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Oil trading looks simple from the outside. Buy diesel or crude from one party, sell it to another at a higher price, and keep the margin. In practice, one cargo can be worth tens of millions of dollars, prices move every day, and the trade only works if the money, the documents and the oil all arrive where they should, in the right order.
That is what trade finance pays for. This guide explains how banks and trade finance lenders fund refined petroleum products and crude oil, what they need to see from a first-time trader, which structures are realistic when you have no track record, and how to recognize the fake deals that circulate in this market.
Refined petroleum products are the fuels that come out of a refinery, such as diesel and gasoil, gasoline, jet fuel, fuel oil, naphtha and liquefied petroleum gas (LPG). Crude oil is the unrefined input. Both are traded physically and financed in similar ways, but for a newcomer they are different markets.
| Feature | Refined products | Crude oil |
|---|---|---|
| Typical buyers | Distributors, fuel retailers, airlines, shipping companies, power plants, mining and industrial users. | Refineries, plus large trading houses that supply them. |
| Typical sellers | Refiners, trading houses, importers holding stock in terminals. | National oil companies, oil majors and large producers, usually through term contracts and tenders. |
| Parcel sizes | From truck and rail loads to coastal barges and ocean cargoes. | Mostly large ocean cargoes, which means large transaction values. |
| Quality specification | Product standards such as EN 590 for European diesel or Jet A-1 for aviation fuel. | Grade-specific, measured by density (API gravity), sulfur content and other assay data. |
| Pricing | Usually a published benchmark from a price reporting agency, plus or minus a negotiated differential. | Benchmarks such as Brent, WTI or Dubai, plus or minus a grade differential, often set around the loading date. |
| Entry for new traders | Realistic, especially in regional distribution with smaller parcels. | Difficult. Genuine supply rarely goes to newcomers. |
A typical financed trade follows the cargo from supplier to buyer, with the bank controlling the money and, where possible, the goods at each step.
The contracts. The trader signs a purchase contract with the supplier and a sale contract with the buyer. Both state the product, quality, quantity, price formula, Incoterms (the ICC rules that define who pays for freight and insurance and when risk passes), the delivery window and the payment terms.
Paying the supplier. The trader's bank issues a letter of credit or another payment undertaking in favor of the supplier. The supplier gets paid when it presents compliant documents, such as the bill of lading, commercial invoice and certificate of quality and quantity.
Controlling the cargo. The bank takes security over the oil, for example through bills of lading made out to its order, or through a pledge over product stored in a tank terminal under a collateral management or tripartite agreement.
Getting repaid. The end buyer pays into an account controlled by the bank, often under its own letter of credit. The bank takes what it is owed and releases the margin to the trader.
Inspection, insurance and hedging. An independent inspector confirms quantity and quality at loading and discharge, the cargo is insured with loss payable to the bank, and price exposure between buying and selling is hedged so a market move does not wipe out the margin.
Oil trades use a small set of instruments, combined in different ways depending on the trader's size and the deal.
A bank's promise to pay the seller against compliant documents, usually issued under the ICC's UCP 600 rules. The most common way to pay for an oil cargo when the parties do not trade on open credit.
A standby letter of credit backs payment on open account terms. It pays only if the buyer fails to pay, which makes it common in repeat supply relationships.
Self-liquidating, deal-by-deal financing in which the lender funds the purchase and is repaid from the sale. This is structured commodity finance in its simplest form.
Revolving lines sized against the value of eligible stock and receivables. They suit established traders with a steady book, not first deals.
Commodity lenders fund transactions they can control and understand. For a first-time trader, the deal itself has to carry most of the credit story.
Credible counterparties. A known supplier with real product and a buyer that can pay. Lenders check both, including ownership, sanctions exposure and whether the trade makes commercial sense for them. This is the know your customer's customer layer of compliance, and it applies to every cargo.
A clear margin. The difference between the purchase price, the sale price and all costs, including freight, insurance, inspection, storage, financing, duties and hedging, has to be positive and believable. Lenders compare your prices with published benchmarks.
Your own capital. Lenders rarely fund 100% of a cargo for a new trader. Expect to contribute cash margin or collateral, and to show where that money comes from.
Control of goods and cash. Security over the oil and a payment route that runs through the lender. Deals where the cargo or the buyer's payment sits outside the lender's control are hard to finance.
Operational capacity. Someone on your team, or a partner, who knows chartering, terminal operations, inspection, documentation and hedging. Lenders back people who can execute, not just people who found a deal.
Banks became stricter after a run of oil trading frauds. In 2020, Bloomberg tallied about USD 9.26 billion of potential losses for banks and creditors from commodity trading failures over six years, including about USD 3.5 billion owed by Singapore's Hin Leong Trading across 23 banks, as republished by Daily Maverick. Methods included financing cargoes that did not exist and pledging the same cargo to several banks. GTR reported that the result was a "flight to quality," with financing concentrating among the largest traders. First-time traders should expect thorough checks and plan their documentation accordingly.
