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Global traders unfazed by national oil companies' plans to grow trading units

London — A push by state-run national oil companies to build and expand their own trading operations is unlikely to present a significant threat to more established independent oil traders, at least in the short term, attendees at a major commodities event heard this week.

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National oil companies will need years or decades to build up integrated trading networks, while corporate culture and a lack of product diversity could hamper their trading margins, leaders of world's biggest independent commodity traders told the FT's Global Commodities Summit in Lausanne.

Saudi Aramco, the world's biggest oil exporter, has said it wants to become a top three global oil trader, trading as much as 6 million b/d of crude and refined products as it expands its downstream reach in Asia.

Aided by a massive asset base of production plants, storage depots and refineries, the strategy is in line with moves by other NOCs to secure greater control of their own crude and product sales, instead of sharing the spoils with middlemen.

But a key hurdle to a profitable trading operation is a corporate culture which allows traders to extract value from deals across a fully integrated assets network, the head of oil trader Gunvor, Torbjorn Tornqvist, believes.

"Their success, I think it depends how they go about it," Tornqvist said. "If they are going to succeed, they are going to have to adapt to the rules of how a trading company works. We've seen many examples of half-hearted attempts which have failed. I'm not sure that's fully understood and that they are prepared to give the entrepreneurial freedom to act which is needed to create a successful trading company."

Barriers to entry for new trading companies also include setting up efficient technology and back-office platforms as well as risk management structures, the traders noted.

Marco Dunand, CEO of trader Mercuria, concurred, saying he believes the ability to trade arbitrage opportunities across a diverse set of energy commodities will remain a key advantage of independent traders.

"I think it takes a long time to build the right mentality to trade," Dunand told the event. "I don't think you can just acquire or build organically very fast. Obviously they have to be taken seriously, but as far as we are concerned, only 50% of what we trade is oil, we trade gas, we trade power and all sorts of other things."

Dunand was also sanguine over the threat of NOC trading ambitions. He believes they are motivated by a desire to optimize their own production flows, rather than influence absolute prices, as they chase new locations and outlets for their crude and products.


A key challenge for NOCs to build profitable trading operations will be integrating their extensive upstream and downstream assets, BP's head of integrated supply and trading Alan Haywood said.

"They can do that by partnering or standalone, but in any case that is going to take time, building a trading business over many decades," he said. "Those starting with a strong asset base is a great starting point, but then you need to ensure the assets are well integrated and run efficiently. My advice, I think, is be patient. These things take time."

Alex Beard, head of oil at Glencore, acknowledged that the trading advantage Saudi Aramco has due to its dominant supply assets can be used to leverage "smart" long-term trading dynamics.

Setting up contra deals for crude supplies tied to high-sulfur fuel oil imports from customers after the IMO's sulfur cap on shipping emissions starts next year is one example of how Saudi Aramco can use supply dominance, Beard said.

"From 2020, they are doing something clever, they are looking at the fuel oil spec change and linking it to their crude and saying to customers 'If you take our crude oil, we'll take your high sulfur fuel oil back.' I think it's a very different approach and it's a very smart one," he said.

The growing footprint of NOCs in trading could also create new opportunities for traditional traders, Beard believes, as they may reach into new regional markets to secure their products, becoming a "new customer for new flows and products."


Aramco's trading ambitions mirror a wider trend among NOCs in the Middle East, which are keen to play a larger role in determining the value of the crude and refined products they produce.

Iraq's state oil marketing body SOMO is planning to build out an active spot market for its crudes. In particular, SOMO is attempting to curb resales of its contracted volumes by term customers and corner the secondary market for Iraqi grades like Basrah Light and Heavy.

With OPEC oil output cuts led by key Middle Eastern producers, large volumes of heavy, sour crudes have left the market, supporting values of heavier crudes.

"There is a shortage of heavy sour crude which they produce, so it's a lot easier to sell it these days ... so I think they feel emboldened now to take that step out and do it themselves," Vitol CEO Russell Hardy said.

SOMO has said it is looking to open offices outside Iraq, starting with Singapore to target its Asian customers. It has already become less flexible in its term contracts, hoping to diminish the influence of traders and control the sales of its crude to only refineries and end-users.

-- Robert Perkins,

-- Edited by James Burgess,