Bunkers: An Introduction to Managing Commercial Risk

Published Date

June 2016

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Bunkers: An Introduction to Managing Commercial Risk

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This clearly-written reference book offers the reader far more than a simple explanation of price risk management and the hedging tools and methods available today. It also provides a wide-ranging examination of the many forms of commercial risk that affect bunker suppliers and traders, just as much as they affect ship operators and charterers, including credit, counterparty, political, currency, insurance and even business continuity risk.

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In these increasingly uncertain times we are all assessing risks and, when possible, devising a means to minimise them – consciously or otherwise. Increasing access to information should permit better risk management but without systems and an appreciation of the level of exposure or damage that can result from poor management, the process of trying to alleviate risk can have a negative impact. Risk management is not gambling but must be an integral part of a company’s business processes.


This book is published at a very opportune time with the future seemingly less predictable now than at any time in the past decades. After many years of accepting that energy prices would continue to increase in real terms, they have faltered. At the time of writing, the majority of industry commentators are predicting that they will stay relatively low for some time but, with the rapid slowdown in capital exploration, they may shoot up again in the not too distant future. In the meantime, prices will be set by the market supply/demand balance rather than a cartel. Hence controlling exposure to price volatility has become even more complex and the approaches and concepts set out in this book provide both the seasoned trader and the newcomer with valuable insights.


The publication of this book coincides with one of the longest periods of poor freight income for the shipping industry, with perhaps the exception of tanker owners. This situation will lead to more shipowners becoming hostage to the banks, an amalgamation of the less fortunate owners and an acceleration of failures. The bunker suppliers, who globally are lending some $6 billion to the shipping industry on an unsecured basis, have an even greater need to assess their credit risks and manage them. At the same time, bunker buyers are under even greater pressure to minimise costs which can result in purchases at the lowest price but not always at the lowest cost. Cheap fuel is often poor fuel which can expose vessels to the inherent risk of engine damage and in extreme cases, the loss of a vessel. Again, accessing and balancing the risks against achieving lower costs requires knowledge and experience as well as techniques.


This book authored by Nigel Draffin will be a welcome and timely aid to many who have thought they could leave risks to others. Knowing how to identify risks and minimise them at a reasonable cost is now an essential management skill.




About the author


List of Figures


Chapter 1 - What is risk?


The ALARP principle

Price risk

Credit risk

Counterparty risk

Operational risk


Failure to manage risk


Bunker price risk

Bunker price history


Identifying strategy

Business need

Price sensitivity

Appetite for risk

Currency risk

Unsecured credit


Product price


Risk reduction


Insurance risk

Link to physical contracts

Link to paper derivatives



Chapter 2 - The History of Derivatives

Differences between futures and forward contracts

Over the counter (OTC) trades

Futures exchanges



Chapter 3 - Hedging Basics


How a swap works

How an option works

Call option

Put option

Using cargo prices instead of bunker prices


Chapter 4 - More on Hedging


Forward curve – contango/backwardation


Volatility and option pricing

Historical volatility

Implied volatility


Market perception – Bull versus Bear

Basis risk



Over the counter (OTC) products for buyers



Cap / collar



Chapter 5 - Credit risk

Managing credit lines (product buyer)

Managing credit lines (product seller)

Credit scoring

Credit insurance

Assignment of receivables




Chapter 6 - Overall exposure


Exposure for derivative seller


Exposure for derivative buyer


Exchange exposure


Specific risks

Country risk

Currency risk



Chapter 7 - Supplier’s risks

Basis risk

Market risk

Credit risk

Operational risk

Liquidity risk



Chapter 8 - Assessing counterparty credit risk


Identifying counterparties


Business model

Market exposure of a ship operator

Market exposure of a trader


Use of credit reports


Resilience versus survival




Credit troubles – the warning signs



Chapter 9 - Tools for sellers


What are you ‘protecting’?

Hedging stock – long position

Hedging an individual transaction – short position



Pricing exposure

Physical exposure



Product spread

Geographical spread

Crack spread

Calendar spread

Volatility trading


Interpreting historical data


Relative strength index (RSI)



Chapter 10 - Margin calls and exposure

Impact on cash flow

Consequence of breach



Chapter 11 - Market prices

Published prices

Non-publishing days


Exchange prices



Chapter 12 - Liquidating positions



Reducing exposure

Liquidity risk



Chapter 13 - Managing portfolios


Rolling contracts


Multiple ports


Changes in trading pattern


Stress testing

Hedge effectiveness

Opportunity cost


Value at risk (VaR)



Chapter 14 – Regulations

Revenue treatment of derivatives

Fair value accounting


US rules

UK rules

General principles

Financial services regulation


Chapter 15 - Authority


Understanding potential liabilities


Management controls and reporting

For ship operators

For sellers


Accounting requirements



Chapter 16 - Dealing with risk across management structures



Chapter 17 - Contracts

Identification of counterparties

Pricing basis

Settlement dates






Chapter 18 - Business continuity


Incident resilience

Business impact analysis

Threat and risk analysis

Solution design


Plan testing, verification and maintenance

Disaster recovery

Testing your response


Some quick suggestions

Temporary office


HR issues


IT issues


Communication procedures




Chapter 19 - Cybercrime

Fraudulent emails

Fraudulent web links

IT policies, procedures and precautions



Chapter 20 - Where to go next

Risk assessment

Credit risk

Credit reports

Currency risk

Derivative trading

OTC products

Business continuity

Marine fuels – technical and legal information






List of Figures

Figure 1. 380 cSt fuel oil quarterly average

Figure 2. Rotterdam prices – historical spot level vs money of January 2015

Figure 3. Volatility as annualised % of standard deviation of prices

Figure 4. Example of daily volatility – Rotterdam 380 cSt January – June 2011

Figure 5. Liverpool Exchange in 1829

Figure 6. The beer hedge

Figure 7. Swap illustration – $340 – budget price $343

Figure 8. Call option illustration – $340 strike, $5 premium

Figure 9. Put option illustration – strike $340, premium $5

Figure 10. Forward curve – Rotterdam barge swap

Figure 11. CBQ15 – Brent crude oil – 120-minute candlestick chart

Figure 12. Multiple overlapping credits

Figure 13. Rotterdam relative strength index

Figure 14. Liquidity pyramid. Crude is the most liquid

Figure 15. Comparison of 12-month, rolling 1-month, rolling 12-month and cap hedges

Petrospot is a dynamic independent publishing, training and events organisation focused on the maritime, energy and transportation industries.

It delivers the highest quality strategic information in the most comprehensive and convenient formats – via magazines, websites and books, or face to face in conferences, exhibitions, seminars and training courses.

Based in Oxfordshire, England, Petrospot was established in May 2003 by Llewellyn Bankes-Hughes (Managing Director). He is supported by Lesley Bankes-Hughes (Director – Publishing), and Luci Llewellyn-Jones (Director – Events).

Title: Bunkers: An Introduction to Managing Commercial Risk
Edition: First
Number of Pages: 110
Product Code: PT1019K
ISBN: ISBN 13: 978-1-908663-25-2 (9781908663252), ISBN 10: 1-908663-25-1 (1908663251)
Published Date: June 2016
Binding Format: Paperback
Book Height: 210 mm
Book Width: 140 mm
Book Spine: 6 mm
Weight: 0.20 kg

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