15 October 2016, London — Trade firms that profited from the renaissance in global refining over the past two years are bracing for tougher times as ample stocks, dwindling volatility and newly powerful refineries in China squeeze opportunities, the chiefs of major trade houses told the Reuters Commodities Summit.
The oil price crash was a windfall for traders, who cashed in by helping the world manage the imbalance in supply and demand it created – for example, by ferrying gasoline churned out at a breakneck pace in Europe to millions of new car and motorcycle owners in India and China emboldened by cheaper fuel.
Traders also padded their profits through easier conditions created by contango – a market structure in which prices in the future are higher than those today. This allows them to make money just by holding onto oil and oil products or even slowly shipping it from one region to another.
But trade house chiefs told the Reuters commodities summit that in 2016, and the year to come, these golden opportunities will become increasingly hard to find.
“I think it will be slightly tougher for everybody,” Vitol Chief Executive Ian Taylor said.
While Europe’s refineries are still remarkably profitable – well after most industry experts thought the margins would have melted away – the money-making opportunities they created are fading.
Gasoline, said Glencore’s head of oil Alex Beard, “really didn’t perform the way many people expected, I think mainly because of an overhang of gasoline from last winter.”
A strong refinery margin, along with a good contango, makes for an ideal trading environment, he said.
Beard warned that “the refining margin outlook is trending back to long-term historical averages, which is challenging to many,” including Glencore.
Distillates, such as heating oil, diesel and jet fuel, have also flooded into the world’s storage tanks. The ample availability means that traders can miss out on additional profits.
Traders are also warily eyeing China’s independent refineries, dubbed “teapots”, which were allowed late last year to start importing crude oil directly for the first time. Suddenly, Taylor said, these units “found everybody’s number on their speed dial”, and began churning products into the global market.
“China has started exporting some products at times. So the surplus tends to be pushed into international markets faster, when traditionally (when Chinese consumption outstripped production) they refrained from exporting products,” said Mercuria chief Marco Dunand. “You have to be a lot more informed about internal product storage levels.”
Even so, no one predicted a return to the crisis of the beginning of the decade for either refineries or traders.
“The market has been able to absorb a number of big (refinery) projects in the Middle East, China, India … in a very short period of time,” said Torbjorn Tornqvist, chief executive of Gunvor, noting these did not collapse margins. “I don’t think it’s going to be as bad as it was three or four years ago when it really was tough.”
*Ahmad Ghaddar; Editing – Ruth Pitchford – Reuters