The changing world of the oil trader

A ‘balancing role’
From its early days in the late 19th century, the companies which we associate with the oil industry have become household names – Exxon, Shell, BP, Chevron, Total, etc. These vertically integrated international oil companies (IOCs) have been joined by state owned concerns, or national oil companies ( NOCd )- names such as Aramco, Kuwait Petroleum, IPC, NIOC, Petrobras, PDVSA, as well as Russian companies such as GazpromNeft, Lukoil and Rosneft. More recent additions have been the three Chinese giants, Petrochina, Sinopec and CNOOC.
Less well known and with a generally lower profile have been the oil trading companies. Their principal raison d’etre and continued existence has been in playing the critical role of balancing supply and demand, for both crude oil and refined products. The need for this role was heightened from the early 1970s, as vertically integrated supply chains became less secure and geographical imbalances began to emerge, in particular the growing US deficit in both crude oil and gasoline. In the 1970s/80s some of the activities of oil trading companies attracted controversy, and criticism e.g. Phibro (Tom O’Malley and Andy Hall) and Marc Rich (now absorbed into Glencore).
The sector is now dominated by 6 companies – Vitol, Gunvor, Trafigura, GlencoreXstrata, Mercuria and Cargill – all of whom are global traders in the wider commodities’ spectrum.
With the exception of Glencore, these are all privately owned companies and, in terms of scale, are very substantial operations. Taking the largest of the group, Vitol, which was established in 1966, its total deliveries of crude oil and refined oil products in 2012 amounted to 261 million mt, which exceeds the combined inland oil demand of Germany, France and Italy. Looked at from another perspective, it represents almost four times the UK’s 2012 inland oil consumption!
Tougher times
Recent years have seen oil trading becoming more competitive and the market more transparent; in addition, the environment for trading has often been unfavourable, being in a state of backwardation, with prompt prices higher than future levels, rather than contango, where future values are higher. The latter condition creates time-related arbitrage opportunities for traders. This less favourable environment is reflected in recent financial performance. Vitol’s reported 2012 net income was $1.05 billion vs. $2.28 billion in 2009. Gunvor’s reported 2012 net income was $318 million vs. $621 million in 2009.
How are they responding to this challenge?
As a sector, the principal response has been characterised by moves to invest in physical assets – such as oilfields, refineries, storage facilities and fuels/lubricants’ marketing businesses.
Vitol established a joint venture company with Helios Investment Partners, called Vivo Energy, in 2011, which acquired the majority share (80%) of fuels/lubes marketing businesses in 14 African countries from Shell ( which retained a 20% interest) and acts as a Shell brand licensee in these countries. The company has in recent years also established a presence in the aviation fuels market, now supplying a total of 2.5 million mt at 46 airports worldwide (including Heathrow, Stansted and Manchester). Last year it acquired the former Petroplus Cressier refinery in Switzerland, along with the associated pipeline, storage and marketing assets in a joint transaction with Atlasinvest.
Trafigura is the majority (80%) owner of Puma Energy, an oil marketing, storage and distribution venture, which is represented in Africa, Central America & Caribbean, Southeast Asia and Australia. Last year, Trafigura acquired Ion Equity’s stake in Blue Ocean Associates., parent company of Harvest Energy, and became joint majority owner of the company along with Denis O’Brien’s investment vehicle, Baycliffe.
In 2012 Gunvor acquired the former Petroplus refineries in Belgium (Antwerp) and Germany (Ingolstadt); crude oil processing operations have resumed at both plants, enabling the company to establish a footprint in the inland marketplace of both countries.
These are examples of diversification away from the core activity of oil trading, into activities where their established expertise and competencies can be applied to good effect and which are complementary with the principal, core business.
As the downstream oil sector continues to experience change, both to structure and ownership, I think that we will witness more instances of the oil trading companies spreading their wings to extend and expand their participation where attractive opportunities present themselves.