August 02, 2023
What, if anything, do you remember about February 6th, 2016?
It’s unlikely to have been your birthday—in the USA, at least, where it ranks 311th in most common birthdays—but perhaps you recall J.J. Watt being named NFL Defensive Player of the Year for the third time in four years?
It’s not a date that evokes special memories for most people, but for a few of us, it was earth shattering.
It was the day the SWIFT system was hacked.
A malware attack siphoned $81 million from the Bangladeshi central bank, via its account at the New York Federal Reserve Bank.
Businesses transacting with companies inside Bangladesh, many of them operating on letters of credit, suffered enormous stress as they dealt with delays and mismatched documents and orders.
For some companies—including my own—it was a fatal blow.
Our customers did the right things, our teams did the right things, but a set of risks far removed from our operations set off a chain of events that led to the demise of our budding trading business.
It was a true “black swan” that led to the most extreme of “holy cow” moments.
Over the preceding decade and a half, a smorgasbord of risk management policies and procedures had been put into place across commodities trading and logistics.
They were designed to control the potential for losses caused by extreme, unanticipated events.
Hedging strategies were devised to deal with market volatility and create a semblance of price certainty following extreme spikes in the electricity markets in the 90s and early 00s.
Continuously tracked counterparty credit limits were imposed and rigorously enforced after the collapse of Bear Sterns and Lehman Brothers.
Rogue traders were made less likely by protecting contract confirmation processes and monitoring position and profit-and-loss swings.
Operational excellence and safety became oft-chanted mantras—practically a religion—for market participants.
And yet, when a vulnerable financial network was compromised by a small band of nefarious actors, serious collateral damage could not be avoided.
Companies inside Bangladesh who would otherwise have posted letters of credit to access their cargos were unable to do so. This led to losses, demurrage, and claims.
There was a mad scramble to figure out what was going on and get supply chains flowing smoothly again.
Similar incidents in recent years have led to strange and unforeseen outcomes, setting trading desks scrambling, along with their schedulers and operators.
Remember when a ransomware attack shuttered the Colonial Pipeline?
That scrambled pipeline schedulers for days, figuring out what to do with batches that had been scheduled and many others that were in the planning process.
It takes a lot of jokes, memes, and coffee to get through such turbulent days.
Then there were the 'interesting' fuel oil blends that vessels took aboard in the Port of Houston.
A group of enterprising traders had found some blendstock that appeared to meet spec, based on standard lab tests.
Suddenly, one vessel after another began reporting mechanical failures.
The entire industry was forced to avoid bunkering at one of the most important port systems in the United States.
Carefully planned and profitable deals flipped into losses.
Shippers and vessel operators had to manage additional costs, imposed out of their control, without a clear understanding of where any of the liability lay.
Finger pointing and much naming-and-shaming undermined the trust on which so much of the commodities trading business depends.
Several industry bystanders got a black eye, even though they had followed processes and policies to the letter.
I have gained more than my share of gray hairs thanks to the vagaries of rail car logistics.
Moving chemicals between refineries and terminals by rail, we routinely encountered errors that led to the “disappearance” of some of our products.
The documentation was all correct but RFID devices that tracked our railcars would sporadically post incorrect locations—and the rail operator occasionally left one or more cars behind.
We spent fortunes integrating the operator’s system with ours. And yet, when operational gaps were encountered, we felt the Grand Canyon still existed between our expectations of control and our actual ability to impact what happened.
Things get even funnier—depending on your sense of humor—when dealing with intermodal scheduling and logistics, such as transferring from barges to rail and vice versa.
When things work well, it feels like we’re conducting a great symphony, orchestrating supply chain melodies, and bringing joy to our customers.
The cacophony of desperate phone calls when something goes awry is correspondingly jarring.
I’ve assembled a veritable blooper reel when it comes to truck logistics.
Imagine your biggest, most favorite, oilfield client is about to pump a frac job, and is depending on your trucks to deliver the 'hydro' part of hydraulic fracturing.
Since they are your biggest client, you’ve sweated over a plan to ensure your best team is all set to go—equipment at the ready, tanks lined up, dispatcher fully prepped.
Your drivers are up early, ready to rock and roll. Everyone reaches the staging area on time. The sun is shining, and the birds are chirping...
Then, a third-party issue causes a delay. The delay cascades into other delays. There’s a lot of waiting around.
Suddenly, many of your drivers are running out of HOS (hours of safety) to complete their assigned tasks before the shift is over.
Since you adjusted their availability to support this high-profile job, the night shift is too thinly staffed to pick up the slack and finish it off.
Who can you blame when the best laid plans go out of the window?
Energy commodity trading has become equal parts timing/pricing arb and location arb.
Efficiency in the scheduling function is a key driver of profitability—and loss avoidance.
Much time, effort, and money has been invested in ETRM systems that monitor market and credit risks. But what about support and controls on the logistics side of the equation?
Scheduling disruptions never announce their ETA.
It’s essential to have reaction plans in place.
The answer to minimizing—if we can’t entirely avoid—incidents like the ones I’ve recalled here lies in better information sharing and alerts, delivered by specialized logistics platforms.
The faster relevant information reaches operators, schedulers, vendors, and customers, the more effectively the whole supply chain can react.
With appropriate investment, we can hope to reduce both the frequency and intensity of the “holy cow” moments we’d sooner all avoid.