EDIT: as soon as I posted this I got a notif saying mods had removed, so I thought it didn't happen sorry! Then later I got inundated with notifications so it's evidently going ahead. I'm green, this is my first AMA.
Going through replies whenever I have time to answer throughout today (I'm being taken through Ikea by my partner right now lol), they are all very interesting questions!
I'm the pricing, sales and trading guy at one of Australia's fuel importers. It's been an insane two weeks on the trading and supply front, but now it's the weekend and my brain is still wired running at 150%.
My partner asked me last night in detail to explain the overall situation. I thought I'd share my knowledge here and happy to answer questions. I'll respond when I can throughout this weekend!
Note we don't have any retail sites so I can't really speak for retail fuel. I also obviously can't share anything proprietary.
- Australian fuel is 90% imported these days, mainly from Asia. The Asia refiners are more competitive and have economies of scale that compete Australian refineries, that’s why most of our have closed. Australia for over a decade has not met the internationally agreed 90-day buffer of fuel reserves in the country, we sit a roughly 32 days of stock. This is the fault of both Labor and Liberal governments in the past. Note: it’s easy to store crude oil but much more difficult to store refined products like diesel and petrol, they are flammable and go off after roughly a month or two of sitting in a tank. It is very expensive to build brand new storage tanks, which is why no commercial personal is doing it – this is why we import so much oil throughput.
- Not all crude oils are the same. The Asian refineries are set up to refine medium sour crude (far more experienced chemical engineers, or Google, can give you more info of the API and Gravity ranges of crude oil types). This is mainly produced by the Middle East. It is very hard to replace this crude oil into the refineries at short notice. So it doesn’t matter how many barrels the US releases from its crude stock piles as that is a “light sweet crude” (and is prohibitively expensive on the ocean freight component). Asian refiners have been cancelling contracts and governments like Thailand and China are banning diesel and petrol exports to keep these critical fuels in their own countries. Therefore, it has gotten very expensive to source alternative cargos to supply Australia (something called the MOPS Premia has skyrocketed. So has backwardation).
The best analysis I am reading is a soon as the Middle East waterway (Strait of Hormuz) opens up, it will still be 1.5 to 2 months before the Asian refiners are running at full capacity again.
Note you can’t just shut down a refinery, these things are designed to run 24/7. Shutting down completely puts equipment at serious risk of damage, therefore refiners are choosing to run at say 50% capacity to delay to running out of crude oil feedstock and not damage refinery equipment.
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While Brent crude has gone from say 70 to 100 USD/barrel (ie roughly 40%), refined products like diesel, petrol and jet fuel, have spiked far higher relatively speaking. This mainly comes down to the regional supply and demand issues being experienced in Asia. Note Australian fuel is roughly priced as Singapore fuel + ocean freight + local costs. Therefore you can’t just take the increase in Brent crude (main type of crude oil) and assume that’s the increase in cost to the fuel that you buy. Diesel seems to be facing far worse supply constraints compared to petrol aka gasoline (and jet fuel even worse than that). I'll link a great article at the end on why jet fuel is spiking so much more (it's a free article on substack)
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Regional Australia wholesale diesel All the oil majors (Mobil, BP, Ampol etc) are hoarding their own product to keep supplying their own retail stations (this was the case last week at least). They stopped selling in the wholesale market. The oil majors years ago largely exited regional Australia and delivery services to farms etc. Independent wholesale business filled in this gap. They do not import their own fuel, but rather buy on the wholesale spot market (where I sell to them), and therefore usually have no term supply guarantees from BP, Ampol etc. Given regional Australia still runs on diesel fuel for all farming, food transportation etc, this is why you hear regional Australia having a fuel crisis more than the cities. This is why I believe that the electrification of key transportation supply chains is critical for Australia’s future. So for Chris Bowen, our Energy Minister, saying he is working with the majors to secure more diesel that is dedicated/prioritised for regional communities, I have no idea how the government are practically going to pull that off (price caps? Allocated volume with some sort of government mandated fixed price? Who knows how it'll work, but it sounds nice in a speech).
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Conclusion/generic thoughts This situation isn't resolving itself anytime soon unfortunately. There is a saying commodity trading – “high prices cure high prices and low prices cure low prices”. When the price sky rockets, demand drops off where possible or supply is increased. When there’s super low prices, supply reduces as said suppliers can’t stay in business selling at those low prices. In this current high prices situation, supply can’t increase right now, so the only lever is to reduce demand. If the price is kept low by governments, demand would stay around, you would have no more supply coming into Australia, and you would eventually run out of fuel. Neither is a good situation, but running out of fuel entirely is probably worse than having some fuel at a high price, which theoretically destroys some flexible demand.
I have not gone into the intricacies of the trading front, fair value, hedging etc as that'll probably take a few hours on its own.
Great detailed article from a guy I follow called Fabian Vera on Linkedin. Also another analyst I'd highly recommend following is Gaik June Goh from Sparta Commodities.
https://open.substack.com/pub/fvr07/p/the-500b-disruption-from-lng-to-jet
I'm an Australian Wholesale Fuel Trader – AMA
byu/theta_bleeder inaustralia
34 Comments
Explain Terminal Gate Pricing and its relation to at the pump prices please 🙂
If you can also expound on the subsidies that are paid and then removed that precipitate these weekly price cycles.
