PRICES AND DISCOUNTS
There are two ways to price products and both mechanisms has its positive and negative sides:
- Fixed price offerings in US$/Metric Tonne(MT) or US$/barrel (bbl) or US$/Gallon(Ga) which are usually offered for the first 12 months contract period and subject to review on yearly basis
- Formula based pricing linked to Platt’s prices or other Benchmark Indices such as Brent or WTI around loading dates MINUS an agreed discount
Offers usually indicate a gross discount and a net discount to Buyer from Seller. The difference between the two is commission to be shared 50/50 between the brokers (Buyer’s side and Seller’s side).
Note: the most important element in the transaction are the procedures and this is where 99.9% of all deals fail to materialize. A careful review of procedures will reveal areas that are usually not workable for either side. If this cannot be overcome then all negotiations fail.
Following links for pricing information are considered by most of our sellers to be the closest estimate of their invoicing prices. The invoiced prices are typically based on the three-day average (the day upon loading, preceding day and the following). Seller uses the actual price on the basis of NWE Platts.
http://www.bloomberg.com/energy
http://www.iata.org/publications/economics/fuel-monitor/Pages/price-analysis.aspx
https://www.iata.org/publications/economics/fuel-monitor/Pages/index.aspx
http://www.bunkerworld.com/prices/
All prices for the Buyer are according to Platt's European Marketscan MINUS discount. The amount of the discount is not fixed, but varies according to:
Type of the product (e.g., JP-54, Mazut, D2, etc.)
Oil Prices and Outlook – Basics
Crude oil prices are determined by global supply and demand. Economic growth is the biggest factor that affects demand—growing economies require energy. The petroleum products made from crude oil and other hydrocarbon liquids account for about a third of total world energy consumption.
Seasonal changes in demand for petroleum products can influence the supply and demand balance for crude oil and its market price. For example, crude oil markets tend to be stronger in the fourth quarter of the year—when global demand for heating oil is boosted both by cold weather and by inventory building—and weaker in late winter as demand for heating oil falls with warmer weather.
OPEC can influence world oil supplies and prices
The Organization of the Petroleum Exporting Countries (OPEC) can have a significant influence on prices by setting production targets for its members. OPEC includes some of the world's most oil-rich countries. Together, these countries control about 73% of the world's total proved oil reserves, and in 2016, they produced 44% of the world's total crude oil.
OPEC attempts to manage the oil production of its member countries by setting crude oil output targets, or quotas, for each member (except for Iraq, which does not have a current target). Compliance of member countries with OPEC quotas is mixed because production decisions are ultimately in the hands of the individual countries.
In general, three main factors determine how effectively OPEC can influence oil prices:
- How unwilling or unable consumers are to move away from using oil
- How competitive non-OPEC producers become when oil prices change
- How efficiently OPEC producers can supply oil compared with non-OPEC producers
The difference between market demand and supply from non-OPEC sources is often referred to as the call on OPEC.
OPEC also maintains the world's entire spare crude oil production capacity. Saudi Arabia, the largest oil producer within OPEC and one of the world's largest oil exporters, historically has had the largest share of the world's spare production capacity. Developing and maintaining idle spare production capacity is generally not cost-effective for international oil companies (IOC) because the IOC business model maximizes revenue by producing oil as long as the price of selling the oil is higher than the cost of getting an additional barrel of oil to market. OPEC spare capacity provides an indicator of the world oil market's ability to respond to potential crises that reduce oil supplies.
Causes of world crude oil prices and supply disruptions
Geopolitical events and severe weather that disrupt the supply of crude oil and petroleum products to market can affect crude oil and petroleum product prices. These events may create uncertainty about future supply or demand, which can lead to higher volatility in prices. The volatility of oil prices is tied to the low responsiveness, or inelasticity, of supply and demand to price changes in the short term. Crude oil production capacity and the equipment that uses petroleum products as its main source of energy are relatively fixed in the near term. It takes years to develop new supply sources or to vary production, and when prices rise, switching to other fuels or increasing equipment fuel efficiency in the near term is hard for consumers to do. These conditions may require a large price change to rebalance physical supply and demand.
