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The World’s Largest Oil Traders Are Shifting Strategy



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.

By Tsvetana Paraskova for

8 Comments on "The World’s Largest Oil Traders Are Shifting Strategy"

  1. Survival Acres on Thu, 22nd Mar 2018 7:35 pm 

    Oh, lucky us. The world’s largest oil traders are going to make more money.

    Where are my dancing shoes?

  2. rockman on Thu, 22nd Mar 2018 11:41 pm 

    SA – A tad more complicated than that. Much of the oil processed by refineries is bought from the oil trading companies. As explained many time before virtually all the oil refined is BLENDED oil with a gravity around 32 API. The oil traders buy various gravity oils and either blend it themselves or sell it to blending companies. Consider the negotiating advantage an oil trader has with the Alberta oil sands producers if it has long term contracts for a significant volume of US light oil/condensate. The Alberta production would be worthless without the light oil/condensate to make dilbit. And then dilbit itself would be worth nothing to US refineries without more light oil/condensate to blend with the 23 API dilbit.

    Some folks get their panties all twisted up thinking about a Big Oil like Shell or ExxonMobil getting a big competitive advantage that negatively impacts consumers. The vast majority of consumers never heard of Vitol or the other big oil traders. But these are the companies that already control much of the oil market. They don’t produce a bbl of oil but they end up owning most of the oil refineries buy. In the last 38 years the Rockman has not worked for company that sold any of its oil production to a refinery. Every bbl of oil was sold to an oil trading company. And as production continues to deplete (the primary reason Vitol et al are making their current moves) consumer supply and prices will be even more under the control of these “invisible” companies then is already the case.

  3. Davy on Fri, 23rd Mar 2018 5:17 am 

    As always Rock you deliver experience to the conversation.

  4. BobInget on Fri, 23rd Mar 2018 9:30 am 

    Traders are in a world of misgivings.
    “China’s yaun/gold Backed Futures Contracts”
    (Opens Saturday)

    “Beijing wants to make the yuan as international as the dollar as part of its Belt and Road initiative. or at least a bit more international than it is right now. They want to grow their influence globally (not that it’s not already great) and having a currency that is used for international transactions is part of this initiative. In this sense, the futures could be only a start but here I’m only speculating. Maybe in several decades Brent will trade in yuans, you never know”.

    Oil & Energy Community Energy General Oil China’s Yaun/Gold backed Futures contracts
    China’s Yaun/Gold backed Futures contracts
    Started by Mufasa , March 22 2018

  5. BobInget on Fri, 23rd Mar 2018 9:46 am 

    As if USD$ NEEDED undermining.

    In case you’ve not heard. DJT fired General McMaster who opposed the President on regime change in NK and Iran, he hired noted Fox TV talking head, John Bolton as national security adviser. As result crude oil surged. While we don’t import oil from Iran, everyone else does.
    Bolton vowed countless times for “preemptive strikes’ on BOTH Iran and N.Korea.

    This will be the first time a cable TV channel
    destroyed an entire planet.

    Donald J. Trump on Twitter: “I am pleased to announce that, effective 4/9/18, @AmbJohnBolton will be my new National …

    The president feels he needs to create even more
    chaos as distraction for firing Muller and Stormy
    ‘confessions’ 60 Minutes, Sunday.

  6. BobInget on Fri, 23rd Mar 2018 10:01 am 

    As if threatening all living things on Earth were not enough..

    President Trump Tweeted:

    Most Republican mavins are predicting DJT will in fact fire anyone who disagrees, including Muller.
    Congress is in recess till 4/9

  7. BobInget on Fri, 23rd Mar 2018 10:31 am 

    This Hawk, Bolton, doesn’t require Senate approval.

    IMO this oil spike is premature. However, keep in
    mind its ‘futures’ we are talking.
    While shortages are indeed inevitable, they won’t
    be evident to Trump voters till May Day.

    The real drama circles around Chinese futures markets opening Saturday.

