Three letters in an oil contract decide who pays for the voyage, who insures the cargo, and who carries the loss if it is spilled or stolen. FOB, CIF, and DES are the ones the trade leans on, and each hides a trap that has cost buyers and sellers real money.
The Shorthand That Runs the Trade
An Incoterm is a three-letter rule, published by the International Chamber of Commerce, that settles a set of questions every physical cargo deal has to answer: who arranges and pays for transport, who insures the goods, who clears customs, and, above all, the precise point at which the risk of loss or damage passes from seller to buyer. Written into a contract as a shorthand like “FOB Lumut” or “CIF Rotterdam,” it replaces paragraphs of legal drafting with an agreed, internationally understood allocation of cost and risk. The current version is Incoterms 2020, and it contains 11 rules.
For seaborne oil, only a handful of those rules do most of the work, and they are the sea-specific ones. But the trade also uses a term that is no longer an official Incoterm at all, which is the first trap worth clearing. Understanding what FOB, CIF, and the delivered terms actually do, and where each one bites, is basic literacy for anyone buying or selling physical cargoes.
FOB: The Buyer Takes the Voyage
Free On Board is the workhorse of the crude and products trade at the load port. Under FOB, the seller’s job is to get the cargo loaded on board a vessel that the buyer has nominated at the named port of shipment. Once the oil is on board, risk passes to the buyer, who has arranged and pays for the ocean carriage and, if they want it, the insurance. The seller is done at the load port rail; everything from there is the buyer’s voyage.
The practical consequence sits in the chartering and the delay. Because the buyer nominates the vessel under FOB, the buyer owns the demurrage exposure: if their ship waits beyond the agreed laytime at the load terminal, those costs land on them. This is why laytime and demurrage terms have to be defined explicitly in every FOB cargo contract, rather than left to assumption. FOB looks like the simplest term, and in risk-transfer terms it is, but it quietly hands the buyer the whole logistics chain and its costs.
CIF: The Trap Everyone Knows and Still Falls For
Cost, Insurance and Freight is where the most famous Incoterms trap lives. Under CIF, the seller pays the cost of the goods, the freight to the named destination port, and marine insurance on the cargo. Reading that, it is natural to assume the seller carries the cargo’s risk all the way to destination. They do not. Under CIF, risk passes to the buyer at the load port, the moment the goods are on board, exactly as under FOB. The seller pays for the journey but does not bear its risk.
Under CIF the seller pays the freight and the insurance all the way to destination, yet the risk passes to the buyer back at the load port. Cost and risk transfer at different places, and that gap is where disputes are born.
That split, cost transferring at destination but risk transferring at origin, is the single most misunderstood feature of the sea terms, and it is deliberate. It also has a documentary edge worth knowing: because the seller insures on the buyer’s behalf, a CIF letter of credit typically requires an insurance certificate for a set value above the cargo price, and the cover provided under Incoterms 2020 for CIF is only the minimum level unless the parties agree more. A buyer who assumes CIF means the seller is on the hook for a mid-voyage casualty has misread the term, sometimes expensively.
DES: The Term That Officially No Longer Exists
Now the trap hiding in plain sight. Delivered Ex Ship, DES, was the classic term for delivering a cargo on board at the destination port with the seller carrying the risk for the whole voyage. The catch is that DES was removed from the Incoterms rules in the 2010 revision, along with several other delivered terms. It is not part of Incoterms 2020. Yet it persists in oil and energy contracts out of habit and familiarity, which means parties routinely write a term that the current rulebook does not define.
DES is retired: Delivered Ex Ship was withdrawn from Incoterms in 2010 and does not appear in Incoterms 2020. Writing “DES” alone leaves the term undefined by the current rules.
The modern equivalent: A delivered-at-destination cargo, with the seller carrying risk to arrival, now maps to the D-terms, principally DAP, Delivered At Place, naming the discharge port.
Why it still appears: The oil trade retains DES-style delivered deals contractually, but the safe practice is to define exactly what is meant, or use a current term, rather than rely on a retired one.