Most of the crude oil reserves in the world are located in regions that have been prone to political upheaval or in regions that have had oil production disruptions because of political events. Several major oil price shocks have occurred at the same time that political events caused supply disruptions, most notably the Arab Oil Embargo in 1973–74, the Iranian revolution, the Iran-Iraq war in the 1980s, and the Persian Gulf War in 1990–91. More recently, political events in Iraq, Libya, Nigeria, Syria, and Venezuela have contributed to supply disruptions.
Given the history of oil supply disruptions caused by political events, market participants constantly assess the possibility of future disruptions. In addition to the size and duration of a potential disruption, market participants also consider the availability of crude oil stocks and the ability of other producers to offset a potential supply loss. When spare capacity and inventories are low, a potential supply disruption may have a greater impact on prices than might be expected if only current demand and supply were considered.
Weather also plays a significant role in the supply of crude oil. Hurricanes in the Gulf of Mexico can affect oil production and refinery operations in the Gulf region. As a result, U.S. petroleum product prices may increase sharply as supplies from the Gulf to other regions drop. Severe cold weather can also strain product markets as producers attempt to supply enough of the product, such as heating oil, to consumers in a short amount of time to meet demand. This seasonal demand can also result in higher prices.
Other events such as refinery outages or pipeline problems can also restrict the flow of crude oil and petroleum products to market. These events can lead to a temporary supply disruption that could increase prices.
The influence of any of these factors on crude oil prices tends to be relatively short lived. Once the supply disruption subsides, oil and product flows return to normal, and prices usually return to their previous levels.
Buyers and sellers at a global auction
Crude oil and petroleum product prices are the result of thousands of transactions taking place simultaneously around the world at all levels of the supply chain, from the crude oil producer to the individual consumer. Oil markets are essentially a global auction—the highest bidder will win the available supply.
Like any auction, the bidder doesn't want to pay too much. When markets are tight (when demand is high and/or available supply is low), the bidder must be willing to pay a higher premium. When markets are loose (demand is low and/or available supply is high), a bidder may choose not to outbid competitors, waiting instead for lower-priced supplies.
Different types of oil market transactions are available
Contract arrangements in the oil market cover most crude oil that changes hands. Crude oil is traded in the futures markets. A futures contract is a standard contract to buy or sell a specific commodity of standardized quality at a certain date in the future. If oil producers want to sell oil in the future, they can lock in their desired price by selling a futures contract today. Alternatively, if consumers need to buy crude oil in the future, they can guarantee the price they will pay at a future date by buying a futures contract. In addition to oil producers and consumers, futures contracts are also bought and sold by market participants or speculators who do not produce or consume crude oil. These types of traders buy and sell futures contracts in anticipation of price changes, hoping to make a profit from those changes.
Crude oil is also sold in spot transactions, or an on the spot purchase of a single shipment for immediate delivery at the current market price.
Changes in prices send signals to the market
Prices in spot markets send a clear signal about the balance of supply and demand. Rising prices indicate that additional supply is needed, and falling prices indicate there is too much supply for current demand. Futures markets also provide information about the physical supply and demand balance as well as the market's expectations.
Delivery Terms
Realization of the payment terms that can be reflected in additional discount Seller can offer to Buyer a very competitive discounts from Platts pricing. Exact pricing and discount will be solved directly during discussion between buyer and seller. Commissions for the beneficiaries are always paid by the Buyer accoridng to NCNDA/IMFPA signed by the Buyer along with Contract/SPA. Buyer does not pay any Seller-side fees. Please note, that the commission must be reasonable - if it is too high, it may put the entire transaction in risk by increased the costs for the Buyer.
