Trading Companies, the invisible hand of the market By Energía 16 A night time view of a support vessel next to the illuminated BP-operated Ensco DS3 drillship at sea in the Gulf of Mexico, USA. Por Teresa Jiménez The international oil market, as we know it today, cannot be conceived without the role of traders, which have become true giant companies of the sector Trading companies are the great unknown in the oil market even though their names (Vitol, Glencore, Trafigura…) appear in the news, as the operations they carry out are not as eye-catching as, for example, a new discovery. However, these companies, which had originally a commercial nature, are sometimes as big as some international oil companies. The revenues of the biggest of them all, Vitol, amounted to $270 billion last year, above the revenue of companies like Repsol or Eni and near the income of other oil majors. And, which is more important, they move vast quantities of oil. Vitol assures it manages five million barrels of oil per day, while Glencore states it supplies 3 percent of the global crude oil demand; that is, more than 2.7 million barrels of crude oil per day. But it is not the only one. Koch Industries processes more than 600,000 barrels per day at its plants, and its pipelines cover more than 4,000 kilometers to transport crude oil and all types of distillate products. In 2014, Trafigura managed 120.4 million tons of oil and distillate products. To understand these figures, suffice it to say that ExxonMobil, the largest international oil company, produced four million BOE/D in 2014, below figures managed by Vitol. How they work Trading companies were originally businesses operating as intermediaries between the supply and demand of a particular commodity. In fact, for many refineries and companies that need oil for refining, trading companies are the simplest way to have access to oil. But, slowly, they have been carrying out more activities, toward other products (but always within the field of commodities) or toward other related activities. Thus, as explains Craig Pirrong, professor of Finance at the University of Houston, these companies engage in “the transformation of raw material: regarding space, logistics; regarding time, storage; and regarding form, processing.” It is in one or in all the phases of this process (transporting by several means: ships, rails or pipelines; storing to supply their clients when they need it or when prices represent an opportunity in the market; or processing the commodity and selling the final product) through which trading companies achieve the margins resulting in high profits (Trafigura obtained a gross profit of $2 billion in 2014). Although these companies seem to share the same model, their activity, their sets of assets and the structure of the main ones of the sector (see Figure 1) are not identical. Most of them (except for Glencore and Noble Group) are private and are not listed on the Stock Exchange. A large part of them not only work in the hydrocarbons business, but also work with other commodities. Diversification in the oil sector At their beginning, these companies were intermediaries for the crude oil demand and supply as production is not located in the main areas where it is consumed. They establish the communication between consumers and producers. This business also attracted the interest of international oil majors which, except for ExxonMobil, have their own trading departments to obtain, for their own refineries, the type of crude they need at a certain moment or to sell the crude they are not able to process. However, over time, trading companies have improved their business models, including other activities related to the oil chain, mainly midstream and downstream businesses. But they are not limited to them, as many of them entered the upstream business. One of the most active companies is Glencore, which in 2012 carried out the sector’s most important transaction in recent years, the purchase of Xstrata for $43.24 billion. But this has not been the only deal in the sector, as Vitol purchased an offshore block in Ivory Coast in 2012, although its business is more focused on midstream and downstream. Gunvor has interests in blocks of the Caspian Sea, Congo, Papua New Guinea. Other transactions are yet to be seen. In the last conference on commodities held by Reuters, traders assured to have resources enough to go shopping, but they are still cautious due to the fact that assets available are above the current market price, or interesting assets are not on sale. “The assets are either problematic, so it’s not clear you want to own them, or they are reasonable assets, but their price hasn’t come down low enough to create an opportunity,” Mercuria chief executive Marco Dunand said. Commercial companies, which benefit from the price volatility as they have capacity of storage (or create it, as they stored oil in supertankers, waiting to unload it when the price improves), have also took advantage of the moment to divest assets. For example, Trafigura obtained $900 million last year, after selling 80 percent of its storage terminal in Corpus Christi, Texas. Gunvor, according to analysts, would obtain $2 billion from the sale of its assets in Russia, which are now available to make purchases. This has been confirmed by its CEO Torbjorn Tornqvist “We have a large amount of cash.” Their role as financers Beyond their role as oil suppliers, one of the main functions acquired by them is the financing activity, both for producers and purchasers, which allows creating an entire business cycle (they not only supply the commodities, but also offer risk and financing management services), increasing the control over the market information. They have been extremely valuable intermediaries for some countries at particular moments. For example, during sanctions to Iran they took advantage of loopholes that allow the exchange of foods (supplied by them) to overcome the embargo. It is also rumored that Vitol supplied fuel to Libyan rebels in exchange of a supply contract in the country, once the government ruled by Colonel Muammar Gaddafi was ousted. At the same time, in Syria, it committed to the government ruled by Bashar al-Assad, who received oil supplies while trying desperately to suppress local rebels. This activity in the extremes of legal trade has put more than one trader in a difficult situation. Trafigura accepted to pay a $5 million fine after a ship was found in Caribbean waters, transporting illegal amounts of Iraqi oil in 2001. Main hubs The truth is that these companies have established their operational base in strategic points. Amsterdam (Europe), Singapore (Asia-Pacific), Texas (United States), Calgary (Canada) and Dubai (United Arab Emirates), are some of them. But a part of the world is yet to be exploited: Latin America, although they are present and operate in the region. Trafigura obtains 15 percent of its sales from the region, partially thanks to its subsidiary Puma Energy. However, as the Deloitte’s report A look at some current issues facing energy and commodities traders says, the economic crisis affecting developed economies has made traders to search for new opportunities, and today Latin America is the place for possible investments of trading companies.