How To Make Profits by Trading Physical Commodities

This is a straight guide. No hype. You make money by controlling optionality, seeing dislocations before others, and carrying risk you understand better than the market. The names you know built empires on this: Marc Rich’s playbook that became Glencore under Ivan Glasenberg, and peer houses like Vitol, Trafigura, Gunvor, and Mercuria. The model is simple on paper and hard in practice. Buy, transform, move, and sell with the right hedge and the right counterparty.

Where the Money Actually Comes From

• Time spreads: buy prompt, sell forward in contango or reverse it in backwardation using storage or early offtake. Earn the carry or the roll.
• Location arbitrage: ship from a cheap basin to a rich one when netback beats freight and fees. This is basis trading in the real world.
• Quality arbitrage and blending: combine grades to hit a spec that clears at a premium. Think crude gravity and sulfur, or metals purity and shape.
• Contract optionality: destination options, volume flex, pricing windows. Options embedded in contracts are profit if you price them correctly.
• Paper vs physical gaps: use futures and options to lock the economics while squeezing a mispriced physical leg.

Business Models of the Big Houses

• Glencore: merchant plus producer stakes. Deep optionality from mines, smelters, logistics, and marketing desks. Discipline on risk and working capital defined Ivan Glasenberg’s era.
• Vitol: the oil giant. Crude and products with storage, terminals, and shipping at scale. Profits driven by cracks, time spreads, and routing.
• Trafigura: strong in oil and metals with port assets and financing arms. Heavy focus on offtakes and midstream control.
• Gunvor: oil products and crude with a nimble style. Good at seizing short-lived refinery and freight dislocations.
• Mercuria: diversified energy and metals. Active in paper markets to lock spreads and fund structured trades.
• Marc Rich’s legacy: arbitrage first, relationships second, balance sheet third. Find the basis that others ignore and move fast.

Production Financing and Offtakes

Traders fund the barrel or the tonne to secure flow. In return they get volume, pricing rights, and first look at cargoes. Structures include:

• Prepayments and PXF: advance against production with take-or-pay offtake. Secured on receivables, inventory, or export proceeds.
• Reserve or resource backed lines: longer tenor tied to reserves or long-term contracts. Often stepped covenants and price hedging.
• Tolling and throughput: pay for processing or guaranteed terminal slots to turn stranded material into a deliverable spec.
• Back-to-back offtakes: producer offtake mirrored with a refinery or smelter sale. The spread is logistics, financing, and optionality.

A Concise Playbook

1. Define the edge: basin knowledge, refinery slate, smelter penalties, port congestion, tax quirks. Pick one and go deep.
2. Source optionality: write contracts with destination options, QP choice, volume flex, and grade ranges that you can monetize.
3. Price and hedge: set the physical price basis and hedge the flat price with futures or options. Keep basis risk intentional and sized.
4. Lock freight and storage: storage creates time optionality. Forward freight or FFA strips protect voyage economics.
5. Control assays and specs: for metals, negotiate payabilities, penalties, and umpire lab clauses. For oil, manage sulfur, metals, RVP, and distillation.
6. Run a tight book: daily mark-to-market for physical and paper. Lot sizes, prompts, currencies, and locations reconciled every day.
7. Finance the chain: use borrowing bases, repo, or prepayments to scale without choking cash. Collateral is inventory and receivables.
8. Execute with discipline: no side-channel deals, no unfunded inspection games, no fantasy valuations. Ship, clear, pay, and collect.
9. Scale what works: expand where your hit rate is real. Kill what does not clear risk-adjusted hurdles.
10. Protect the downside: stop-loss rules, VaR limits, counterparty caps, and sanctions screening. Survival is the first profit center.

Unit Economics: One Simple Cargo

Rare Opportunities You Wait For

• Infrastructure outages: refinery fires, smelter shutdowns, pipeline leaks. Local basis explodes. Move fast.
• Policy shocks: tariffs, quotas, taxes, and sanctions. Price relationships break. Only trade what you can clear and insure.
• Weather and logistics events: low river levels, canal delays, port strikes, storm seasons. Freight and delivery premia appear.
• Quality squeezes: shortage of a spec that refineries or smelters must have. Blending and substitution earn outsized returns.
• Paper dislocations: futures squeeze or air pockets. Hedge first, then work the physical to release the basis.

Risk Principles That Keep You In The Game

• Never leave flat price naked unless it is intentional and sized inside limits.
• Basis is profit and danger. Measure it by route and grade, not just by benchmark.
• Cash is oxygen. Model variation margin and working capital for worst case.
• Documentation is a position. Clean title, proper inspections, and enforceable terms prevent losses.
• Reputation pays. Counterparties lift your cargo first when they trust your paper and your word.

Trading carries market, credit, and operational risk. Keep firm limits, broker lines, and daily reconciliations. If a quote or certificate looks unreal, it is.