    Venezuelan crude or the lack there-of never caused any shortages because KSA flooded
    markets. Today, the Saudis would be hard put to
    pump 10 MB p/d that took oil from $100 to $28.

    Well, with US sanctions restored on Iran, with China determined to undermine USD, I predict
    EVERYONE will simply ignore US banking, industry, and begin to trade in currency ‘baskets’.

    DJT, with his sanctions, tariffs, interventions,
    further isolates the US.

  8. rockman on Fri, 23rd Mar 2018 3:01 pm 

    Dave – Dealings of the oil traders is definitely an insider’s game that 99.9% of the consuming public is not aware. Just like some folks here. LOL. For instance, consider all the focus here on the amount of oil in storage and changes in those numbers. Depending on whose storage numbers you read the vast majority is not owned by producers, refineries or speculators: it’s owned by the oil trading companies. It is those companies that buy oil from producers and haul it to their terminals where it becomes part of the oil storage statistic. Folks should think of them as oil “clearing houses” or whole sellers. These are the companies that sell the vast majority of oil the refineries buy. And guess what: the “price” of oil (really the oil futures contracts) tossed around is presumed to be the price refineries pay. It isn’t: almost all the oil refineries buy is sold for “second” or “third” purchase prices. IOW even if that futures price really was the “first sales price” paid to us producers IT IS NOT THE PRICE the refineries pay for the oil they buy. First, as explained, they buy blended oil and not WTI, Canadian oil sands, Arabian light, etc. And that purchased oil is blended by the oil traders or sold to blending companies. And second, the price paid by the refineries is set by the trading or blending companies: not the oil producers.

    Which, as an aside, is why some models that focus on the price of oil the consumers pay is silly. First, consumers don’t buy oil…they buy refinery products. Second, the futures price is not what oil producers get paid. Third, the price producers get for their oil is not the price refineries pay for the oil they process. Refineries pay what the trading or blending companies charge. Forth, the difference in the price that refineries pay for their oil and what consumers pay for those products for is the “refinery margin”. And the refinery margin can vary greatly over time. Here’s the composite * refinery margins from the EIA: 1998 ($8/bbl); 2007 ($23/bbl); 2009 ($14/bbl). Notice the refining margin does not track the price of (futures or otherwise) very closely. Look at the variations in refinery margins compared to the implied accuracy of the “oil prices” that consumers can afford according to some “models”. What a joke.

    *A volume weighted average of the refiner prices to resellers for aviation gasoline, kerosene-type jet
    fuel, kerosene, motor gasoline, distillate fuel nos. 1, 2, and 4, and residual fuel oil.

    There’s a huge world of the oil market that the public (and many here) are completely oblivious. Consider if a trading company, like Vitol, controls a significant % of the US light oil/condensate. Not only do the Alberta oil sands producers require it but also US and Canadian refineries as wells as the Venezuelan national oil company. Venezuela? Yes: same reason the Canadians need it…to blend with their heavy crap. And Venezuela had been frozen out of that market to some degree which is why last year it had to import light oil/condensate half way around the world from north Africa to make blended oil that could be pumped.

    Imagine the negotiation power these oil trading companies have on not just the price but the availability of oil the refineries have to purchase. ExxonMobil et al don’t call the shots…Vitol et al do. For instance Vitol supplies over 3.4 million barrels per day of crude oil and feedstocks to the refining industry globally. A company that does not own a single oil well. And how many bbls does XOM produce? I don’t know: all can find is the # of bbls EQUIVALENT. IOW converting daily NG to bbls. And that was 4.1 million bopd’e’. And then add to the fact that XOM sells an unknown amount of oil to oil trading companies and not to refineries. So then it’s safe to assume Vitol, a company very few consumers (and some here) ever heard of, sells more oil directly to refineries then one of the largest oil producing companies on the planet…ExxonMobil. Also not all the oil XOM refines comes from XOM wells: it also buys an unknown amount from oil trading companies. And not all XOM oil production is refined at XOM refineries.

    And you’ll never see the details of these transactions: they are some of the more tightly held proprietary information.

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