Physical Cargo Hedging

Q1: What is Brent crude, and why is it important?

A1: Brent is a benchmark crude oil blend from the North Sea. It's widely used as a pricing reference for physical and financial oil markets globally.

Q2: What is the difference between Dated Brent and Brent Futures?

A2:

• Dated Brent refers to physical cargoes ready for loading, priced using Platts assessments.
• Brent Futures are financial contracts traded on exchanges, settled in cash, and used for hedging or speculation.

Q3: What is the role of the Forward Market in Brent trading?

A3: The forward market allows buyers and sellers to fix cargo prices 3–4 months ahead. It links financial instruments to the physical market and supports price discovery.

Q4: What is a CFD (Contract for Difference) in oil markets?

A4: A CFD is a weekly financial contract that tracks the difference between Dated Brent and Brent Futures. It's used to hedge short-term price exposure.

Q5: What is the DFL (Dated to Frontline) contract?

A5: It’s a futures-based contract capturing the price difference between Dated Brent and front-month Brent futures. DFLs help hedge physical price exposure more precisely.

Q6: What is a Swap in commodity trading?

A6: A swap is a contract where one party pays a fixed price and the other pays a floating market price over time. It's used to hedge when there’s no direct futures market (e.g., Jet Fuel).

Q7: When would a trader use a basis swap and Gasoil futures?

A7: When there's no futures contract for a product (like Jet Fuel), the trader uses Gasoil futures + a Jet Fuel to Gasoil basis swap to replicate a hedge.

Q8: What’s the first thing you do when hedging a physical cargo?

A8: Collect all info: loading/discharge dates, contract terms (e.g. 5 days around B/L), premiums, and hedge prices for CFDs and forwards.

Q9: How do I choose the right dates for price calculations?

A9:

• If pricing says “5 days around B/L”, pick 5 days around the loading date.
• If it says “5 days after completion of discharge”, start from the day after discharge ends.

Q10: How do I calculate the average Dated Brent spot price?

A10: Add the 5 Dated Brent spot prices for the correct dates and divide by 5.

Q11: How do I calculate the average Brent forward settlement price?

A11: Add the 5 Brent forward prices (same dates) and divide by 5.

Q12: How do I calculate the CFD value for each day?

A12: CFD = Dated Brent Spot – Brent Forward Settlement

Q13: What do I do once I have daily CFD values?

A13: Calculate the average of all daily CFD values → this gives you the market CFD price.

Q14: What do I compare my hedge prices to?

A14: Compare your locked CFD and forward prices to the market averages you just calculated.

Q15: What is the formula to calculate hedge profit or loss?

A15:

• If you bought (long): Hedge P&L = Hedge Price – Market Price
• If you sold (short): Hedge P&L = Market Price – Hedge Price

Q16: When I buy a physical cargo, what do I do with CFDs and Forwards?

A16: You sell CFDs and Forwards to hedge against falling prices.

Q17: When I sell a physical cargo, what do I do with CFDs and Forwards?

A17: You buy CFDs and Forwards to hedge against rising prices.

Q18: How do I calculate the physical contract price for a purchase?

A18: Purchase Price = Average Dated Brent (loading) + premium (e.g., +$2)

Q19: How do I calculate the physical contract price for a sale?

A19: Sale Price = Average Dated Brent (discharge) + premium (e.g., +$5)

Q20: How do I calculate Physical Trade P&L?

A20: Physical P&L = Sale Price – Purchase Price

Q21: How do I calculate total trade profit or loss?

A21: Total P&L = Physical P&L + Hedge P&L

Q22: When buying a cargo, how do you know if your hedge made a profit?

A22: If the market CFD and Forward prices are higher than the prices you locked in, you made a profit.

Q23: When buying a cargo, when do you lose money on the hedge?

A23: If the market prices are lower than what you locked, you lose money on the hedge.

Q24: When selling a cargo, how do you make money on the hedge?

A24: If the market CFD and Forward prices are lower than what you sold, you made a profit.

Q25: When selling a cargo, when do you lose money on the hedge?

A25: If the market prices are higher than what you sold, you lose money.

Q26: What is the final formula for your full trade evaluation?

A26: Total P&L = (Sale Price – Purchase Price) + (Hedge CFD P&L + Hedge Forward P&L)