close to protection. Once again, the NCND is a totally useless piece of paper unless the product is in your own country. Internationally, these documents floating around the Internet are impossible to enforce in a court of law.

7. About FPA, IFPA or IMFPA. IMFPA stands for (Irrevocable Master Fee Protection Agreement.) The FPA (Fee Protection Agreement) and NCND are usually attached to each other. FPA / NCND is not the proper way to protect intermediary/broker’s interests. Beware if someone claims to be the Mandate, Supplier, End Buyer while at the same time requesting FPA and NCND. A real mandate never fears circumvention as he is protected by the one who extended the mandate to him. Does the MFPA (Masters Fee Protection Agreement) enforce payment of commission? The flawed document MFPA does not protect a commission payment. There are documents under International Law that can protect your commission but the MFPA is not one of them.

8. About LOIs and ICPOs. LOI: This term is used out on the Internet by inexperienced traders as a “Letter of Intent” which is incorrect. LOI mean “Letter of Indemnity.” Inexperience “intermediary seller” who is claiming to be the supplier will ask for a “Letter of Intent” to purchase goods. You as an intermediary cannot give a letter of intent to buy goods as your intentions are not to buy goods but to sell the “Title” of the goods. So your letter of intent to buy goods would be a lie. Giving a Letter of Intent only means “Yes I intent to buy the goods but I can change my mind anytime. A letter of Intent is not a binding contract. The Letter of Intent is a total waste of time on a worthless piece of paper. An intermediary can only give to the supplier an “Offer” which is to SELL the Title of the suppliers goods. As to ICPO… This term means Irrevocable Corporate Purchase Offer. This term will not work for the intermediary. An ICPO may work for the end buyer to the supplier dealing with each other but not for an intermediary. An intermediary works with different applications. Once again, intermediaries cannot “irrevocably offer to purchase” the goods when not purchasing. They are offering to sell the “Title” to the said goods, not purchase and take possession of goods. If any intermediary offers you an ICPO you know they are inexperienced or trying to scam you. Only the end buyer can offer such a document. The intermediary should first ask the supplier for a “RFQ” (Request for Quote) not issue a (LOI). The next document is an “Offer” for you as a “buyer/seller intermediary” to consider from the supplier (“Offer to Sell”) Not (ICPO). This is all that is needed (Quote, Offer). Not understanding the proper procedures and documents for an intermediary one of two things will happen. a/ The deal will collapse, and/or b/ You as an intermediary will be circumvented. In the International Trading business, the only thing needed is a “Quote” “Offer” “Contract” “Payments” and “Delivery of goods”.

9. About BCL and RWA. A BCL stands for a Bank Comfort Letter. It is a letter provided by the buyer’s bank to confirm that the buyer has sufficient funds to carry out the transaction. The intermediary cannot give a BCL because intermediaries do not have the money in their bank account. If you get a BCL from your end buyer and hand it over to the supplier you have just lost the deal. They will deal directly with each other and you are out. An intermediary cannot deal with a BCL. However it may apply to a direct buyer doing business with an end Supplier on some occasion – It cannot simply be applied when intermediaries such as Buyer/Seller are involved. As to RWA…. It basically means Ready Willing and Financially Able. Like the BCL the same applies to RWA. (“Look I have the money to buy”- IT DOES NOT MEAN I WILL BUY) If an intermediary asks for a RWA or BCL from a Buyer and the Buyer gives a Genuine RWA/BCL, then the intermediary has to continue with the deal which usually means disclosing the supplier to the buyer’s side – and here is your problem -The supplier is disclosed and the buyer changes his mind, then returns to the supplier at a later time and circumvents everyone in the group. The buyer just saved himself millions of dollars.

