Part Two: The Political Problems
Peter Cooperman, Triple Point Technology
Editor's Note: Building upon the first piece (OGFJ, November, pg.45) in this two-part series, Peter Cooperman of Triple Point Technology turns his attention to the political sphere and how it affects the physical and financial challenges of crude oil trading introduced in part one. Cooperman examines the political problems that come into play as well as the need for technology that manages and mitigates risk while guiding profitable trading decisions.
It's easy to imagine but difficult to predict how physical issues lead to risks for businesses trading oil. It's also apparent that financial market conditions introduce other risks into the equation. Risk caused by the political backdrop is equally as important, though less immediately evident. Without keeping a close eye on the ever-changing political situations that affect the crude oil market, as well as effective management of their risks, firms are in danger of falling prey to changes they didn't anticipate, including volatility.
Political fear factor
Navigating uncertainty in oil markets is not simply a matter of monitoring physical and financial market activity. Market participants must also account for the immediate and future impact of political events; and their success depends upon their ability to react quickly. In the wake of political change, fear can affect the price of crude oil more than the actual political event. This phenomenon occurred recently when reactions to the removal of Egypt's President led to a shift in crude oil market sentiment. The shift was not based upon the change of leadership but rather on speculation and an assumption that the event would affect the availability of supply. Fear that transportation routes in the region, including the Suez Canal, would be shut down by the new government or protesting supporters of the former President drove prices up. Many believe that the reaction was the primary driver when the value of WTI nearly surpassed that of Brent.
Prices rose despite reassurances that transport through the canal would not be affected. History may have also played a role in the market reacting the way it did. The current political unrest in Egypt has been compared to the Egyptian phase of the Arab Spring that caused severe market disruption years ago. Despite the fact that only 5% of seaborne crude passes through the Suez Canal, and the volume of vessels passing through the Canal has yet to be affected, an air of uncertainty remains.
On many occasions, fear of unrest is not unfounded. Travel south and west from Egypt and you can witness oil theft on a grand scale. Organized oil thieves in Nigeria, a country often characterized by its political unrest, have cost several oil companies billions of dollars. By tapping into unguarded pipelines, it has been estimated that thieves are able to steal 400,000 barrels per day. This activity has threatened to put an end to oil exploration and recovery in the region. The Trans Niger Pipeline (TNP) has been shut down on numerous occasions due to record daily losses. Nigeria is a member of OPEC, so these losses have further contributed to the concern that the organization must strategize in order to remain relevant. Safety is also a concern as thieves rarely take the time to properly shut off or repair damaged pipeline.
Oil market participants must remain vigilant about monitoring events throughout the world that constantly contribute to oil market volatility. All levels of risk must be taken into account, on all levels, to profit in today's markets. Traders must be resourceful and can only make intelligent trading decisions if they properly manage the risk factors that are within their control and they have the technology necessary to react quickly once the market is disrupted. As Stale Tungesvik, a senior director at Statoil, told The New York Times, "Oil price predictions used to be about oil consumption and markets but now it's about where the next riot will break out. It's so much more politically based, and that makes it a mystery to everyone." Crude oil markets are extremely difficult to navigate but technology can help participants mitigate risk and react quickly by promoting intelligent trading decisions in the face of unexpected change.
The commodity management solution
Crude oil markets are extremely volatile and market dynamics are being shifted by events taking place all over the world. The complexity that exists in oil markets requires the monitoring of an immense number of factors that affect crude oil recovery, transportation, processing and demand. Traders must turn to technology - in the form of complete end-to-end commodity management software - to properly mitigate risk and drive profits when trading crude oil.
Sophisticated commodity management solutions enable crude market participants to:
- Monitor positions and mitigate risk by centralizing relevant data and analysis that clearly illustrates global trading activity and provides an aggregate view of all physical and financial market positions to promote effective risk management.
- Improve supply chain efficiency by planning, orchestrating and optimizing complex physical movements from upstream through downstream in real-time for all modes of transportation.
- React quickly to unforeseen market events and daily volatility by providing advanced analytics that support faster decision making.
- Eliminate human error by automating the complete transaction process from front through to the back-office with commodity management software.
The crucial need to manage risk
Market volatility is an omnipresent risk in today's oil markets. Operating on a global scale, oil traders must overcome multifarious challenges, and mistakes in judgment are met with severe consequences. Risk mitigation has become an imperative for every trader in this period of unrivaled market uncertainty. To be successful, participants must be prepared to monitor activities and events that threaten the stability of their physical and financial market positions. Traders must also be able to react quickly in the face of unexpected adversity.
Today's market has made it necessary to rely on advanced technology to mitigate risk and maintain profits. Excel has become a misnomer in the industry, and participants that continue to rely on spreadsheets will find themselves severely outmatched and unable to endure their losses. A commodity management solution centralizes data and performs complete analysis that promotes efficient and intelligent trading decisions in today's crude oil markets.
About the author
Peter Cooperman is a marketing specialist at Triple Point Technology, a provider of on-premise and in-cloud commodity management. He has always held an interest in commodities markets and now focuses on the energy industry. Prior to working for Triple Point, Peter headed solutions marketing and software product management at a global technology provider. He earned a bachelor's degree in economics from Binghamton University.
