Traders Brace for More Volatility From Transition

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The world’s top oil traders are banking on more price volatility in the months and years ahead, as commodity markets adapt to the accelerating energy transition. At this month’s Energy Intelligence Forum, the chief executives of Vitol, Trafigura and Gunvor, which between them trade more than 15 million barrels per day of oil, all flagged up the dangers of extreme price spikes and called for some order to be restored to overheated markets. "We've never seen this level of disruption across the supply chains," the head of Trafigura, Jeremy Weir, said, describing the situation as “explosive.” He cited the effects of Covid-19, extreme weather conditions and underinvestment in hydrocarbons as reasons for the current supply crunch, especially in European gas markets. Russell Hardy, chief executive of Vitol, said he expected more “price bumps” along the way, and warned that gas prices would soon become unaffordable for industrial and household consumers in Europe and parts of Asia. The boss of Gunvor, Torbjorn Tornqvist, predicted there would be a further rise in gas prices as winter approaches, primarily because there is no spare production capacity. All three said oil demand would return to pre-pandemic levels around the second half of next year, when international flights gather pace.

It is unlikely the traders will repeat the windfall profits of last year, when the oil price collapse enabled them to put billions of cheap barrels into storage and then sell them after markets had recovered. But the big firms continue to record bumper profits in a still volatile market. Trafigura, for instance, made a net profit of $2.1 billion during the six months ending Mar. 31, with revenues topping $98 billion. Vitol, the largest of the traders in terms of volumes, reportedly made a net profit of $3 billion last year, while Gunvor recorded net income of $213 million during the first half of 2021 — down only slightly from $231 million in the first half of 2020.

The three trading bosses agree that oil will remain a key commodity well into the next decade, when global demand starts to decline. Trafigura boss Weir predicted demand would start to drop off in 10 years’ time, but would leave a long tail behind it, while Tornqvist said it was "inevitable" oil demand would increase in the coming years, and that there would be big differences between consumption patterns in the East and West. All three stressed the importance of gas, including LNG, as a key bridging fuel in the transition, although Vitol CEO Hardy described the current volatility as “worrying.” Across the board, the traders have ramped up their LNG portfolios, taking advantage of abundant supply and expanding markets in Asia, especially India and China, and volumes are expected to rise. Trafigura, Gunvor and Vitol handle combined volumes of more than 30 million tons per year, a multifold increase compared to five years ago.

As they diversify their portfolios, the traders have started to move upstream again, but executives say future investments will be limited. Earlier this year, Vitol struck a deal via its Texan subsidiary Vencer Energy, to acquire the Midland Basin production assets of Hunt Oil, currently producing around 40,000 b/d of oil. Trafigura acquired a 10% stake in Russia’s Vostok Oil, an Arctic oil development, from Rosneft for more than $8 billion, with Vitol expected to take a 5% interest in the venture in alliance with Singaporean trader Mercantile and Maritime. Hardy stressed that upstream was “not taking over” Vitol’s business and said whatever money the company spends on it, a similar amount would go into renewables. Weir said there were opportunities out there, with asset valuations still low, but said the company is putting greater emphasis on renewables.

All the traders are stepping up investments in renewables. Vitol recently entered into an alliance with Hong Kong-listed BYD, the world’s largest manufacturer of electric vehicles and rechargeable battery systems, and also acquired 10% in Norwegian hydrogen firm Gen 2 Energy. But the three CEOs cautioned that it would take years to make hydrogen, in all forms, a profitable business.

Oil Trade, LNG Trade, Corporate Strategy , ENERGY INTELLIGENCE FORUM 2021
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