Oil trading and Libya

[Liokault]

So, do I understand this correctly?

People that trade in oil generally don’t actually hold the oil but are trading in the rights to future oil?

If so, are there loads of investment institutions and individuals that have a deal with the old Libyan regime which will no longer be honoured?

[Hereward]

Most Libyan crude was traded under "term agreements", ie contracts of 12 months duration, or more, where the parties agree to trade a certain quantity each month. The seller is obligated to sell and the buyer is obligated to buy. The price will typically be derived from the average price of oil at the time each cargo loads onto a vessel, plus or minus an agreed premium/discount.

All such contracts will contain a "Force Majeure" clause whereby the parties can terminate the agreement in the event of Acts of God or war etc. In the current circumstances this is what's happening. The usual receivers of Libyan crude (mostly Meditteranean refiners) are now desperately looking for other supplies (eg. Russian origin)to make up the shortfall.

[Vanya]

Ok, this is an interesting topic.

Not with respect to Libya, but I would like to discuss this further with both Liokault and Hereward.

Perhaps we can do this off forum.

Please PM me if interested, I am not spamming or anything, it's just for my own benefit.



V.

[Liokault]

Vanya said:

Ok, this is an interesting topic.

Not with respect to Libya, but I would like to discuss this further with both Liokault and Hereward.

Perhaps we can do this off forum.

Please PM me if interested, I am not spamming or anything, it's just for my own benefit.



V.

Problem is, I know nothing!

My real question was: Have hedge/pension funds and who paid for the oil before it was pulled out of the ground lost their investment?

[Steven Quas]

Liokault said:

Problem is, I know nothing!

My real question was: Have hedge/pension funds and who paid for the oil before it was pulled out of the ground lost their investment?

Hedge funds will not be exposed to individual oil contracts in general as they don't want physical delivery so they trade on the futures exchanges (NYMEX and IPE) for barrels of benchmark crude - Brent or West Texas Intermediate. Or they trade derivative contracts with banks which settle against these benchmarks. Similarly pension funds will not have contracts for physical delivery so they will not have lost. If they had invested in shares in an oil company which did have these contracts with Libya then potentially there could be a loss, as the shares could have lost value. Hedge funds are just as likely to have profited (by going short) as to have lost. In general neither pension or hedge funds will have been affected.

For pension funds, who will virtually all be holding shares in oil companies, the instability in the middle east has been positive for them so far, since the price of oil has risen, which in general causes their oil company shares to rise.

Steven Quas
Hamburg

Edited by Steven Quas on Sunday 8th May 18:31

[Liokault]

Steven, thanks for that.

So, the answer is yes (?) some people who purchased future oil from the old regime will not have that honoured by the new regime (if and when one forms)?

[Steven Quas]

Liokault said:

Steven, thanks for that.

So, the answer is yes (?) some people who purchased future oil from the old regime will not have that honoured by the new regime (if and when one forms)?

The purchase of oil from countries like Libya isn't a contract where you pay upfront for a certain quantity and await delivery. Instead oil companies buy a licence from the Libyan government to explore and develop oil fields themselves in a certain area. When they start producing oil a certain proportion of the value, say 60% is paid to the Libyan government and the oil company can do what it likes with the oil. If gas is produced as well, that tends to be sold locally to avoid the need to liquify it for transport.

The oil company generally only starts paying the 60% when they have recovered their exploration and development costs from the oil produced, which often run in to hundreds of millions.

Given Libya's dependence on oil for revenue, it is likely that contracts will be honoured so even if there is a pause in exploration or production, it is in both sides' interest to resume once stability returns. Any oil company that was heavily invested in Libya would probably have suffered some loss of value of their shares while the uncertainty remains, but you would expect this to be corrected if the country stabilises and exploration/production resumes.

Steven Quas
Hamburg

[Liokault]

Steven Quas said:

The purchase of oil from countries like Libya isn't a contract where you pay upfront for a certain quantity and await delivery. Instead oil companies buy a licence from the Libyan government to explore and develop oil fields themselves in a certain area. When they start producing oil a certain proportion of the value, say 60% is paid to the Libyan government and the oil company can do what it likes with the oil. If gas is produced as well, that tends to be sold locally to avoid the need to liquify it for transport.

The oil company generally only starts paying the 60% when they have recovered their exploration and development costs from the oil produced, which often run in to hundreds of millions.

Given Libya's dependence on oil for revenue, it is likely that contracts will be honoured so even if there is a pause in exploration or production, it is in both sides' interest to resume once stability returns. Any oil company that was heavily invested in Libya would probably have suffered some loss of value of their shares while the uncertainty remains, but you would expect this to be corrected if the country stabilises and exploration/production resumes.

Steven Quas
Hamburg

Great answer, thanks.