The kind of crazy up-and-down movements of the oil markets in recent weeks and months is not a ripe opportunity for a major trading company like Vitol. In fact, its CEO and chairman Ian Taylor says that whipsaw activity is a nightmare for his company.
“A market that is up $3 in the morning, down at lunchtime and then back up again at the close is almost impossible to hedge,” Taylor said in a one-on-one interview this week as part of the Platts Global Energy Forum. “I don’t think the trading companies do particularly well in that environment.” (Full disclosure: I conducted the interview with Taylor at the forum’s luncheon.)
And contrary to some beliefs, a relatively calm market that goes on many months — like the first part of 2014 — isn’t quite as bad as it might seem. “You’re making an assumption that traders speculate,” Taylor said when asked whether the first relatively non-volatile part of the year was a difficult time for a trading company. “Hardly any trading companies in existence today speculate. Shell, BP, Vitol…we don’t do flat price trading. A predictable long-term trend is much easier to handle.”
Instead, Taylor described Vitol’s business as “the moving of molecules, from where they are produced to where there is demand. In many ways, our business won’t be very much affected by moves in the underlying price of oil.”
Trading companies worldwide continue to go through significant transformation, picking up physical assets and leaving far behind any characterization of them as a desk and phone operation, simply trying to buy low and sell high. Vitol has had an extensive physical presence in oil markets for years, and got bigger this year with the purchase of Shell’s downstream assets in Australia.
So the question is: do assets like that get bought to be profitable on their own, are they acquired primarily to support trading operations, or is the truth somewhere in the middle?
Not surprisingly, it’s the latter. “We try to do both,” Taylor said. “Any asset we buy has to be stand alone and it has to make money by itself.”
But looking for synergies with the rest of the Vitol operations is always sought as well. “The guys at Shell Australia are amazed at how much better we have been in supplying their business than their previous owners,” he said. “(Shell) had a slightly different view of the asset and we have a view that you have to have one market related to the other.”
Taylor touched on several other points:
- The absence of banks that have pulled out of trading is creating a distinct lack of counterparties for Vitol to play with. And it’s exacerbating market swings, he said. Banks had long been one of the key players in the “back end” of the price curve, the contracts that established a price as far out as 2018 or 2019. There are fewer of them there now. “One of the reasons (the price of oil) has come down so far is that they are very few people taking the other side of that trade” on the back end, Taylor said. Ironically, when the price was significantly higher this year, there were other analysts and economists who cited lack of back end buying by departed banks as aggravating the price rise. The argument from both Taylor and others is clear: banks moderated price swings, not added to them, and their absence is felt.
- Vitol isn’t likely to go public. After issuing a joking “apology” to any bankers in attendance who he said had been trying to persuade Vitol to sell shares to the public, Taylor said such a structure probably doesn’t work for a trading company like his. “Trading can be very poor,” he said. “It doesn’t grow quarter by quarter and so we’re fortunate we have a great partnership. That is the right setup for a trading company.”
- Vitol is involved in trading LNG, but it’s a tough business. “It isn’t easy unless you are a major consumer or a major producer,” Taylor said. It won’t be a significant open market….unless. And the “unless” is a “really big breakthrough in floating LNG,” where a floating unit can produce gas from waterborne assets and liquefy them at the floating facilities. “That loosens up stranded gas, and it is a complete reduction in costs,” Taylor said. But he noted that development was probably “a few years away.”
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