In an oil and gas company, all roads lead to the “Supply and Trading” aspect of the business. It’s where inventories get managed, oil is traded, and a slew of risks are encountered.
While there are risks scattered like landmines all around the oil and gas landscape, some of the greatest risks are incurred here–at the stage where oil and gas actually exchanges hands on the local, international, and global platform.
While this makes trading seem orderly, the fact is it couldn’t be more tumultuous. Constant adjustments, movements, and daily decisions affect thousands of participants. It’s kind of like a massive wave pool, where every person inside gets affected by the next wave storming down from the deep end. Given all this pandemonium, there’s a few risks for these major players in the trading world.
1. Market Risk
The risk of a sudden change in the market, like oil price, that affects every player in the game. This is like a massive wave coming through the pool that’s bigger than any of the rest.
2. Basis Risk
When the price of the same commodity is different in various markets. Have you ever traveled out of state to see lower gas prices than at home? That’s what this is.
3. Liquidity Risk
The risk that, given prices or costs, no other party will be interested in buying what you’re selling. Now the seller is stuck with physical or financial assets they don’t want.
4. Operational Risk
A company is one big, complex system. If there are any weak spots in this complex chain of operations, even if they’re insanely small, then small inefficiencies could turn into big problems when multiplied to a business-wide level. That’s operational risk.
5. Credit Risk
The risk that a company won’t follow through on their promise to another company highlighted in the contract.