With China and Thailand now limiting jet fuel exports, do you realistically see a scenario where international travel will be affected as jet fuel is being rationed? And what will that look like practically?
No question, just thanks for taking the time to explain. Cheers.
Do you think the govt will introduce rationing for consumers soon? The longer they leave it I feel the more of a problem we’ll have later.
I’m curious about how retailers price fuel. Do they have a lot of live modelling and data being ingested or is it more of a rule of thumb/follow the leader type of thing?
Why did the price go up before the current (paid for pre war) fuel was sold?
Who would have thought that the entirely predictable result of progressive offshoring of our liquid fuel dependency would leave us short of fuel in a crisis?
Plenty of people have been warning about this for years but on both sides of politics the dogma of globalisation and JIT supply chains has won out every time.
Australia is a massive energy exporter but we allowed ourselves to become reliant on fragile supply chains and this is the end result.
You deal with the wholesale side you said – are you talking in the hundreds of thousands of litres per sale, or into the millions of litres per sale? I’m just interested in the scale of your operation…
Why do you think it got so bad so quickly? Surely any hoarded fuel will offset demand.
Great read thank you. Can you tell me do we have refinery infrastructure that’s been decommissioned but could be recommissioned?
Also do you think they could bring wholesale market legislation to avoid the wholesale hoarding problem like an emergency power?
how are smaller fuel companies able to charge so much less eg. united, pearl, metro? Than your big Ampol’s and Shells, is their positioning just off major roads etc just that much more convenient?
are you hoarding bullets, canned food and gold?
No question but great summary, thanks
So $3/L Diesel at the pump late next week?
Thank you for this.
I have a bit of exposure to commodities (mostly swaps on ag commodities and some interest rate derivatives), does your desk settle most trades physically? Are you hedging volatility with caps/collars or just simple put/call strategies?
I know liquidity in Australian derivative markets is almost zero for a lot of commodities, assuming more liquidity exists in the fuel sector?
Did your desk take any speculative long positions prior to the war announcement? What’s the overall desk P/L looking like given the recent volatility?
Opens an AMA then doesn’t answer any questions for over an hour…
GG
Would it be feasible that, financially, you would be better off selling fuel in Australia to, say, the USA… because of the opportunity cost?
Does the government actually need to physically store oil (or derived products) to maintain our 90 day supply or could we just maintain a financial instruments portfolio that we roll over to keep optionality on the global supply?
Great summary mate, well done!
Thanks for the great summary: my question is why did petrol prices double on day 1 of this war, with trading probably taking a week from Singapore and ample supply available? Price gauging?
What is your closest prediction, if the strait remains closed, for unleaded 91 price at the bowser in 6 months time?
High volatility, backwardation, and supply crunches are exactly where wholesale traders make their most outsized margins.
Maybe the stress is not for the Australian farmer; rather because the spreads are massive as your profits and / or potential losses?
Admitting the complexity is a way to avoid admitting the profitability
If refined product goes off after 60 days then the only way to have 90 or 120 days of buffer fuel is to subsidise/ maintain crude oil refineries in the country Is that right ? How many do you think are needed at a minimum for the amount of fuel we consume ?
Very interesting, thank you for sharing.
Thanks for the info. Quite fascinating.
It’s time to electrify our transport as much as possible.
Nothing to ask but just to add a odd experience I had working in a oil company office, I can’t remember which one. I’m an electrician, i was doing an emergency light test in their office. One thing is I remember about being in their office is they had all these trophies that had been awarded for the price of barrel if oil. They were little clear glass trophies with a tear drop of oil in it saying
‘congratulation oil is $XXXX a barrel”.
E: the company was called Oil Search i believe.
They were giving each other awards for petrol costing more. I’ll never forget it.
So fuel conservation is the only option.
Electric vehicles.
Working from home and public transport.
Ride sharing with work colleagues.
Bicycle commuting, walking and EVs scooters.
No junk purchases from China or Asian countries.
No impulse buying.
Some wealthy people will be mildly inconvenienced, so it will be a tough period on social media.
Cookers will be loud, obnoxious and ignored.
Great post. Thank you for your insights.
So really, just another example of why the government should have been investing in developing infrastructure, education and maintaining local production instead of sitting on their hands and selling out.
Thanks for all that. Really useful to understand the situation.
>They do not import their own fuel, but rather buy on the wholesale spot market (where I sell to them), and therefore usually have no term supply guarantees from BP, Ampol etc.
This kinda surprises me. In a market where the cost of hedging is usually pretty low, why are they so willing to take spot exposure, and what’s stopping them from taking up guaranteed offtake agreements from upstream wholesalers?
You sir, are a fucking gem!
Just reading this made me want to yell out “SELL 200 APRIL 142!”, but this isn’t Frozen Concentrated Orange Juice.
This was a fantastic and informative read.