The World’s Largest Oil Traders Are Shifting Strategy

Authored by Tsvetana Paraskova via OilPrice.com,

The world’s largest independent oil trader, Vitol, is looking to secure long-term deals with some of the biggest oil-producing countries in the Middle East, in what has become a challenging wider oil-trading market.

Vitol is in discussions to seal either joint venture, or long-term offtake and supply agreements with Abu Dhabi, Bahrain, and Kuwait, Ian Taylor, who stepped down as CEO last week to become chairman at the oil trading group, told Bloomberg in an interview on the sidelines of the FT Global Commodities Summit in Lausanne, Switzerland.

“I am going to be visiting Africa and the Middle East and trying to promote Vitol and do some structural deals,” Taylor said, adding that he couldn’t be certain that any deal would be completed because they are “bloody tough to do and bloody tough to find.”

While Taylor is now chairman at Vitol, he will keep his role of managing the relationships with OPEC countries and other national oil companies that he has built during his tenure as chief executive.

Securing deals with some of the largest producers in the Middle East would secure oil volumes for Vitol, which trades more than 7 million barrels of crude oil and oil products every day.

Oil trading houses currently face tougher market conditions than at the peak of the oil oversupply a couple of years ago. The oil futures market structure flipped into backwardation last year, meaning that front-month prices are higher than those further out in time, which makes storing oil for future sales uneconomical. The biggest oil traders raked in profits during the height of the glut in 2015 when the market structure was in steep contango—the opposite of backwardation—that makes oil storage profitable.

In addition, the current lack of volatility in oil markets also cuts into profits and margins.

“And I don’t think anybody is making a lot of money,” Taylor told Bloomberg.

While pursuing long-term deals in the world’s biggest producing region, the Middle East, Vitol’s chairman recognizes that “U.S. exports are the big feature,” and that “Pipelines in the U.S. are going to be very critical.”

In December, Vitol and Harvest Pipeline Company, an affiliate of Hilcorp Energy Company, agreed to explore joint development of a crude oil terminal in the Port of Corpus Christi to “facilitate the efficient delivery of U.S. crude to global markets, thereby increasing marketing opportunities and optimizing value for U.S. producers.”

Another big independent oil trader, Trafigura, was the largest exporter of U.S. crude oil and condensate over the past year, its CEO Jeremy Weir said this week. Trafigura is also boosting its U.S. export capacity to take advantage of the surging American production.

Although cost inflation and possibly insufficient takeaway capacity may curb some of the Permian production growth, booming U.S. shale production is the biggest factor that could make OPEC and Russia extend their pact to curtail production beyond 2018, Vitol’s Taylor told the Financial Times at the FT Commodities Global Summit.

“My guess is they’ll keep them going,” Taylor said.

“The [higher] price is making up for what they have cut in terms of production, but I don’t think they should be looking at this in terms of defending market share,” Vitol’s head noted.

Yet, soaring U.S. production is also weakening the outlook for oil prices this year, Taylor said.

“I’m a bit surprised the market is hanging in there right now,” Taylor told the FT, referring to the current price of oil. He expects oil at $70 a barrel in the summer when higher refinery runs will absorb more crude oil, but then he sees prices falling back to $60 by the end of 2018.

As an industry veteran, Taylor knows the uncertainties of predicting oil prices, so he added “And I’m sure I’ll be wrong.”

While the profit margins of independent oil trading houses greatly depend on the price of oil, if Vitol were to strike more deals in the Middle East, it could secure volumes from some of the largest supply countries to export to destinations where demand will be highest.