RMG Ugly Facts Of Life Of Being An Oil Broker


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The Hard Facts About Being an Oil Broker

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RMG Ugly Facts Of Life Of Being An Oil Broker

  1. 1. THE UGLY FACTS OF LIFE ABOUT BEING A PETROLEUM TRADERAnyone whos got involved in the inevitable daisy chains that are part of theonline international commodity "trading" business has learned a new meaning ofthe term "dead end."The fact is (and this is learned from real oil traders who know from experience)that most of these "deals" are just fake, plain and simple.Thanks to the Internet, these days some phony-baloney oil brokers even havetheir own websites and call themselves petroleum suppliers or petroleumcompanies even though they may not have completed a single real oil tradetransaction in their lives. I often ask myself “Why do they keep doing it?”The answer is, I honestly dont know and the sad thing is these traderspersistence could be putto good use if they evertook the time to actuallylearn about the business.And for one moment,dont think its only theunschooled that fall victimto these daisy chains.Many sophisticated andintellectual people such asattorneys, experiencedbusiness professionals,both men and womenwho should know betterare frequently drawn into the black hole created by these “Joker-Brokers”.When real petroleum companies such as Shell, Chevron, BP, AGIP deal with realrefiners in foreign countries, the standard procedure is that the seller makes afirm offer to the buyer - subject to whatever he needs done - and the buyer thentakes a look at the offer and says either weve got a deal or we dont.Simple! Its just like any other trade transaction in that regard. Too manybuzzwords and too many qualifiers usually mean you should stay clear. Andcontacts who are actively seeking banking information before any discussion ofproduct are usually non-players. This also allies to so called “Sellers” who ask forProof of Funds prior to issuing any form of Proof of Product………What about discounts? Real traders know theres no discount on orders whetherits a big deal or a small deal but the "play traders" believe that if the deal is
  2. 2. bigger, there should be a bigger discount. This is another example of notknowing the industry.Instead of looking for suppliers of huge amounts of oil in its various forms, the realbuyers know that no single supplier can come up with one million barrels amonth (an amount frequently tossed around) because the refining capabilityjust isnt there.What about someone fronting for a rich Saudi Sheik? Fat chance! Say the realtraders. In the case of Saudi Arabia, there are only two legitimate organizationsthat sell oil on behalf of the country or an oil consortium. Someone who says hesselling on behalf of a Saudi sheik is just, well, full of sheik!And if they start talking about millions of barrels per month its almost certainly not real unless theyre talking about crude oil. Remember, a brokers entire job is to help a petroleum companys trading department find or sell oil and related products so that he will receive a commission when the deal comes together. Will you get paid? Thats always an issue for export intermediaries but it canbe especially tricky in the oil business.The fact is that most oil companies -- and especially the big ones -- have tradersin their marketing departments who operate honestly and fulfill obligations tobrokers. But there are some independent and smaller companies who treatbrokers shabbily and their reputations are widely known - another reason to getsmart on the oil business before you dive in.Surprisingly, you will probably find that many of the bigger oil trading companieswill not only accept your services but may also provide advice and assistance.So whats the bottom line?Like I said before, being a Petroleum Trader isn’t easy, and youve got to knowwhat youre doing. The fact is, petroleum marketing is a dog-eat-dog business
  3. 3. and if youre a broker, youd better have the resilience and perseverance towork through the baloney and outright deceit which seems to attach itself topetroleum trading.Frankly, unless you have contacts in or familiarity with the petroleum industry, Irecommend you stay with small- and mid-sized product manufacturers who arenot exporting their products. It may not be as exotic as trading in petroleum, butit works - and you can make some real money. If you insist on trading in thevolatile petroleum industry, try to find someone who will mentor you on the insand outs. This is probably the best way to make sure you dont get "burned" byoil.OIL BROKEROne who acts as a go-between in thedomestic or international crude oil market.A broker will find a market for a quantity ofcrude or product not committed by long-term contract. Just as readily, he will comeup with oil for someone who wishes to buy.Brokers perform a useful function in the oilbusiness by being knowledgeable about theindustrys supply and demand situation Heis the unobtrusive link between buyer andseller, independent producer and smallrefiner. For his services, the broker receiveseither a flat fee or a percentage of the dealhe helps consummate.This brings us to DUE DILIGENCE and COMMISSIONS and I shall refer to themseparately.DUE DILIGENCE a phrase rarely spoken of or used by a broker, maybe that’sbecause they don’t want to find out that the so called “Seller” has nothing tooffer or perhaps they think that ignorance of the understanding of the phrasewill protect them in a court of law.So to clarify things let me define what Due Diligence is.DUE DILIGENCE is the process of evaluating a prospective business decision bygetting information about the financial, legal and other material (important)information and or state of the other party.In simple lay terms it means finding out about the company that is selling theproduct, for example where is the company registered? Are they the actual titleholder of the product? Is the product free of all encumbrances and liens? Whatport is the product at? What is liftable? Does it come with a current SGS or
