On global freight, network theory, and microstructure

There is a strong similarity between the microstructure of high-frequency arbitrage and the vast network of global, national, and local dry and wet freight.  ICE and NOS exchanges offer physical and financially settled freight derivatives to manage freight risk when operating on a global physical scale.  These forwards provide a basis for pricing physical spreads between terminals and ports. 

Cross market arbitrage uses currency as a general medium of price discovery.  Physical commodity arbitrage uses the freight market in a similar fashion. 

To illustrate the point further: A Year of Global Shipping Routes Mapped by GPS.

Each system contains popular or frequently traversed nodes offering price discovery - consider the relationship of CME's GC contract as the global benchmark for gold and the pricing of related ETFs relying on that fundamental relationship.  Each system contains bottlenecks and capacity restrictions, from pipeline radius to canal width to latency limitations.

Strogatz and Watts (1998) and Watts (2002) (pdf) offer insight into network complexity, how and why certain nodes become popular, and responses in the event of network constraints or cascades.  Knorring (2003) (pdf) provides insight into route choices based on distance traveled and perceived congestion between two comparable routes. Morse and He (2010) (pdf) and Kumagai, Arai and Iwata (2001) (pdf) provide context for pricing physical arbitrage via forward markets and import/export flows.

In the end, there is something to be learned from every network containing profit-seeking entities. 

Urals Blend Arbitrage Continues From Novorossiysk

The Urals arbitrage looks to be strengthening relative to the REBCO curve on Thursday.  Urals is a blend of light and heavy crude oils from West Siberia, the Ural Mountains in Russia, and flow from fields in the Caspian, an area rich in oil history.

Following an export suspension after a flood last week, Novorossiysk  is once again busy, adding 2 tankers between yesterday and today. 

Green icons are bulk traffic: wheat, coal, iron ore.  Red icons are chemical, crude, and gas tankers.  Live marine traffic data available here.

Several were stuck in rotation waiting for space through the passage at Istanbul, one of several major choke-points along the way.  Below is a picture of the congestion at 10:00pm Istanbul time.

And a closer look at the actual channel:

via Reuters,

Urals differentials in the south were still said to be strong on the back of tight supplies. The July programme is largely sold out with only part cargoes left.

    "It's all sold out. It's part cargoes changing hands at ridiculously high levels," said one trader.
    One Italian refiner has started taking Urals cargoes from North West Europe to the Mediterranean in a rare arbitrage movement, taking advantage of the north/south price gap, a trader said.

Immediate tanker (red icon) traffic at Primorsk, the main export terminal for Urals in the Baltic, remains surprisingly dry.

Urals blend arbitrage on strong Med demand

Russian export blend Urals is gaining strength on tight supplies in the region on the back of EU sanctions.  Above is the forward curve for the REBCO contract on CME.  While the REBCO contract is for delivery at a port much further north, Primorsk, the Med arb is said to be taking place between Novorossiysk and Spain.  

via Reuters,

"The arbitrage to the Mediterranean is open," said a trader
with a major house, adding he had heard that at least one
100,000 tonne cargo of Urals might be moving in this direction
from the Baltic.
    "If you want to bring a cargo to the Med, to Spain for
example, the arb is workable," said another trader with a large
company.

A snapshot of today's traffic at Novorossiysk shows several tankers and bulk carriers awaiting their loading windows.  The red icons are wet tankers while the green are dry bulk.