20 Nov How the digital tidal wave is transforming commodity trading and commercial shipping
Increasing market volatility and stiff competition in oil trading and commercial shipping is forcing companies to turn to digital technologies to gain and sustain competitive advantage. Emerging digital technologies are automating complex and cumbersome processes, bringing efficiency and leading to faster and better decision-making. New digital platforms are surfacing that deliver enhanced benefits to customers. This use of artificial intelligence (AI), machine learning, sensors, and satellite data is transforming inefficient markets on a global scale.
AI is about training computers to think and act like a human by teaching them to accomplish specific tasks, such as speech recognition and visual perception. This is achieved by processing large amounts of data and recognising patterns that the human brain would identify naturally. Whilst AI was founded as an academic discipline in 1956, in recent years it has experienced a resurgence due to advances in computational power and big data. AI is now a core element of the technology industry and is helping to solve many complex problems and outperform the limits of human intelligence.
Solving inefficiencies in oil trading with AI and satellite data
Oil supermajors such as BP, Shell, and ExxonMobil are key players in the global industrial landscape. They are huge organisations, vertically integrated through all parts of the commodity chain from production to distribution. These global industrial institutions have also invested heavily in significant trading divisions, and as a result, are exposed to the many variables affecting the commodity-trading landscape.
In the commodity world, global supply and demand influences price. For oil traders to improve their oil market forecasts, a broad view of the global market and an understanding of how all the individual pieces tie together is key. Prior to recent digital innovations, oil traders have relied on traditional sources for oil data such as International Energy Agency forecasts, OPEC production data and US Department of Energy reports. Huge trading and investment decisions would rely on third party historical reports, opinions, and subjective data in order to forecast forward oil supply.
Image source: Orange Business Services
Today, all eyes are in the sky. According to Florian Thaler, CEO of OilX, an oil analytics company, “the current exponential growth in oil data from sensors and satellite is unprecedented and is not showing any signs of slowing down.” The fusing of AI and data science with multiple data sources such as satellite, radar imagery, customs information, EIA, JODI and IEA is what enables OilX to provide a digital twin of the global oil supply chain and act as the world’s first digital oil analyst.
The web-based platform automates many of the cumbersome tasks done today by oil analysts, enabling oil traders to analyse the global supply and demand balance of crude oil in near real-time, and forecast near-term supply through its nowcasting capability. This is a huge step forward when compared to the official data sources that traders have relied on in the past, which would often lag the market by many months. Data science has opened up the oil supply chain, enabling trading organisations to increase efficiency and profitability.
Image source: Courtesy of OilX
Enabling fairer price information and transparency in derivative trading
Crude oil is one of the most actively traded commodities in the world. Despite increased emphasis on alternative energy sources such as renewables, oil remains the major energy source for the world. A multitude of factors continuously influence global oil prices, from the weather and global arbitrage through to economic and political conditions or even general market sentiment. This high market volatility carries price risk to market participants which can be mitigated through the trading oil futures contracts. These oil derivative contracts enable traders to manage inherent price risk in their operations, leverage market information to speculate on future price movements and are one of the most actively traded derivatives in the market. Most of these transactions today take place through outdated means. Multi-million dollar trading decisions are made through phone and webchat systems where an intermediary will often selectively bring buyers and sellers together. This creates an environment that is biased, opaque and inefficient.
Trading oil futures can also be very expensive due to the high transaction costs that companies incur, often increasing as larger volumes are traded. BLOC-X, a fintech startup, provides an alternative electronic trading software for over-the-counter (OTC) oil futures that promises to reduce transaction costs by up to 90%. To put this in context, a company that trades 1,500,000 metric tons of oil per month at a $0.05 transaction fee would spend $900,000 in annual execution fees with the current model. Using BLOC-X’s software, however, the same company could save $787,500 in execution fees, a massive cost reduction.
Use BLOC-X’s calculator to calculate your savings.
In addition, BLOC-X offers greater market transparency and unrestricted access to multiple clearing venues such as ICE, NYMEX and SGX. BLOC-X believes that efficiency gains through the use of technology must be passed onto end users – something that just doesn’t happen now.
Commodity trading houses, market makers and energy brokers are starting to see that their industry is undergoing a generational change and are beginning to utilise BLOC-X’s software to facilitate trading and offer alternative transaction models to their clients.
Digital technology in Commercial Shipping
Commercial shipping is another sector that is witnessing transformational change driven by digital technologies. Charterers, shipowners, and shipbrokers need tools that give them access to greater market intelligence in order to improve commercial decision making and ultimately profitability. The commercial shipping sector has become an increasingly competitive market and the availability, variety, and quantity of relevant data has increased dramatically.
Vessel fixtures, positions, and available cargoes are still predominantly communicated via email, with the average physical market participant receiving hundreds of market related fixture messages every day. In order to make the best possible commercial decisions this mass of data needs to be understood and cross-referenced against complex information related to vessels, ports, routes, and trading patterns. Much of this process today is still done manually or through an exchange of information between a mix of spreadsheets, databases, proprietary platforms, and public data sources.
AI-powered software such as The Signal Ocean Platform, enhance commercial performance for the entire shipping supply chain. Charterers, for example, can access accurate, real-time information that will help them to fix the best possible available vessel. This means they can identify the optimal ship, at the right time, travelling via the safest and most efficient route. Shipowners, in addition, can maximise the utilization of their vessels. A better understanding of the market enables the owner to make critical pricing decisions and cargo choices that can provide a competitive advantage. Finally, brokers can access comprehensive information so they can secure the best possible deal.
Companies face intense pressure to achieve profitability and meet the increasingly sophisticated needs of their customers. As digital technology makes industries more efficient, companies in the oil and shipping sector will benefit from increased efficiency, higher productivity and higher margins.