Oil trading surge strengthens commodity houses’ grip

The world’s largest independent commodity houses have expanded their oil trading volumes by more than 65 per cent during crude’s near three-year slump, marking them out as the biggest beneficiaries in the industry from oil’s protracted downturn.

Vitol, Glencore and Trafigura together trade more than 17m barrels of crude oil and refined fuels every day, according to company statements and industry sources, handling daily volumes equivalent to more than half the Opec cartel’s output.

Their rapid expansion, up from a little over 10m barrels a day in combined oil volumes in 2014, underlines the rising influence and power of a trading industry that for decades tried to shun close scrutiny. Together with Gunvor and Mercuria, the other two top-five independent oil traders, they account for 22m barrels a day.

“There is a huge race between them,” said Jean-Francois Lambert, a former head of commodity trade finance at HSBC and consultant. “You need to trade a lot of barrels to make a big profit.”

Their growth highlights how trading houses have developed from their roots as buccaneering merchants to playing an increasingly influential role in global trade.

One of the drivers of their growth has been cash-for-crude deals, where they provide multibillion-dollar loans to cash-strapped commodity producers and national oil companies to secure long-term supplies.

Rising US production and the lifting of restrictions on exporting crude from the country last year has also boosted volume growth for independent traders, while higher global demand means they are chasing a bigger slice of an expanding market.

“Scale enables us to add value to customers . . . it means we can access opportunities,” said Vitol chairman and chief executive, Ian Taylor.

Commodity traders operate on razor thin margins, so require huge volumes to turn big profits. Since oil fell from above $100 a barrel in 2014, volatile markets have also increased trading opportunities, from storage deals to increased arbitrage shipments of oil to different regions.

“We’ve been seeing a focus on volume growth in a significant way,” said Roland Rechtsteiner at consultancy Oliver Wyman.

Privately held Vitol has gone from shipping 5m barrels a day in 2014 to more than 7m barrels a day last year, the company said on Friday. It has utilised a number of loan for oil deals with countries such as Kazakhstan, as well as selling fuel to Libya.

Glencore, the only publicly listed company among the three, is expected to handle up to 5.5m b/d this year, according to people familiar with the company, an 80 per cent increase on 2014.

It will be helped by its purchase of a fifth of Russia’s Kremlin-backed oil company Rosneft with the Qatar Investment Authority.

Trafigura is now handling about 5m b/d, up from 2.5m b/d in 2014. It has grown trading volumes partially through a competing deal with Rosneft. Volumes could rise further after it purchased a stake in India’s Essar oil refinery.

Gunvor and Mercuria trade 2.6m b/d and 2.5m b/d respectively, largely steady from 2014, though they have grown in other commodities.

Mr Rechtsteiner at Oliver Wyman said he expected the traders’ expansion to continue despite signs conditions are becoming more difficult as oil has recovered to $50 a barrel.

Supply deals in the oil industry were becoming larger and increasingly complex, giving them an advantage over smaller rivals.

“Volume growth for the largest independent traders will go on,” Mr Rechtsteiner said. “There’s a bifurcation of the market where the very large players are getting bigger while for the smaller players it’s becoming more difficult.”