Buyer and Seller issues - who really needs protection?

Everyone entering this market hears it a lot: no information exchange before NCND is in place or buyers or sellers refusing to identify themselves upfront but both are often arrogantly demanding information from the other party without willingness to provide it of themselves. But what is the reality behind all this? Here are some of our views.

It may surprise some but many find it logical after thinking about it for a moment: in the markets for fuel products the buyers are more vulnerable than the sellers and have more to lose. The sellers may voice their concerns but even they must agree when looking at the buyer side. And let's be realistic about these matters: it is a seller's market where buyers are fiercely competing to find a reliable seller with the product and the only reason sellers may wish to stay anonymous initially would be to protect themselves from an unwanted avalanche of inquiries coming their way.

Few premises to start with: a) world is energy hungry and there are more buyers than suppliers and b) there are no international police forces who would be checking the possible fraudulent activities in the market in a very pro-active manner and c) much of the structural or planned fraud taking place in this market is due to speculation (meaning that party is offering the product to the market before owning it establishes structural problem) or loose governance, observing and monitorin of international and national trade laws (for example a party makes a product offering with a planned scenario to cash-in on the fees involved in large trade transactions) established in countries where legal systems are loose and/or corrupt.

The aforementioned are giving incentives for fraud to take place either in a form of non-existent products where the so-called "seller" goes on looking for the product with buyer's funds or plans to cash-in on fees involved or may be phishing for banking or financial information which can be turned to a real benefit (more of this in the latter paragraph).

Let us evaluate the seller side objectively. It is a seller's market. If a seller has fuel, someone will want to buy it. At our end we often state that as the world is energy hungry, the sellers are better positioned than the coveted Hollywood Movie Makers who need to take real risks in the market as not everyone goes to movies and not every film is for everyone but as far as energy products go - they are more or less part of everyone's daily living in the forms of heat, transportation and maintaining infrastructures. A seller for fuel products doesn't need to try to find a buyer (only a reliable buyer), just passing a word out and the potential buyers will find them. It is more of a case - as we have often witnessed - of who would the seller prefer to sell their product to? Who on top of the cash paid in, is the most interesting party they would like to work with over the longer term? And what are the risks when seller has the product? There are several related to product safety and security as these are indeed potentially explosive and hazardous materials. But is someone going to run away with the seller's millions of barrels or metric tons from the tank farm or suck it out of the pipeline while the seller turns their back for a moment? We don't believe so. So what do the sellers have to worry about? They have their concerns but the protections are there.

Now the buyer side is more problematic. The buyer wishes to buy a product but - as it is a case most often - they should provide a LOI or ICPO to an anonymous party via some other party with a their bank's back up and/or potentially costly banking instrument or in some cases the procedures require them to submit instruments like DLC, BG and SBLC. Now the question is would you when you don't know if the product exists and who is the final party to whom the information goes in the process?

Contrary to what most think- it is the buyer who is more vulnerable in these deals, providing bank information is far more risky than providing the product verification, information can go anywhere on the buyer's banking after it's released contrary to product which can stay at the tank farm as long as needed. Buying and selling of fuels is easy as long as the product exists and it usually exists when the sell side is forthcoming with the information relating to the product. Trading becomes difficult only in the case of fakes which occur more often on the seller side than on the buyer (there are those buyer attempts also) as in such case the seller side is indeed the party trying to pump the information from the buyer. A good seller loses nothing except their anonymity by providing product information. Who can take their product away from them when they announce the sale in the market? Trading fuels is only difficult in case of speculative offers and frauds as there is nothing to trade with starting with the information which can be very vague (or fake). If one wishes to know how easy it is to trade when the product is existense and real - one of the Majors we work with usually requires a CC upfront, they can verify the product in 20-30 minutes if it is really there, then they simply dip, pay and lift, all in few hours or days time window provided both parties agree on the mutual procedure. They do this 24/7 and as long as the product is in tanks, it can work fast. In many cases there are however resellers who don't have the product but turn themselves into a buyer when they get an inquiry. That only produces frustrations to all parties. As long as it's in tanks - all can be done very quick and clean, money exchanges hands and product is lifted all go home. The sellers have nothing to lose by coming to a CC and/or proving information the product exists - nobody will run out of the tank farm with 1M bbl or 1M Mt very quickly.

Please allow me to also explain what can happen when the buyer issues DLC, BG and SBLC instruments: The so called seller activates the instruments with a 2% performance bond, they then take the instrument to certain countries (with loose laws and banking regulations) where they can obtain a loan of up to 80% of the activated instrument value. The seller then uses the money to purchase product (any product they wish to) locally or internationally, in order to take it to the market. They never necessarily deliver the product to the buyer in question, they simply got a possibility for funding, the initial instrument issuer ends up with their funds blocked in their account until they can obtain the funds for the performance bond. They are not out of pocket but neither do they receive any fuel product. The original buyers loss is the inability to use their blocked funds and of course never receiving product. This scam is extremely popular and no buyer should ever issue these instruments unless they want to help someone else get rich.

On our behalf, we would like to see some of the trade becoming much easier. While working with both buyers and sellers and intermediaries - we recognize there is a great deal of basic trust missing from this complex market place. If we can bring in even some - it will be part of our success.