Firm, subject or stale? Handling offer validity when oil moves $3 a day

An offer is a promise to deal on stated terms if accepted within a stated time. The time window is the validity. During that window, the party making the offer carries the risk that the market moves against it.

When prices are calm, a validity of a day or two costs the offering party little. When prices are volatile, the cost rises sharply. On a 1 million barrel cargo, a $3.55 move is a $3.55 million change in value. A supplier that has offered a fixed price for three days has given the buyer the right, but not the obligation, to take that cargo at yesterday's price if the market rises, and to walk away if it falls.

Physical market participants manage this in two main ways:

Floating prices. Most physical crude and many product cargoes are priced against a benchmark over a future pricing period, for example the average of Dated Brent quotations around the bill of lading date, plus or minus a differential. The flat price risk then sits in the pricing period, not in the validity window. What is negotiated and offered is the differential.

Short validities. Where a fixed price or a differential is offered in a fast market, validity is typically short: hours rather than days, with a stated time zone.

Differentials are not immune to volatility either. In September, Kpler reported North Sea medium and heavy crude differentials widening to as much as $20 a barrel over Dated Brent after an outage on Saudi Arabia's Red Sea export route. When supply shocks hit particular grades, the differential can move as fast as the benchmark.

Brokers often pass on documents described as offers that are nothing of the kind. Three categories help:

Indicative. A price idea or level of interest with no commitment. Useful for testing appetite. It should be described as indicative when passed on.

Firm. A commitment to deal on stated terms if accepted within the validity. A firm offer names the parties, product and specification, quantity and tolerance, delivery basis and location, laycan or delivery window, price or pricing formula, payment terms and validity.

Firm, subject to. A firm offer with named conditions ("subjects") that must be satisfied or lifted before it becomes binding. Common subjects in physical oil include:

subject to supplier or management reconfirmation;

subject to vessel nomination and acceptance (vetting and terminal approval);

subject to counterparty credit approval or acceptable payment security;

subject to agreement of the full contract or general terms and conditions;

subject to compliance screening (sanctions and know-your-customer checks).

Each subject is an exit. An offer that is "firm" but subject to supplier reconfirmation is, in practice, close to indicative: the supplier can decline at the moment of acceptance. Whether a particular wording creates a binding contract is a legal question that depends on governing law and the exact language, so brokers should not give opinions on it. But they should be able to read an offer and say which exits remain.

Several features that are merely untidy in a calm market become red flags in a fast one:

Long validity on a fixed price. Five working days on a flat price when the benchmark is moving several dollars a day is not credible. Either the price is not real or the party offering does not understand its own exposure.

No time zone or expiry time. "Valid until Friday" can mean different things in Singapore, Geneva and Houston. In a fast market, a few hours matter.

Price "refreshed" by an intermediary. If a document passes through several hands and the validity has been extended or the price adjusted by someone other than the principal, it is no longer the principal's offer.

Unexplained discount that survives every market move. An offer that stays at a large discount while the market rises $13 in two weeks is either not tied to any real cargo or comes with hidden conditions.

Subjects that cannot be lifted by the parties. For example, "subject to allocation" from a producer when neither party holds a confirmed contract with that producer.

None of these proves fraud. Together, they tell a broker that the document is unlikely to lead to a performed cargo.

A broker receives, on a Monday morning, a document described as a firm offer for 1 million barrels of medium sour crude, FOB, at a fixed price of $105 a barrel, valid for five working days, from an intermediary who says it represents the seller.

Brent futures closed the previous Friday near $116.72. Over the following days the benchmark moves $2-4 a day.

The broker asks five questions:

Is the price fixed or floating? Fixed. On a 1 million barrel cargo, each $1 move is $1 million. A five-day fixed-price validity hands the buyer an option potentially worth several million dollars. A real supplier would not grant that without payment.

Who is offering? An intermediary, not the seller. Can it show written authority from the seller to offer on these terms, with this validity?

What subjects apply? The document says "subject to final seller confirmation". That means the seller can decline at acceptance. The offer is effectively indicative.

Does the price make sense? A fixed price more than $11 below the benchmark for a medium sour grade, at a time when sour differentials have been strong, needs an explanation: quality, location, timing or compliance issues.

Is the timing workable? Is there a named load port and laycan, and is that terminal currently loading normally?

The broker concludes that the document cannot be passed to a buyer as a firm offer. The professional response is to describe it, if at all, as an unverified indication, to ask the intermediary for the seller's written authority and a floating-price structure with a stated differential and short validity, and to decline to circulate it further until those are provided.

Compare a credible version: "Firm offer, valid until 16:00 London time today. 1 million barrels, plus or minus 5% at seller's option. Named grade, FOB named port, laycan 20-22 November. Price: Dated Brent average of five quotations around bill of lading date, plus a stated differential. Payment by documentary letter of credit from an acceptable bank. Subject to buyer's vessel acceptance and agreement of seller's general terms." That offer still carries risk, but every exit is visible and the validity matches the market.

Classify every offer before you pass it on. Indicative, firm, or firm subject to named conditions. Label it accurately to your counterparty.

Record the validity precisely. Date, time and time zone. Forward offers quickly, with the original timestamp visible.

Never alter or extend a principal's offer. If validity needs extending, the principal must do it in writing.

Read the subjects as exits. List them for your counterparty and ask which can be lifted, by whom and by when.

Check that the pricing structure fits the market. In volatile conditions, fixed prices with long validity are a qualification warning. Ask how the price is set, and what the benchmark was when it was quoted.

Relay counters and acceptances immediately and in writing. An acceptance sent after expiry is, at most, a new offer.

Escalate legal questions. Whether a given exchange created a binding contract is for the principals and their lawyers, not the broker.

Volatility can fall. If tensions in the Gulf and Red Sea ease, daily moves may narrow and longer validities may again be workable. The principle of matching validity to volatility still holds.

Market practice varies. Some product markets, regional trades and term negotiations work with longer validities or different conventions. Brokers should learn the norms of the market they work in.

Fixed prices are not always a warning. Some buyers want fixed prices and pay for them, for example through hedging by the seller. A fixed price with a short validity from a principal with a hedging capability can be perfectly genuine.

Legal effect depends on wording and law. The description of firm and subject offers here is general. The binding effect of any exchange depends on governing law and the words used.

In a market that has moved $3.55 in a day and more than $13 in under two weeks, offer validity is part of the price. Brokers who classify offers accurately, read subjects as exits, and expect validity to match volatility will spot weak documents early and give their counterparties information they can actually act on.