  4. 4. Saybolt inspection of quality? Is it being sold CIF or FOB? Basic questions, seldomasked.The problem is that a Broker passing on information from a “Reliable Source”without doing any Due Diligence could find themselves embroiled in a law suitshould the facts that they presented to the Buyer not be as stated and bechanged with “Fraudulent Misrepresentation”Fraudulent misrepresentation is a situation in which an individual or entity has taken deliberate steps to intentionallydeceive one or more other parties. The deception may involve issuing statements that are known to be untrue, or todeliberately omit relevant facts or information that ultimately lead to some type of loss. In many jurisdictions, this type ofnegligent misrepresentation is punishable by fines, prison, or a combination of the two. Often, the party found guilty of themisrepresentation is ordered to make some type of recompense to the injured party.Misrepresentation is a type of tort that a defendant can be charged with in a civil action. It typically occurs when aperson makes a false statement of material fact for the purposeof persuading another person to enter into a contract or otherarrangement.Negligent misrepresentation is a concept which arises in contractlaw. In general, misrepresentation refers to a situation in whichsomeone makes a false statement for the purpose of making adeal, resulting in the person who relies on the statementexperiencing harm. In the case of negligent misrepresentation,someone makes a statement without any grounds for knowingwhether it is true or not.So for those brokers that do not performDue Diligence you have been warnedignorance of the law is no excuse.This brings us to commissionsCOMMISSION-FEESA fee charged by a broker or agent for his/her service in facilitating atransaction, such as the buying or selling of securities or real estate.In the case of securities trading, brokers can be split into two broad categories depending on the commissions they charge.Discount brokers charge relatively low commissions, but provide no services beyond executing trades. Full service brokerscharge higher commissions, but provide research and investment advisory services.Over the past few years I have seen the fees charged to a possible transactionspiral upward in some cases reaching the astronomic heights of $30 USD permetric ton to be divided 50 – 50 between the buy side and the sell side. For GodSake! Get a life! Or at least do the mathematics, on a simple 100,000 metric ton
  5. 5. transaction using the figures I have quoted that’s $30,000,000 please explainhow we as the buyers are supposed to justify that amount of money to the bankat which we have our lines of credit, and perhaps if I have a reader at this pointthey can explain what the broker did to earn this amazing sum of money andalso answer me the question that comes up each time this situation occurs, Whyare we paying the commission for the sell side of the transaction, isn’t that theresponsibility of the Seller?I have no idea where the idea that fees of this magnitude are paid to brokers inan oil transaction, or for that matter who in the transaction is going to pay them,certainly not me as the buyer! I have heard brokers state that all fees in thisindustry are set by the International Chamber of Commerce (ICC) WRONG! TheICC has nothing to do with this business, we are not members, therefore are notgoverned by ICC rules.The standard fee for a transaction is $1.00 to the buy side brokers divided howthey wish and certainly no fees are paid by the buyer to the sell side, that’s theresponsibility of the seller. Bear in mind, none of the majors pay brokers fees, sobe happy with what you are given.Having been in the oil business since 1976 many years prior to the birth of theinternet and Skype I feel that have the practical experience and the hands onmanagement knowledge and skills required to try and set some of themisunderstandings right, if you disagree, that’s your prerogative, but as I tell thepeople that work for us, “THINK THE DEAL THROUGH” if you as a fresh facedyoung broker or a grizzled seasoned veteran take the time to think about theprocess, I am sure that you will realize that this industry requires a lot of hard workand effort, so rather than just pass the deal from your friend Joe along to thenext broker friend, Do some dam work and find out if the deals real or not andtry to earn your commissions Robert McAngus Managing Partner for the Robert McAngus Group www.mcangus-group.com ORIGINALLY ARTICLE WRITTEN AND ISSUED IN 2004 - © RMG