10. About CIF and FOB. In a FOB deal the End Buyer order/charters the vessel. In a CIF or CFR deal the Supplier secures the vessel. Even though the vessel is ordered by the supplier, the buyer is still responsible for the cost of vessel which is on the supplier’s invoice… Now if you see the “CIF ASWP” you should suspect it to be a scam. Why? Well … CIF ASWP stands for Cost Insurance and Freight to Any Safe World Port. This is a flawed term which does NOT exist in the real market. The CIF part of the term is correct, the ASWP is wrong. There is a simple logic behind this. The shipment cost cannot be the same to ANY World’s Port! For example the CIF (Cost Insurance and Freight) price to ship sugar from Brazil to China would be double compared to if it was shipped to South Africa. This could make it over half a million dollars price difference. No real buyer would be willing to pay extra just to get an “easily” quoted CIF ASWP price.

11. About the DLC. A Documentary Letter of Credit (DLC) is a type of financial instrument used to pay for goods being ordered. The DLC has terms and conditions applied. The end buyer issues a DLC to supplier and if all conditions are met the supplier can obtain collection of funds. By default a DLC becomes an irrevocable Letter of Credit. The best form of DLC issuance are confirmed and irrevocable (CIDC). The CIDLC is guaranteed by the issuing bank and not the buyer.

In other words the bank is saying to the supplier “we don’t care what the end buyer says, you the seller have met the condition of the CIDLC, we the bank will guarantee payment for the goods ordered”. The intermediary should never accept a Revocable Letter of Credit as it can be modified or even canceled by the buyer without notice to the intermediary. The payment instrument should be A Pre Advised “IRREVOCABLE” DLC. The operative word here is “IRREVOCABLE”.

Once the conditions of the Pre Advise has been met the DLC becomes active and the buyer cannot change his mind and cancel the DLC. With a revocable DLC he can. As to transferable DLC; it may be transferred to more than one supplier but can only be transferred once. Hence, one supplier gets xx% of the TDLC and another supplier gets yy% of the same TDLC but once transferred to the suppliers it cannot be transferred again.

12. About the Nuances between Performance Bond and Performance Guarantee. A Performance Bond (PB) is a guarantee that follows the goods to the destination port in where if the goods can be rejected for good reason, then applying on the collection of PB supported by a Bank Guarantee (BG). Both the Performance Guarantee and the Performance bond are “based” on performance yet both are different types of performance assurance.

A Performance Bond is for a deal that works for the supplier in possession of goods and an end buyer taking possession of goods. The delivery of title documents cannot be secured so an intermediary is not to enter in such deals. As to Performance Guarantee, it is a guarantee given by the seller’s bank to the buyers bank in the form of an unconditional Stand-By letter of Credit.

If the delivery fails and the delivery documents are not presented to the bank on the date specified in the contract, the bank just automatically pays buyer bank the Performance Guarantee unconditionally, No questions asked. So the Intermediary must ask the seller to issue a Performance Guarantee (PG) of 2% (Not a Performance Bond) of the total cost as defined in contract, issued as unconditional as per Stand-by Letter of Credit procedures defined under UCP600 banking rules, issued within 3 days of buyers L/C being transferred.

Special Note: A Performance Guarantee does not activate the L/C. Same applies to activation of the L/C does not mean money. A Bank Performance Guarantee is issued in the form of a Stand by Letter of Credit defined by and subject to the rules of ISP98 (International Standby Practice) by the suppliers bank as a guarantee of delivery to the buyers bank. This is a complete separate entity to the Pre Advised Documentary Letter of Credit. The Pre Advised Transferable Documentary Letter of Credit is issued by a prime Top World Bank Per UCP600 banking laws by the buyer for purchase of goods and is activated only when the Pre Advise conditions are met.

The conditions in the Pre Advise L/C is not the Performance Guarantee. Activation of a letter of credit is not money in the suppliers bank account. Activation of the L/C means the buyer who issued the L/C cannot change his mind and void the Letter of Credit unless fraud is proven. The active Letter of Credit turns into money only when the delivery documents are presented to the bank and the end buyer.

