Letter of Credit in Energy Trading: From Trust to Technology
- Elevon Global Tech
- Sep 4, 2025
- 2 min read
In international energy trading, deals often span borders, currencies, and regulatory environments. This creates challenges of trust and financial security between buyers and sellers. One of the most reliable instruments used to bridge this trust gap is the Letter of Credit (LC).
🔹 What is a Letter of Credit?
A Letter of Credit is a financial guarantee issued by a bank on behalf of a buyer. It assures the seller that they will receive payment once they meet the terms of the contract.
For the seller: Payment assurance once conditions (like shipping documents) are fulfilled.
For the buyer: Confidence that goods will only be released after agreed terms are verified.
This simple yet powerful tool reduces counterparty risk and enables smooth global trade.
🔹 The LC Process in Commodity Trading
A typical Letter of Credit process in the energy sector involves multiple steps, ensuring that physical and financial flows stay aligned:
Sale Agreement – Buyer and seller finalize trade terms.
Request LC – Buyer asks their bank to issue a Letter of Credit.
Issue LC – Issuing bank sends LC to seller’s advising bank.
Advising Bank – Confirms and authenticates the LC.
Ship Goods – Seller dispatches commodities such as crude oil, LNG, or refined products.
Present Documents – Seller submits shipping and trade documentation.
Verify Documents – Bank checks documents against LC requirements.
Payment Process – Buyer’s bank releases funds to the seller.
Release Goods – Commodities are handed over to the buyer.
Complete Transaction – Trade closes with financial and physical flows reconciled.
This structured process minimizes disputes and ensures transparency.
🔹 ETRM Point of View (ETRM POV)
Modern ETRM (Energy Trading and Risk Management) applications make the LC process more efficient by:
Aggregating cash flows from multiple trades into a clear timeline.
Forecasting obligations (e.g., “USD 1M due to XYZ on June 3, 2024”).
Providing dashboards for finance, trading, and risk teams to monitor upcoming payments and receipts.
Supporting compliance by maintaining a detailed audit trail of documents and payment milestones.
By embedding LC workflows, ETRM systems reduce manual effort and provide real-time clarity across the trade lifecycle.
🔹 Why Letters of Credit Matter in Energy Trading
✅ Reduce counterparty risk by ensuring both payment and delivery.
✅ Enable global trade by bridging trust between international entities.
✅ Provide transparency with clear timelines for goods and cash flows.
✅ Improve compliance with auditable processes for banks and regulators.
🏁 Conclusion
In today’s volatile energy markets, Letters of Credit are not just banking instruments—they are the backbone of trust in global trade. When integrated with advanced ETRM platforms like RightAngle, Endur, Allegro, or SAP CTRM, they deliver both financial assurance and operational clarity.
At Elevon Global Tech, we combine deep domain knowledge with technical expertise to help clients manage Letters of Credit and broader trade lifecycles seamlessly. From sale agreements to final settlements, our solutions ensure that your business moves confidently—from complexity to clarity.
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