In Traders – Secrets in the Commodity Game Part VII, we’ve shared some observations about Mercuria Energy Trading SA, about their modus operandi. How Dunand and Jaeggi, no stranger to the market (Phibro, Goldman, Universite de Geneve) have forged relationships with business partners long before they gained the actual level credence they’ve now in the market.
It all started with one good trade:
Mercuria essentially envisioned the potential of what could become China at the early beginning of its energy liberalization. (the 1st tectonic shift in energy trading).
From one good trade, they have organically built, a tiny Swiss-based operation into a successful and one of the top independent energy trading firms in the world…
Mercuria should also be credited for having timely recognized the oil trading potential of North America in 2009, at the beginning of the shale revolution. (2nd tectonic shift in energy trading, 2 on 2).
For the part VIII, we will bring a contextual example of what could be described as the third tectonic shift in the commodity game.
A PRACTICAL COMMODITY CASE: MAKING A MARKET FOR AN ATLANTIC CRUDE GRADE IN ASIA/INDIA.
For an overview of the hedging and operations of an Atlantic to Asia–Pac oil trade read Oil Trade and Freight Hedging Process Flows.
Commodity traders effectively correspond to physical operations and therefore comprise the purchase or sale of a commodity with a view to deliver it.
Additionally, the time separating the sale and the purchase of this activity poses challenges, entails taking positions on an anomaly and execute a lot of sequencing in order to timely deliver, get paid and realize a profit.
The Brent/Dubai Exchange for Swap is regularly priced above $2 per barrel. In 2nd decade of March, the Brent/Dubai EFS came off in the fork of $1.30- $1.40 per barrel.
We were ahead of the spring maintenance at the refineries making the geographical arbitrage between East and the Atlantic a possibility.
What’s is now in the mid $1/barrel is making the Dubai-linked crude looking more expansive compared to the Brent-linked crude.
Calgary-based Suncor Energy has sold a cargo of light sweet Hibernia crude oil to New Delhi, India-based Indian Oil Corporation (IOC).
The IOC, Indian Oil Corp, knowing exactly the value of their crude basket (to nearest 5 cent) chopped a sweet Hibernia blend (35 API, 0,44S) from Canadian Suncor, bypassing both the West-African, the Middle East grades.
The Indian major realized this flow out of the Eastern-Canadian Coast to be benchmarked against the Saudi Arabia Light and blended to a specification that wasn’t promptly available in their market, this without the help of the trade houses.
The equilibrium behind this trade, and the most part of it, rested on a favorable freight situation, marked by a sharp correction in the tanker freight market that occurred in precedent months and followed by an interim period.
A tanker source also pointed out that the “game changer” was in the 3rd decade in WAFR-east where rates accelerated from the mids 80s to ws100 rapidly.
Above. Left-side (suezmax spot) identified as game changer in the 3rd decade of March. Right-side: the sharp correction in the tanker freight market charter rates which peaked and died at 40,000 USD/day with the “contango/storage” media hype.
Freight market aside, this trade has highlighted the operational capacity and readiness of an Asian oil major to strike, very opportunistically on a sudden anomaly.
THE RISE OF THE DRAGONS AND THE ELEPHANTS IN ENERGY TRADING.
The Indian elephants: Reliance, IOC (Indian Oil Corp), HPCL.
The Dragons: CNPC/Petrochina, UNIPEC, SINOPEC.
These majors or either government-backed or IPO-ed.
They also often run outside of the western banking channels but trade with the central bank money.
They are less diversified geographically but remain well-capitalized compared to trade houses trading with very little tangible equity.
THE SHORTS…NO LONGER SHORTS
Oil traders have pioneered the market for freely traded oil in the 70’s.
A tectonic shift for traders has appeared in the early 2000s with a rapid economic growth in China nurturing an imbalance on the world markets and propelling an unprecedented trading volume rush to source hydrocarbons at the four corners of the world.
The 2nd recent tectonic shift has been the U.S shale revolution, also characterized by the enormous opportunities that it brought trading-wise (and the demises).
China and India produce respectively 5.5 and 0.96 million bbl per day) versus a daily consumption of 11.9 and 4.1 million bbl per day) according to the BP statistical review of 2016.
China and India are shorts physically, constantly buying barrels in the market to get covered.
However Petrochina Unipec, Sinopec, Reliance, IOC, off-the-radar have gone through a rapid learning curve since the 1st tectonic shift.
The difference today lies in how they buy using different time spot vs term, different routes and geographies or technical arbitrage. They have built strategic infrastructure and supply chains as opposed to just buying large volumes.
It has all the hallmarks of the strategies used by a trader to determine and price the value .
It appears that the once end-users counterparties are now “jostling the trade houses on the bid”.
They now understand the trade, its intrinsic value (and everything a trader might like to charge over it).
Being a short, knowing the exact value (to the nearest 5 cent per barrel), inescapably elbows the houses “bread & butter” (create, transport and deliver an oil grade or blend quality which is not promptly available in a market for a customer).
Some anecdotal evidences:
- In terms of infrastructure, IOC is the 1st or 2nd charterer of suezmax tankers in the world with UNIPEC (well ahead of Trafigura, Mercuria…)
- Well-known trade architects who learnt the ropes at the houses have moved to develop the trading program of the majors.
- A jadis diva of the Genève oil trade scene has become head of trading for Petrochina in Houston. (a very supportive one !)
- “The gasoline king of the New York Harbor” has been asked by Reliance (a GSC also not stranger to this author) to boost their U.S trading know-how.
- The Dragons and the Elephants are paying cash ( real cash, no complicated phantom shares) for ready to get streamlined expertise.
This venture into commodity trading could be wisely guided as they manifestly have the net equity, know-how and the infrastructure to allowing them to get around the commodity houses to gain the access to price anomalies and execute the arbitrage opportunities in the energy market.
Crude traders effectively correspond to physical operations and therefore purchase or the sale of a cargo with a view to deliver it.
This activity entails taking a position on the market as a result of the anomalies in order to make a profit.
For the houses, the economic significance of this rise of the dragons and the elephants is that they have Shorts who are no longer Shorts.
This return of the pendulum would mean less return on the working capital for their ability to accurately predict the physical supply and demand evolution and timely deliver.
Like the yin and the yang, what is profiling in the horizon is more risk, for the same opportunity-profit units.
Paradoxically, each time in the history that an over-geared a trader has faced more competition but under different set of reasons, they have taken more financial gearing, not the opposite.
What is interesting ?
You can draw your own conclusions but these firms had to blown–up only for the marketplace to discover the horror: that finally these traders touting their invincibility were already loose financially, had a considerable reported turnover in comparison to their net equity, no financial substance and absolutely zero risk-management.
It’s a world of traders and merchants that has been and will be always in a constant crisis but there will always be a romance maintained about commodity trading.
1-226-348-5610 Advising the producer, processor and end-user in North America.
Jacques, S (2017) Traders-Secrets in the Commodity Game Part VIII- The rise of the Dragons and Elephants in Energy Trading,Navigating the commodities markets with Freight and Spreads , March 20, 2017.
As always, read it here now, before it is elsewhere later.