When the subtle risk taking goes wrong…..
Few months ago when LSFO take a deep dive from 700USD to 400USD level, I have client asking howto lock the USD4xx price for 2020 . They also feedback that many traders / suppliers called them and offering many amazing proposal on how they could minimize the risk and secure the cargo.
There are 2 type of bunker contracts in general :
1. Formula based : It could be “Monthly average ” plus / minus a premium so no matter which date in the amount , its same price as its calculated base on monthly average. This formula work very well especially on office politics because your boss / college cannot complain that the day you fix the bunker- price drop immediately tomorrow ( weird you never get praised when price went up LOL)
2. Fixed price : normally work with another financial institution, trader/supplier can come up with a fixed price (e.g. USD350/MT for the whole April/ whole quarter / whole year).
For (2), Its sounds a good deal when you expect price going up but what if price drop below US200 like literally TODAY ? You are losing USD150/MTD compare to the spot market and that could means profit or loss for the whole voyage.
Its great to catch the low point of oil price but also understand the consequence and implication of fixing a fixed price contract you are GAMBLING the price will go back up and what will be the losses if your “prediction” gone south.
Until next time
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