In the words of Glencore chief executive Ivan Glasenberg, the world’s largest trading houses had a “blowout” year in 2015 as a sharply falling oil price has 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.
From deals to ship oil from war-torn Libya, through large-scale arrangements to market Iraqi Kurdish and Russian crude, the three largest independent oil traders have spent much of the past year working closer than ever with cash-strapped producers to get oil to market.
The opportunities presented have been too profitable to turn down after years when growing competition and stable prices squeezed margins. The deals have also allowed the companies to increase the volume of oil they can access, often through prepay 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 consultancy Oliver Wyman, which advises the industry.
“That means the way they grow their business is changing and we are seeing traders do more prepay arrangements in order to get access to volumes.”
Swiss-based Trafigura has increased the volume of oil it ships in the past 18 months by 20 per cent to more than 3m barrels a day, or almost 3 per cent of global demand. Its biggest advance has been with Russia’s sanctions-hit producer Rosneft, leveraging ties between some of their top executives to become the go-to crude and refined products shipper for the Kremlin-controlled company.
While the company says the deals are not traditional prepay arrangements, which tend to last months or years, Trafigura is now second only to China in shipping oil from Rosneft.
Christophe Salmon, Trafigura chief financial officer, says all the arrangements with Rosneft are permitted under western sanctions related to Russia’s involvement in Ukraine as 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,” adds Salmon. “When we do this early payment before loading it is purely operational. We have a vessel that is nominated, have a loading range. You can almost touch the oil.”
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Salmon says US banks were among those helping to finance Trafigura’s deals with Rosneft, as well as long-term loans to other producers.
Excluding the Rosneft transaction, the value of the commodity prepayment deals carried on Trafigura’s balance sheet, including metals, has jumped 30 per cent in its last financial year to almost $3.2bn. While the company does not break out what different deals made, gross profit margins rose to 2.7 per cent versus 1.6 per cent in 2014.
Most recently, the company inked a $100m prepay deal with Latin American producer GeoPark for a share of its Colombian oil production.
Other countries have also provided opportunities for traders willing to provide financing to regions struggling during the oil crash.
Vitol — the world’s largest private oil trader — has helped Iraqi Kurdistan grow its oil sales to around 600,000 barrels a day through prepay deals in the past year, despite fears in Baghdad 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 semi-autonomous region.
To limit the risk of a showdown with Baghdad, which has in the past claimed independent Kurdish oil sales are tantamount to smuggling, the companies have established a system of sales that employs cat-and-mouse tactics to mask the source of the oil. The tactics include ship-to-ship transfers off Cyprus and deliveries into Israel, a country not recognised by Iraq.
Through the deals the Kurdistan Regional Government has received billions of dollars in return for promises of future oil delivery. The KRG says the payments have helped fund its fight against Isis.
Vitol has also arranged a $3bn prepayment with Kazakhstan’s state-owned energy company KazMunaiGas in return for shipments of crude.
Vitol finance director Jeffrey Dellapina says banks are keen to help trading houses finance prepay arrangements even as oil prices have fallen to the lowest in more than a decade.
“There remains appetite by financial providers for prepayments,” Dellapina said. “Naturally the focus today is on higher rated counterparts.”
In Libya, Glencore signed a deal with the country’s national oil company (NOC) to ship crude from the war-torn state, despite rival politicians threatening to block the sales.
Libya’s NOC and central bank are two of the only functioning institutions in a country that has descended into chaos and recriminations four years after the removal of Muammar Gaddafi.
Debt-laden Glencore is bucking the trend, however, saying it plans to reduce its loan portfolio by up to 20 per cent from $4bn.
Vitol has also been involved in Libya, making shipments of refined fuel to the NOC. With low oil prices expected to persist for much of 2016, trading houses may find more opportunities to structure deals and secure supplies.
“We always try to support our clients,” says Vitol’s Dellapina. “Irrespective of the price environment.”
— Financial Times
