Mastering the Spread: How to Structure Premiums and Discounts in Oil Trading

In the world of Crude Oil and Fuel trading, the most common question from newcomers is: “Should I ask the buyer for a premium or take a bigger discount from the benchmark?”

The answer depends on whether you are simply “pushing paper” or acting as a professional Principal. To succeed on the global stage, you must move from a passive observer to an active refiner of the deal.

The Refining Process: From “Green” to Expert

For your first year, your job is simply to survive. You will deal with thousands of ill-informed traders and “ghost” offers. This is your training period to spot fakes.

Once you have trained your eye, you stop waiting for offers and start issuing Invitations to Bid (ITB) based on your own terms. You approach a supplier directly (e.g., Lukoil or a major refinery) and dictate how you want to pay. They will likely push back, and that is where the “refining” happens. You adjust your methods based on their advice until you “crack” their in-house selling procedure.

Understanding the Benchmark, Discount, and Premium

In a standard D2 Diesel or Crude Oil deal, the price is almost always tied to a benchmark (like WTI, Brent, or Platts).

The Benchmark: The base market price (e.g., $100/MT).
The Discount: The reduction given for high-volume, long-term contracts (e.g., -$28.00/MT).
The Premium: An added fee or “buffer” applied to the price to handle market volatility or intermediary gains.

The Math of a Real Deal:

Imagine your supplier offers you a $28.00/MT straight discount off the benchmark. You then turn to your end buyer and offer them a $14.00/MT discount.

Your Revenue: Benchmark minus $14.00.
Your Cost: Benchmark minus $28.00 (plus shipping costs, e.g., $9.80/MT).
The Result: You have created a “gap” of $14.00. After paying the shipping ($9.80), you have a $4.20/MT gross profit. You can then pay your intermediaries their share (e.g., $1.80) and keep the remaining $2.40/MT for yourself.

Creating the “Gap”

You asked if you should seek a “Premium” from the buyer. The answer is: You create the application that works for you. Whether you call it a “Monthly Premium” or a “Reduced Discount,” the goal is the same — to ensure there is a protected margin between what the buyer pays into your account and what you pay out to the supplier.

The Supplier Side: They may want a fixed premium added to the price every time the benchmark increases by $100.
The Buyer Side: They want a simple, attractive discount.

Your skill as a COFI trader is to “match” these two sides so that the buyer’s Documentary Letter of Credit (DLC) covers both the supplier’s price and your profit.

The “Take It or Leave It” Position

In the Crude Oil and Fuel trading market, there is no single “standard” procedure. It is more broadly applied than mainstream commodities like sugar. You test discounts, you test premiums, and you show real skill by presenting a professional offer to your buyer.

You are effectively saying to your end buyer: “This is the benchmark, this is the discount, and these are my requirements. Take it or leave it.” ## 5. Controlling the Tolerance Because oil prices fluctuate daily, your financial instruments must be flexible. When you open a DLC under UCP 600 rules, you should include a 5% tolerance factor. If the price increases or decreases within that month, the credit value adjusts automatically. If the market breaches that 5% limit, you issue an amendment to the credit for that specific delivery.

Final Summary: The Principal’s Mindset

Don’t Play with the Supplier’s Offer: Never simply forward a supplier’s quote. Adapt it. Create a brand-new offer on your own letterhead with your own pricing structure.
Refine the Process: Every supplier has different internal rules. Learn them, adapt to them, or move on to the next one.
Control the Payment: You are the one who controls the “Gap.” If you don’t ensure a healthy spread between the buy and sell price, you aren’t trading — you’re just gambling with your time.

Success in the oil market doesn’t come from following a manual; it comes from the ability to structure a deal that is so attractive to the buyer and so secure for the supplier that both sides have no choice but to say “Yes.”