Oil Price Crash Brings Big Profits For Swiss Banks, Investment Corps

Posted: December 20, 2014 in Econ 101, Technology and Energy

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Geneva’s army of oil traders embraces profits a crash brings

Crude oil’s worst slump since the financial crisis means profits for Geneva’s army of traders.

After years of steady prices, the crash has brought back the volatility on which traders thrive. While the fall in benchmark Brent to five-year lows has rocked economies from Russia to Venezuela, the world’s biggest commodity trading houses, which buy and sell about a third or world’s oil from the Swiss city, are relishing the return to a bear market.

Lower prices have cut financing costs, provided an opportunity to lock in profits by storing fuels and heralded the return of big price swings that can help firms from Vitol Group to Trafigura Beheer BV generate higher returns.

“Commodity traders are in a much more optimistic mood these days,” Roland Rechtsteiner, a Zurich-based partner at Oliver Wyman, an industry consultant. “They all hold a lot of inventory, they hold a lot of infrastructure and this can only be monetized when there is volatility. So these are good times for them.”

As banks including JP Morgan Chase & Co. (JPM), Deutsche Bank AG and Barclays Plc (BARC) have exited or pulled back their physical commodity activities, trading houses have purchased assets such as storage tanks, pipelines and refineries. These holdings give traders more options to take advantage of the sudden shift in prices.

Market Contango

The oil market has moved into contango since July, a situation where spot prices are lower than those for delivery at a later date. That’s improved the outlook for trading profits, Alex Beard, global head of oil at Baar, Switzerland-based Glencore Plc, said at an investor day in London on Dec. 10.

A market in contango allows traders who control or have access to storage tanks to make money if the cost of storing oil or petroleum products is less than the difference between current and future prices.

“There is no doubt that a contango market is a more interesting trading environment than a backwardated one,” said Beard. Glencore, the second-largest independent oil trader, is more exposed to the contango in oil-products trading rather than in crude, he said.

Volatility Opportunity

Trafigura, the world’s third-largest independent oil trader, handling more than 2.5 million barrels per day, is similarly upbeat as volatility increases and fuel storage becomes more profitable.

“The shift in Brent structure from backwardation to contango after June made tankage more productive and was generally supportive for our profitability,” Jose Larocca, Trafigura’s head of oil and petroleum products trading, said in the Dutch trading firm’s annual report.

Geneva’s biggest commodity-trading firms declined to comment further for this story.

Switzerland’s $21 billion a year commodity trading industry accounts for about 3.5 percent of the country’s gross domestic product, making it bigger than tourism, according to Swiss government figures. In Geneva, where Trafigura, Mercuria Energy Group Ltd., Gunvor Group Ltd. and Vitol all have major operations, trading accounts for more than 10 percent of GDP, according to the Swiss Trading and Shipping Association.

Finance Costs

The plunge in crude will benefit all traders by reducing the cost of finance, particularly for smaller houses, said Olivier Jakob, the Zug, Switzerland-based managing director of Petromatrix AG, an industry consultant which publishes a daily newsletter on oil markets.

“They trade more of a niche market with relatively small margins so if your costs are being reduced it is better,” Jakob said in an interview.

The fall in Brent to as low as $59 a barrel is hammering oil-producing nations. Iran needs oil at $143 a barrel to keep its budget balanced, while the figure for Russia this year is $100, Finance Minister Anton Siluanov said last month. Nigeria, Africa’s biggest producer, has seen its currency skid almost 12 percent in the past three months, with Norway’s Krone dropping more than 13 percent.

Brent futures for February delivery rose as much as 2.2 percent to $60.60 a barrel today.

Whipsaw Prices

While the currency of oil-importer Switzerland has declined the least against the dollar of the 16 major currencies tracked by Bloomberg over that period, the gyrations of the crude market can cause anxieties for the country’s biggest traders. Ian Taylor, chief executive officer of the world’s largest oil trader Vitol, told Platts in a Dec. 11 interview that whipsaw swings, with prices rising in the morning, falling at lunch and rising again at the close, make hedging “almost impossible.”

Nonetheless, the health of one of the city’s most important industries is being felt by local businesses.

At the Lady Godiva pub, a block away from Vitol’s office, the landlord Glen Simons says trade has never been better as traders slake their thirst with pints of Guinness costing 9.50 Swiss francs each ($9.86). He’s reminded of 2009 when executives from OAO Lukoil (LKOD)’s Litasco unit brought laptops to the pub for fear of missing trading opportunities.

He hopes that falling commodity prices may provide some cost savings for his own business.

“If it was $65 for a barrel of Carlsberg, I would be more than happy,” he said.

SOURCE:  http://fuelfix.com/blog/2014/12/20/genevas-army-of-oil-traders-embraces-profits-a-crash-brings/

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