23 Oct Purchasing strategy for the local market
Curoil N.V. has been trading oil derivative products (not crude oil) from oil trading companies or refineries for almost 35 years now. Until two years ago, the main supplier was the local Isla Refinery.
Since the local Isla refinery stopped producing and closed by December 2019, Curoil reassures that local communities are being supplied with oil products (derivatives) by importing these. To guarantee continuity of supply, term contracts for 6 months are in place for most products, with a price structure of the applicable market price (at the moment of buying/pricing) and a fixed agreed premium for the contract period. So, when the price of crude oil drops, it is not a direct opportunity for Curoil to take action at that time. However, when the price of crude decline, it is the speculation that also the derivatives’ market will go down, but not at the same levels of crude. The market price of the derivatives of crude oil, such as gasoline, diesel fuels, LPG, jet fuel and fuel oil, do not correlate with the same trends as the crude prices. However, when crude becomes less expensive, it will reflect in the prices of derivatives’ prices at some point. Nonetheless, it should be remembered that transporting, storing and processing the crude oil, before it becomes a derivate, costs money.
It is worth noting that pricing the product will always be a snapshot of the market price at that time and this may continue to drop or rise depending on the macroeconomic and geopolitical events in the world. Also, we cannot overlook unexpected events, like we are experiencing at this moment with the world pandemic. It is thus not guaranteed that procuring and pricing a product at a certain time will be at lower or higher market prices than the future market prices. When importing, pricing derivatives is foremost based on a certain moment in time when the product arrives at its destination or by pricing unpriced barrels (e.g. consignment) of a previous import that are being stored locally. Considering this, if no unpriced barrels are held in storage locally, the timing of receiving the new import batch to price (with the goal to reach a purchase at a lower market price), may differ from today’s market price. At least 2-4 weeks must be taken into account before the time to order, load and ship the product to its destination (timing differs per product).
Procuring in large quantities in these uncertain times means locking up money with no outlook of the payback time especially considering the significant drop in offtake by customers. This will immediately affect the liquidity of our company whilst (again) there is no certain outlook when the product can be sold. To conclude, it is risky to keep large stocks of derivatives in these uncertain times as the product has a shelf life (shelf life of each derivative differs), which means that when keeping the product stored too long it can become unfit for use.