FINANCIAL INSTRUMENTS
Standby Letter of Credit (SBLC)
SBLC is a bank guarantee in the form of a documentary credit, which is used to: (1) guarantee any failure to pay on the part of the purchaser / importer and (2) to guarantee any failure to perform the agreement on the part of the supplier / exporter. The SBLC is only used if what is agreed between the two parties is not performed or is performed incorrectly. Only the documents requested by the terms of the SBLC are taken into consideration. SBLCs are subject to the Uniform Customs and Practice for documentary credits (UCP). This means that where commercial documents have to be presented, the UCP sets out how they may be verified. An SBLC may also be confirmed, whereas a guarantee issued by the beneficiary’s bank requires a double commitment, since the issuing bank has to counter-guarantee the guarantor bank. It is also known as a "non-performing letter of credit".
Bank Guarantee (BG)
A guarantee froma lending institution ensuring that the liabilities of a debtor will be met. In other words, if the debtor fails to settle a debt, the bank will cover it. A Bank Guarantee enables the customer (debtor) to acquire goods, buy equipment, or draw down loans, and thereby expand business activity. A Bank Guarantee and a Letter of Credit are similar in many ways, but they are two different things. The main difference between the two Credit security instruments is the position of the bank relative to the Buyer and Seller of a good, service or basket of goods or services in the event of the Buyer's default of payment. A Bank Guarantee is a guarantee made by a bank on behalf of a customer (usually an established corporate customer) should it fail to deliver the payment, essentially making the bank a co-signer for one of its customer's purchases. Should the bank accept that its customer has sufficient funds or Credit to authorize the guarantee, it will approve it. A guarantee is a written contract stating that in the event of the borrower being unable or unwilling to pay the debt with a merchant, the bank will act as a guarantor and pay its client's debt to the merchant. The initial claim is still settled primarily against the bank's client, and not the bank itself. Should the client default, then the bank agrees in the Bank Guarantee to pay for its client's debts.
Irrevocable Transferrable Documentary Letter of Credit (ITDLC)
Transferable letter of credit is a sort of a documentary credit which can be used in situations where middlemen are playing a certain role. Usually middlemen (first beneficiary) do not have enough capital establishment to buy the goods from their sources (second beneficiary) before they re-sell them to their final customers (applicant). If the final buyer finds it valuable working with a middleman for a definite foreign trade transaction, he can let the middleman benefit from his credibility by supplying him a transferable letter of credit.The middleman than have the part or all of the transferable letter of credit transferred to his supplier who has gained considerable payment assurance to ship the goods. The supplier can acquire its payment portion in exchange for the complying documents stated in the letter of credit. The middleman is entitled to substitute its own invoice for the one of the supplier and acquire the difference as his profit in transferable letter of credit mechanism.
Important Points of Consideration:
- Transferable letters of credit should be issued in an irrevocable form
- A letter of credit can be transferred to the second beneficiary at the request of the first beneficiary only if it expressly states that the letter of credit is "transferable"
- A bank is not obligated to transfer a credit
- A transferable letter of credit can be transferred to more than one second beneficiary as long as credit allows partial shipments
- The terms and conditions of the original credit must be indicated exactly in the transferred credit. However, in order to keep the workability of the transferable letter of credit below figures can be reduced or curtailed
- Letter of credit amount
- The expiry date
- The presentation period
- The latest shipment date or given period for shipment
- The first beneficiary may demand from the transferring bank to substitute his name for that of the applicant. However, if a document other than invoice required in the transferable credit must be issued in a way to show the applicant's name, in such a case that requirement must be indicated in the transferred credit.
- Transferred credit can not be transferred once again to any third beneficiary according to the request of the second beneficiary
Irrevocable Revolving Documentary Letter of Credit (IRDLC)Single L/C that covers multiple-shipments over a long period. Instead of arranging a new L/C for each separate shipment, the buyer establishes a L/C that revolves either in value (a fixed amount is available which is replenished when exhausted) or in time (an amount is available in fixed installments over a period such as week, month, or year). L/Cs revolving in time are of two types: in the cumulative type, the sum unutilized in a period is carried over to be utilized in the next period; whereas in the non-cumulative type, it is not carried over.
PLATTS OIL PRICING AND MOC METHODOLOGY EXPLAINED