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Commodities


Crude traders revive their risk-taking ways


By David Sheppard and Neil Hume



In the words of Glencore chief executive Ivan Glasenberg, the world’s largest trading houses had a “blowout” year in 2015 as a collapse in oil prices spurred profitable storage and arbitrage trades.

But less talked about has been the contribution of the kind of deals that first established the risk-taking reputation of traders such as Trafigura, Vitol and Glencore, and their ability to buy and sell oil in some of the most troubled corners of the globe.

With deals to ship oil from war-torn Libya and large-scale arrangements to market Iraqi Kurdish and Russian crude, the three largest independent traders have spent much of the past year working closely with cash-strapped producers to get oil to market.

After years of growing competition and margins squeezed by stable prices, the opportunities have been too profitable to turn down. The deals have also allowed the companies to increase the volume of oil they can access, often through pre-pay arrangements to lock in supplies.

“It is more difficult for independent traders to get large volume flows than it once was because many national oil companies, like those in China, have established their own trading groups,” says Roland Rechtsteiner of Oliver Wyman, the consultancy.

“That means the way they grow their business is changing and we are seeing traders do more pre-pay arrangements in order to get access to volumes.”

 Despite sanctions

Swiss-based Trafigura has increased the volume of oil it ships 20 per cent in 18 months to more than three million barrels a day, or almost three per cent of global demand. Its biggest advance has been with Rosneft, the Russia’s sanctions-hit producer, leveraging ties between top executives to become the go-to crude and fuel shipper for the Kremlin-controlled company.

Trafigura says the deals are not traditional pre-pay arrangements, which tend to last months or years. In any case the group is second only to China in shipping oil from Rosneft.

Christophe Salmon, chief financial officer, says all Trafigura’s arrangements with Rosneft are permitted under western sanctions related to Russia’s involvement in Ukraine because the deals are always under 30 days, the maximum permitted under sanctions.

“We early-pay each and every individual cargo 25 days before loading. So it’s extremely short-term,” he says. “When we do this early payment before loading, it is purely operational. We have a vessel that is nominated. You can almost touch the oil.”

US banks helped to finance the Russian deals and long-term loans to other producers, Mr Salmon says.

Excluding the Rosneft transactions, the value of commodity prepayment deals on Trafigura’s balance sheet, including metals, jumped 30 per cent in its most recent financial year to almost $3.2 billion (CHF 3.2 billion). Gross profit margins rose to 2.7 per cent, from 1.6 per cent in 2014.

Kurdish oil sales

Other countries have provided opportunities for traders that have been willing to provide financing to regions struggling during the oil crash.

Vitol - the largest private oil trader - has helped Iraqi Kurdistan increase its oil sales to about 600,000 barrels a day through pre-pay deals in the past year, despite fears in Baghdad that independent sales could speed the breakaway of the region.

Trafigura is also involved in financing the sales, with the two companies competing for access to fast-growing supplies from the semi-autonomous region.

To limit the risk of a showdown with Baghdad, which has tried to halt independent Kurdish oil sales, Vitol and Trafigura have employed cat-and-mouse tactics to mask the source of the oil. Methods include ship-to-ship transfers off Cyprus and deliveries into and out of Israel, a country that is not recognised by Iraq.

In return for promises of future oil delivery, the Kurdistan Regional Government has received billions of dollars, which it says have helped fund its fight against Isis.

Keen banks

Elsewhere Vitol is arranging a $3 billion prepayment with Kazakhstan’s state-owned energy company, in return for oil supplies at a later date.

Jeffrey Dellapina, chief financial officer, says the banks are still keen to help trading houses finance pre-pay arrangements, even as oil prices fall to the lowest in more than a decade.

“There remains appetite by financial providers for prepayments,” he says. “Naturally the focus today is on higher-rated counterparts.”

Glencore signed a deal with Libya’s national oil company (NOC) to ship crude from the war-torn state, even though rival politicians threatened to block the sales.Vitol has also been involved in Libya, making shipments of refined fuel to NOC.

With low oil prices expected to persist for much of 2016, trading houses can be expected to seek out more opportunities to structure deals and secure supplies. As Mr Dellapina puts it: “We always try to support our clients - irrespective of the price environment.”

Copyright The Financial Times Limited 2016

Financial Times

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