Without a track record, you will not get a revolving facility on day one. You can still trade with bank support if the structure moves risk to where lenders are comfortable.
| Structure | How it works and when it fits |
|---|---|
| Back-to-back or transferable letters of credit | Your buyer's letter of credit supports the one you issue, or is transferred in part to your supplier. Works when the buyer's bank is strong and documents line up exactly. |
| Cash-backed letter of credit | You deposit cash with the bank, which then issues the letter of credit. Expensive in capital, but often the fastest way to complete a first cargo and build history. |
| Credit enhancement | A third-party guarantee, standby letter of credit or insurance policy supports your facility where your own balance sheet is too small. See our credit enhancement service. |
| Supplier or buyer credit | A supplier sells on deferred terms, or a buyer pays a prepayment, reducing how much external financing you need. |
| Partnering with an established trader | An experienced trader or distributor takes the cargo on its lines and shares the margin with you. You give up some profit in exchange for execution and a track record. |
| Starting with smaller regional parcels | Truck, rail or barge deliveries from a terminal to local buyers. Smaller tickets, faster cycles and easier control of the product. |
Most crude oil is sold by national oil companies, majors and large producers to refineries and established trading houses, through term contracts and tenders with strict qualification rules. Sellers want buyers with proven payment capacity, shipping capability and a history of performance. A newly formed trading company is unlikely to be offered a genuine term allocation.
That is why so many crude "offers" reaching new traders are not real. A genuine crude trade is also large. One ocean cargo can run into tens of millions of dollars, which means the financing, hedging and operational requirements are far beyond what most first-time traders can carry alone.
Crude is not off-limits, but the realistic path usually runs through refined products first, or through a partnership with an established trader, a refinery or a producer that already has the relationships and the credit lines.
The petroleum market attracts a large volume of fake offers aimed at newcomers. They often use real-sounding procedures and documents. In Financely's experience, these are the warning signs that should stop a deal until they are explained.
| Red flag | Why it matters |
|---|---|
| "Allocations" from national oil companies | Genuine term supply goes through formal qualification, not through intermediaries selling access to strangers. |
| Huge monthly volumes at a big discount | Offers of millions of barrels a month for 12 months, priced well below market, from a seller you cannot verify. |
| Proof of funds or bank instruments demanded first | Requests for SWIFT messages, bank comfort letters or blocked funds before you have verified the seller, the product or the tank. |
| Upfront fees for documents or inspections | Payments demanded for "tank storage receipts," "dip tests," legalized documents or "injection" before any verifiable product exists. |
| Long chains of intermediaries | Several layers of brokers and mandates, each adding a commission, with no one able to put you in direct contact with the actual holder of the product. |
| Documents that cannot be verified | Certificates, storage receipts or bills of lading that the issuing terminal, inspector or shipping line will not confirm directly to you or your bank. |
The rule is simple. Verify product and title with the terminal, inspector or shipping line directly, and never send money or bank instruments to a counterparty you have not independently checked.
Financely is a debt advisory and arranging firm. We don't lend and we don't trade oil. We work for traders, structuring transactions so banks and trade finance lenders can approve them.
We review the deal before it reaches a lender. We look at your contracts, counterparties, pricing, logistics and documents, and tell you plainly what a credit or compliance team will question. If an offer looks like one of the patterns above, you hear it from us before you commit money.
We structure the financing. We choose the instrument and security package that fit your size and your trade, from letters of credit and standby letters of credit to transactional structured commodity finance, with credit enhancement where it is needed.
We arrange it with lenders who fit. We approach only banks and commodity lenders from our network of more than 12,700 verified capital providers whose mandate covers your product, corridor and ticket size.
Tell us about your supplier, your buyer and the product, and we will send you an estimate showing the scope of work and the fee to structure and arrange the financing. You decide whether to proceed once you have seen it.
Yes, but usually on a transaction-by-transaction basis rather than through a revolving facility. Lenders will want credible counterparties, control over the cargo and the payment, a clear margin and a cash contribution from the trader. Cash-backed letters of credit, credit enhancement and partnerships with established traders are common starting points.
Rarely for a new trader. Lenders typically expect the trader to contribute margin or collateral. The amount depends on the product, the counterparties, the price risk and how much control the lender has over the goods and cash.
It is difficult. Crude is mostly sold by national oil companies, majors and producers to refineries and established traders through qualified term contracts and tenders. Most new traders start with refined products or partner with an established player.
Usually the sale and purchase contracts, commercial invoice, bill of lading or terminal transfer documents, certificates of quality and quantity from an independent inspector, certificate of origin and insurance documents. Letters of credit specify exactly which documents must be presented.
Warning signs include claimed allocations from national oil companies, large volumes far below market price, demands for proof of funds or bank instruments before you can verify the seller, upfront fees for documents or tests, and documents the issuing terminal, inspector or shipping line will not confirm directly.
No. Financely is a debt advisory and arranging firm. We structure trade and commodity financing and arrange it with lenders from our network of more than 12,700 verified capital providers.
This article is for general information only and does not constitute legal, tax, compliance or investment advice. Petroleum trading is subject to sanctions, export control, licensing and anti-money laundering rules that vary by jurisdiction. Financely is an advisory and arranging firm, not a lender or broker-dealer. Any financing is subject to lender underwriting, due diligence, compliance review, credit approval, documentation and conditions precedent, and no outcome or closing timeline is guaranteed.
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