BP, Shell Help Lift Oil-Trading Profitability to 6-Year High

EghtesadOnline: The trading arms of Royal Dutch Shell Plc and BP Plc enjoyed their best year ever in 2015, helping push the combined gross margins of oil merchants to a six-year high, according to a closely watched report.

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26 October 2016

Oil traders last year “stormed ahead, thanks to low, volatile spot prices that created cash-and-carry opportunities,” consultancy Oliver Wyman said in its annual review of the commodities-trading industry published Wednesday.

These gross margins -- a rough measure of profitability -- rose to a combined $19 billion, the highest since 2009, when oil traders benefited from big price swings and oversupplied markets. For commodities traders in general, total gross margins stagnated at $44 billion for the second consecutive year as natural gas, power and other markets underperformed oil, reports Bloomberg.

“The main driver of growth over the last few years across commodities trading has been in oil -- 2015 was an exceptional year in terms of trading conditions and volumes have gone up tremendously,” said Roland Rechtsteiner, a partner at the management consultant based in Zurich.

The Oliver Wyman report is closely watched in the commodities industry as several of the world’s top traders, including units of major oil companies such as Shell, BP and Total SA, don’t disclose their profitability. Shell and BP have said they had a very strong year in 2015.

Independent energy traders including Vitol Group, Trafigura Group Pte, Glencore Plc, Gunvor Group Ltd. and Mercuria Energy Group Ltd. profited last year from the increase in volatility as oil prices plunged below $50 a barrel, from $100 in mid-2014.

Contango Opportunity

The oil traders filled tanks to take advantage of an unusually strong contango market structure -- where contracts for future delivery are trading higher than spot prices, allowing them to buy oil cheap, store it and sell the commodity at a profit later by locking in their income through derivatives.

Oliver Wyman noted that profitability also increased last year as the top independent traders boosted volumes to an average of 4 million barrels per day each, while the trading arms of oil majors handled 5 million to 10 million barrels a day each.

The trading conditions have since changed, with contango narrowing and even disappearing in some markets and volatility dropping.

“Oil trading is driven by volatility and that has had a nice ride in 2015,” Rechtsteiner said. “That may not be repeated again this year or every year, but I think we are going to see a sustainability in oil profits.”

Artificial Intelligence

The report, co-authored by Graham Sharp, one of the founders Trafigura, warned that the number of commodities trading houses will “shrink” in the next few years as competition increases and margins drop.

The commodity-trading industry is about to undergo major changes in how it uses technology to manage shipments, the consultancy said in the report, adding that “digital contenders” will exploit advances including artificial intelligence to automate processes.

“Managing fleets of vessels, optimizing credit risk, aggregating internal and external intelligence on cash flows, and even making freight decisions accounting for cargo flows in relation to the market, weather, congestion, and other factors will soon all be assisted by machines as often as by man,” Oliver Wyman said. “Vastly fewer people will be required, compared to today’s standards, because artificially intelligent systems will manage the bulk of volume.”

The report also highlighted the increase in long-term offtake agreements struck between traders and producers to increase flows. Traders are also acquiring physical assets such as refineries, pipelines and storage to build mini-systems spanning production to service stations to rival integrated majors.

“The business models of the independent traders and the asset-backed trader are getting closer to each other,” said Rechtsteiner.