Why Crude's Slump Means Record Profits for World's Oil Traders

• Trafigura's oil trading unit posts record gross profit
• Trader boosts volumes and prepay deals amid oil price crash

As the price of crude slips to the lowest in almost seven years, oil traders at Trafigura Pte Ltd. and other trading houses are making hay.
At Trafigura, oil and petroleum product trading volumes increased to a record of more than 3 million barrels a day this year as gross profit from the unit doubled to $1.7 billion, the highest in the company’s 22-year history, it said Monday in its annual report.

Traders are taking advantage of price volatility, lower financing costs and a market structure known as contango that allows them to lock in profits by buying and storing oil to deliver at higher prices in the future. The price crash has also pressured producers to seek financing from traders through pre-payment deals that guarantee flows of crude while buffing profits.
“The volatility in oil prices seems to continue and this volatility is very good for our business,” Trafigura’s Chief Financial Officer, Christophe Salmon, said in a phone interview. “I don’t think we have reached the bottom of the cycle yet.”
Commodity markets are set for another “difficult” year in 2016 but, unlike traders who are also major commodity producers such as Glencore Plc, Trafigura’s “business is very much price agnostic,” Salmon said.
Oil traders, including Vitol Group, Gunvor Group Ltd., Mercuria Energy Group Ltd. and Castleton Commodities International LLC, join refiners, storage companies and shipping firms as segments of the energy industry benefiting from the crude-price slump. A record oil-trading performance saw Trafigura’s earnings before interest, taxes, depreciation and amortization surge 43 percent to $1.86 billion in 2015. Gross margins at the third-largest independent oil trader jumped to 2.7 percent from 1.6 percent the year before.

Impressive Increase

“The big increase in trading margins is impressive,” and Trafigura is “clearly able to more than offset weak commodity prices,” analysts at Investec Plc wrote in a note Monday. “Oil products trading has been an area of growth for trading houses and Trafigura has more exposure to oil trading than to metals and minerals trading than some of its peers.”
With producers reeling from commodity prices at six-year lows and desperate for cash, Trafigura has dramatically increased prepayment financing deals. Those long-term arrangements where Trafigura receives guaranteed flows of commodities in return for advance payments almost tripled to $1.07 billion during the year.
“We have a lot of companies knocking on our door looking for financial support,” Salmon said.
Most of the risks related to prepayment loans is spread among Trafigura’s financial partners including banks and other lenders.

Trafigura’s adjusted net income of $1.1 billion, the third highest in its history, allowed it to reward its 600 employee-shareholders with share buybacks totaling $775 million. The payouts came even as the company’s metals and minerals division reported a little changed gross profit of $920 million and the company wrote down the value of physical assets such as bulk commodity ports and iron ore projects by $407 million.
Salmon signaled that share buybacks, which are made at the discretion of Trafigura’s board of directors, are unlikely to increase significantly in the near future. The Singapore-registered company, which has major trading operations in Geneva, expects to maintain annual net income of at least $1 billion, he said.
“One of the strengths of Trafigura is this fortress balance sheet we have built,” Salmon said. “We do not want to jeopardize this.”
Despite the jump in oil-trading profit, the yield on Trafigura’s bonds due in 2018 widened to a record 11.11 percent on Monday. Salmon said the company’s bonds have suffered contagion effects over concerns with Glencore’s debt. Trafigura has no plans to buy back its the bonds, he said.
Glencore said last week that it plans to reduce debt to as low as $18 billion by the end of 2016. That’s lower than a September estimate and compares with a $30 billion debt load this year.