While spot deals aren’t new or particularly innovative, they’re often quite lucrative — especially in today’s downstream energy market. Despite the common preference for term contracts when executing transactions, spot deals serve as a familiar, essential mechanism in pricing crude oil and refined products.
Let’s briefly explore some of the main pros and cons, and how both buyers and sellers can use spot deals to take advantage of market opportunities that increase their revenue and overall profitability.
First and foremost, buying and selling on spot markets offers traders more flexibility. It also provides greater transparency. Since traders only execute deals when they see an opportunity they like — and are happy with the current price and terms — they can enjoy the benefits of limited risk.
An example of this is arbitrage, where a trader buys in one market and instantly sells in another, making a profit from the price difference. Traders simultaneously monitor multiple markets, hunting for the lowest and highest prices. However, to seize maximum profit, they must also factor in the cost of transporting the product.
Arbitrage is just one way to take advantage of the spot market. There are several other reasons traders execute spot deals. Two of the more common are:
- Speed: with spot deals, payment and delivery typically happen immediately.
- Transparency: it’s easy to share spot prices via market exchanges.
Now, you may be thinking spot deals sound great — so why don’t they happen more often? Why wouldn’t a buyer or seller use them?
The reasons can vary widely by participant and organization, but here are two common ones that prevent fuel traders from leveraging spot deals.
- The inability to scale: today, most spot deals are handled between traders, one-on-one, through phone calls, texts, or even faxes. These methods can quickly become very labor-intensive and time-consuming — and inefficient communication or a lack of timely response can easily lead to lost opportunities.
- Poor integration: likewise, if a deal is secured, it must be accurately documented, and allocations, shipment, and payment carefully tracked. This typically requires manual data entry into spreadsheets or isolated systems, taking up valuable staff time and greatly increasing the potential for errors and introducing risk into back-office operations.
How to seize spot deals
For fuel traders to capitalize on the spot market, they need digitally driven tools that help accelerate and streamline internal processes. Reducing back-office friction is also a must and integration with critical systems, such as allocation management solutions, can help companies eliminate error-prone tasks, such as manually keying vital data. Further, modern solutions also free up staff to focus on activities that fuel add revenue and propel profitability.
In short, achieving greater profitability in the spot market requires integrated processes that minimize the risks of increased trade volume while also elevating revenue potential within a frequently imbalanced market.
Seize more day deals
If you’re looking to add spot deals to your trading program, we invite you to explore our innovative Energy Digital Commerce solution.