Neil Hume
For some the lavish party thrown by Socar, the state oil
company of Azerbaijan, during International Petroleum Week, was a chance
to drown their sorrows and forget about the market.But for others enjoying the hospitality at the Grosvenor House Hotel on London's Park Lane there were reasons to celebrate.
After several years of flat markets, falling profits and declining margins, oil traders are enjoying the most favorable trading conditions they have seen since the global financial crisis in 2008.
For the big players such as Glencore, Gunvor, Mercuria, Trafigura and Vitol, which source, store and transport crude oil and related products, the market rout may be a boon.
"2015 could be an interesting year," says Roland Rechtsteiner, partner at Oliver Wyman, a consultancy. "There is a high level of volatility and a high level of
uncertainty. There are lower oil prices, financing costs, and also contango."
Contango is industry jargon for when prices for delivery in the future are higher than in the spot market. It was largely responsible for the record profits oil traders booked in 2008-09.
If the contango is steep enough traders can make money buying oil, storing it and selling it forward on the futures market. A trader can currently purchase a barrel of oil for $61 and sell it in December for $67. For those companies that have invested and have the correct infrastructure, a contango market can be lucrative.
"At the moment, the oil market is building stocks so there's a need to warehouse inventory. The stocks also need to be financed, hedged and insured. That's part of what we do and there's a demand for these services," says Daniel Jaeggi, co-founder of Mercuria, the Swiss-based trading house.
The rise in oil volatility, which has jumped to its highest level since the financial crisis, is another reason why the industry, which buys and sells huge volumes of commodities but for razor-thin margins, is feeling upbeat.
"Volatility is good for traders", says Christophe Salmon,
Trafigura's chief financial officer for Europe, Middle East and Africa.
"The more volatility, the more arbitrage."
The 46 per cent slide in crude oil since mid-June has also provided a shot in the arm by boosting profit margins for the ailing European refining industry, which struggled to turn a profit when crude oil remained at or around $100 a barrel.
Some of the big commodity traders have acquired refineries, as well as oilfields, warehouses and ports, as part of a shift toward owning physical assets. Gunvor owns two refineries in Europe, while Vitol has interests in two plants with private equity group Carlyle.
Low oil prices have also lifted traders' working capital. This is because it costs much less to finance a tanker of oil when crude is at $60 a barrel rather than $100. Low interest rates have also helped the traders' working capital.
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In addition, bankers believe there could be an increase in prepayment, or loan for oil deals, this year as producers, surprised by the sharp drop in crude prices, look for new sources of finance. Traders are keen on so-called pre-pay deals because they provide a guaranteed source of supply on a monthly basis for several years.
But while market conditions are better than they have been for years, few believe 2015 will be as good as 2008/09, when some trading houses banked the biggest profits in their history.
"Things are good, but not that good. There's more competition," says the head of another Geneva-based trading house.
And with more opportunity comes more risk. "These are good market conditions provided you have strong risk management and controls," says Mr Salmon.
Others say talk of a storage boom has also been overblown, noting the contango structure in Brent and WTI is not steep enough to make floating storage work.
"There was a very short window for floating storage - around two weeks - and it has gone," says Ian Taylor, the head of Vitol, the largest independent oil trader. "At no point has there been contango in oil products," he adds.
As last year proved, commodity markets can turn quickly and catch even the most fleet-footed by surprise. As such, no one in the oil trading industry is taking anything for granted. Mr Jaeggi says it is too early to make predictions about the year ahead.
"The exit of a trade is as important as the entry and depending on how things develop, it is very hard to say how the year will progress," he adds.
The 46 per cent slide in crude oil since mid-June has also provided a shot in the arm by boosting profit margins for the ailing European refining industry, which struggled to turn a profit when crude oil remained at or around $100 a barrel.
Some of the big commodity traders have acquired refineries, as well as oilfields, warehouses and ports, as part of a shift toward owning physical assets. Gunvor owns two refineries in Europe, while Vitol has interests in two plants with private equity group Carlyle.
Low oil prices have also lifted traders' working capital. This is because it costs much less to finance a tanker of oil when crude is at $60 a barrel rather than $100. Low interest rates have also helped the traders' working capital.
More from the FT:
Greece bailout talks collapse in acrimony
Hong Kong anger at Chinese 'locust' shoppers intensifies
Fortress Ferrero resists bankers' siege
In addition, bankers believe there could be an increase in prepayment, or loan for oil deals, this year as producers, surprised by the sharp drop in crude prices, look for new sources of finance. Traders are keen on so-called pre-pay deals because they provide a guaranteed source of supply on a monthly basis for several years.
But while market conditions are better than they have been for years, few believe 2015 will be as good as 2008/09, when some trading houses banked the biggest profits in their history.
"Things are good, but not that good. There's more competition," says the head of another Geneva-based trading house.
And with more opportunity comes more risk. "These are good market conditions provided you have strong risk management and controls," says Mr Salmon.
Others say talk of a storage boom has also been overblown, noting the contango structure in Brent and WTI is not steep enough to make floating storage work.
"There was a very short window for floating storage - around two weeks - and it has gone," says Ian Taylor, the head of Vitol, the largest independent oil trader. "At no point has there been contango in oil products," he adds.
As last year proved, commodity markets can turn quickly and catch even the most fleet-footed by surprise. As such, no one in the oil trading industry is taking anything for granted. Mr Jaeggi says it is too early to make predictions about the year ahead.
"The exit of a trade is as important as the entry and depending on how things develop, it is very hard to say how the year will progress," he adds.
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