The general rule: Under the delivered D-terms the seller bears cost and risk all the way to the named destination, the opposite of the FOB and CIF pattern where risk passes at the load port.
The lesson is not that DES is forbidden, since parties can agree whatever they like in a contract. It is that relying on a term the official rules no longer define invites ambiguity, and ambiguity in a document that decides who owns a multimillion-dollar loss is exactly what a trader should avoid. If a deal is genuinely delivered-at-destination, saying so with a current, defined term protects both sides.
What Incoterms Do Not Do
The most important boundary of all is what these rules leave out. An Incoterm governs cost, risk, and delivery obligations. It does not transfer title, and it does not set payment terms. Ownership of the cargo passes according to the sale contract and the shipping documents, not according to the Incoterm, which is why in oil trading title can transfer under entirely different conditions than risk. The contract has to address both separately, and the point where title moves is bound up with the bills of lading rather than the three-letter term.
An Incoterm tells you who bears the risk and who pays the freight. It never tells you who owns the oil. That question belongs to the sale contract and the bills of lading.
This is why a trader cannot read risk, cost, and ownership off a single label. The Incoterm settles cost and risk. The documentary chain settles title. The payment mechanism, often a letter of credit calling for documents that conform precisely to the chosen term, settles how and when money moves. Treating the Incoterm as if it answered all of those questions at once is a recurring and costly error.
Getting It Right
For anyone trading physical oil, a few habits prevent most of the pain. Match the term to who you actually want controlling the voyage and bearing its risk, and remember that under both FOB and CIF that risk sits with the buyer from the load port. Do not assume CIF puts the seller on the hook for the voyage; it does not. Avoid writing DES as if it were a current defined term, and if the deal is delivered-at-destination, use a term the rules still recognise and define it clearly. And never treat the Incoterm as settling ownership, because title lives in the sale contract and the shipping documents, not in the three letters.
Handled that way, the Incoterm does its real job: a compact, unambiguous allocation of cost and risk that both sides understand identically. Handled carelessly, as a label whose detail nobody quite checks, it becomes the clause everyone points to after a cargo is lost, spilled, or delivered to the wrong hands, each side having read it to mean something different.
Frequently Asked Questions
Under CIF, who bears the risk during the voyage?
The buyer. This is the classic CIF trap. Although the seller pays the cost, the freight to the destination port, and the marine insurance, the risk of loss or damage passes to the buyer at the load port, the moment the cargo is on board, exactly as under FOB. Cost transfers at destination while risk transfers at origin, so a buyer who assumes CIF keeps the seller responsible for a mid-voyage casualty has misread the term.
Is DES still a valid Incoterm?
No. Delivered Ex Ship (DES) was removed from the Incoterms rules in the 2010 revision and does not appear in Incoterms 2020. The oil trade still uses it out of habit, but writing “DES” relies on a term the current rules no longer define. A delivered-at-destination cargo with the seller carrying risk to arrival now maps to the D-terms, principally DAP (Delivered At Place), and it is safer to use a current, defined term.
Do Incoterms decide who owns the cargo?
No. Incoterms govern cost, risk, and delivery obligations only. They do not transfer title or ownership, and they do not set payment terms. Ownership passes according to the sale contract and the shipping documents, which is why in oil trading title can transfer under different conditions than risk. Both must be addressed separately in the contract, with title closely tied to the bills of lading.
Who pays demurrage under FOB?
Under FOB the buyer nominates and pays for the vessel, so the buyer carries the demurrage exposure if their ship is delayed beyond the agreed laytime at the load terminal. Because of this, laytime and demurrage rates should be defined explicitly in every FOB cargo contract rather than left to assumption, since they can turn into significant costs.
Sources: International Chamber of Commerce (ICC), Incoterms 2020 rules (11 terms; FAS, FOB, CFR, CIF for sea and inland waterway transport; CIF minimum insurance cover) · ICC, Incoterms 2010 revision (withdrawal of DES, DEQ, DAF, DDU) · Incoterms 2020, cost-versus-risk transfer points explained · Incoterms 2020 for commodity buyers (oil trade: title vs risk, demurrage, LC documents)
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