The L/C is always issued first by the buyer and the Bank Performance Guarantee is issued by the supplier second. Sometimes instead of a Bank Guarantee the supplier offers a “LDD” (Late Delivery Discount) applied as a credit of XX% to favor of the end buyer on the Sellers invoice if delivery fails to be made on time. The buyer sometimes sees the “LDD” as the favorable choice of delivery guarantee as the % value offered on the LDD is higher than the % value of the SLC.

13. About Allocation Holders: Allocation holders are not title holders no matter how loudly they protest. Most sellers do not have title and need buyers to bankroll them. Unless you are dealing with title holders, you are just wasting your time.

14. About POP: Upfront POP is never what it seems to be . POP as often seen on the Internet is basically Proof of Product. Intermediaries cannot give POP if they have never even seen the goods; and even if one goes to the supplier’s country and looks at the goods he is going to purchase, there is no guarantee that the goods he has seen, will not be sold to someone else tomorrow. A Proof of Product (‘POP’) is often requested by buyers or intermediaries who believe it will give them some guarantee of the existence of the product and ability of the supplier to deliver. Many POPs produced are fake. The POP offers no proof at all, because once a POP has been drafted, it is automatically out of date. The product could have been sold to another buyer and no longer exists. If an end Buyer were dealing with a supplier, anything can be suggested especially in matters of POP.

15. Due Diligence: You can never do enough due diligence; especially when dealing with royals from the Middle East or Russian BS artists supposedly close to the major Russian refineries. We have by the way, devised a way of spotting those con artists in a heartbeat as we now have operators working in the heart of Moscow, Dubai and even Nigeria.

16. Track Record: Forget about the house in the Bahamas and generational wealth. If you/your client haven’t closed an oil deal already; don’t try to do it on our watch please. Nothing really personal; only business. We just don’t and won’t ever deal with rookies

17. Trust: Always trust…but also always verify everything.

Conclusion:

Oil trading is quite simple and is conducted in a similar manner than international trade in rice, cars or consumer electronics.

Every industry and every country has their own standards and different rules and regulations that govern trading in their jurisdiction. Buyers, Sellers, Brokers, Intermediaries all need to educate themselves in the proper legal procedures for their industry and location.

In any business though, knowledge is power. In the international trading business, knowledge is survival. Not knowing the proper procedures, you will not survive and you will never close a deal with us at Blackhawk. Go and educate yourself real well before engaging with us please. It will all serve us very well and avoid us both tons of aggravation.

We look forward to doing business with you and to continue being your resource for deals, capital, relationships and advice.

Your feedback as always is greatly appreciated.

Thanks much for your consideration.

Comments

  1. S.B AzzariaS.B Azzaria

    With regards to Allocation Holder mentioned above in the comments, I know, from experience, that such can apply to petrol, particularly crude from producing nations as opposed from resellers. Such is a political understanding and practice regarding how, e.g., a ruling sovereign earns off his exports utilizing an Allocation Holder cutout. Not illegal as per the supplier origin nor his banking, not fraudulent, as the sovereign often makes the laws and has veto power over any proposed in-country restrictions thereof. So, basically, one suit does not fit all.

  2. BL HolmesBL Holmes

    Good article, but I take issue with your blanket invalidity of “Allocation Holder,” as such sometimes is basis a direct relationship with the Beneficial Owner wherein the Holder also is the Sales & Purchase Agreement titled Seller. Often such a relationship is implemented for economic, political, societal, financial, familial or confidentiality reasons, particularly when involving government or sovereign ownership of assets, e.g., gold bullion.

  3. Pingback: About Closing Oil Derivatives Related Transactions by Blackhawk Partners

  4. JS WallaceJS Wallace

    Excellent article – a real eye opener. I freely admit to being a Rookie of the greenest variety and am grateful for the wealth of information provided here. My education awaits and I am eager to learn more. Thank you!

  5. DavidDavid

    Ziad…very helpful info…but what is the proper way to protect IM? Your comment: FPA / NCND is not the proper way to protect intermediary/broker’s interests….There are documents under International Law that can protect your commission but the MFPA is not one of them.

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