With Saudi Aramco preparing to open a new trading office in London, rival state-run producers are watching closely as the oil giant leads the charge by resource-rich national oil companies to compete for global trading volumes.
Through its trading arm, Aramco, the world's biggest oil exporter, has hired a number of traders this year to staff a London desk and is moving closer to launching operations in the coming months, market sources said.
OPEC's top producer has previously said it wants to open a trading desk in London or Geneva by the end of the year. The move comes as Middle Eastern and North African NOCs are going head to head with independent oil traders such as Vitol and Trafigura as well as Integrated oil majors to capture a larger slice of the global energy commodities market.
Trading figures show that the concerns of traditional commodity houses may be warranted. After a period of stellar volumes growth since the 2014 oil price crash, the combined oil trade at the world's top independent traders dipped last year for the first time.
The UAE's ADNOC, Iraq's SOMO, and Algeria's Sonatrach have also voiced plans to grow or launch trading operations in recent months. The plans largely follow a two-pronged strategy: taking direct control of selling the NOC's crude and products, while using large state-owned downstream and infrastructure assets to capture geographical arbitrage trading flows.
In the case of ADNOC, Sonatrach and SOMO trading expertise has already been acquired through a number of joint venture deals with established independents, such as Litasco and Vitol, according to market sources. ADNOC agreed to join forces with Eni and OMV for trading in January and has also been on a hiring spree to grow its in-house trading reach. The producer has picked up talent, hiring former Total traders as part of the move, according to sources.
Image updated on July 17.
SAUDI TRADING GROWTH
Aramco's trading arm, Aramco Trading Company (ATC), has been expanding fast, assuming the role of integrating all of Aramco's global trade volumes, while expanding into new markets including the US.
Set up in 2012 to initially market Saudi refined products, base oils, and petrochemicals, ATC began trading its first non-Saudi crude cargo in 2017. At the end of 2018, the company was trading around 800,000 b/d of third-party crude, ATC head Ibrahim Al-Buainain has said.
Last year, ATC's oil trading volumes reached 4 million b/d, up from 1.6 million b/d in 2017, as a result of integrating Saudi Arabia's seaborne trading in refined products. ATCalso set up its first subsidiary in Singapore last July, with a view to becoming a hub for Aramco's growing LNG trading.
"The sustainable growth over recent years has enabled the company to grow exponentially...2018 took the company one step forward toward achieving its goal of being one of the top three trading houses worldwide," Buainain said in a statement earlier this year.
Further out, ATC has said it expects an increase in oil trading volumes to 6 million b/d by 2020. If achieved, that would place ATC behind Vitol as the world's second-biggest oil traders by volume based on 2018 figures.
Aramco and ATC did not respond to requests for comment on the progress of their London trading desk.
ADNOC could soon open an oil trading office in the eastern UAE port of Fujairah, sources have told S&P Global Platts, a move which would mirror ATC's own trading push at the key Gulf oil trading hub.
ADNOC declined to comment on its trading growth plans.
Iraq's SOMO has said it is looking to open offices outside Iraq, starting with Singapore to target its key 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 key grades like Basrah Light and Heavy to only refineries and end-users.
PEAK DEMAND IMPERATIVE
One reason NOCs are becoming more aggressive over growing their integrated downstream and trading operations is the industry's anxieties over shrinking oil demand in the not-too-distant future, according to consultants Wood Mackenzie.
"Securing a market for crude volumes becomes a critical strategic goal for NOC exporters to avert the risk of resource stranding," Wood Mac chief analyst Simon Flowers said in a note last year. "Resource-rich NOC crude exporters...are weighing up the options as intently as any IOC. In some cases, it's not just the company's future in their hands but the national economy too."
Indeed, control of oil and gas resources in the ground is a key advantage over independent oil traders. NOCs control some two-thirds of the world's remaining commercial oil reserves, and of the world's top 25 oil producers, more than three-quarters are state owned, analysis by S&P Global Platts shows.
In addition to extending global reach and boosting access to a broader range of crudes, NOCs are also able to use their supply-side clout to leverage longer-term trading dynamics.
Aramco, for example, is keen to set up contra deals for its crude tied to high sulfur fuel oil supplies from customers after the International Maritime Organization sulfur cap on shipping emissions starts next year.
Until now, most independent oil traders appear sanguine over the competitive threat from NOCs. At a major commodities summit in March, trading house chiefs expressed doubts that the corporate culture of an agile, entrepreneurial trading desk can be successfully emulated at state-run companies.
With new trading desks in locations like London and Singapore, however, NOCs may find it easier than expected to build a pool of expertise that, until now, has underpinned the growth of the commodity powerhouses.
-- Robert Perkins, firstname.lastname@example.org
-- Tamara Sleiman, email@example.com
-- Edited by James Leech, firstname.lastname@example.org