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Volatility stirs activity in oil market in Q1

But new Gulf refineries and Crimean sanctions make for tough trading environment

[SINGAPORE] Market volatility caused by geopolitics, including the confrontation over Ukraine, is helping to boost oil market activity here in the first quarter, say oil traders.

While one source said it is leading to a "slightly better" Q1 showing, another trading firm boss downplayed this, saying that "it's still a tough market". A trading executive reckoned that there has been a 10-15 per cent increase in physical and paper trades here in Q1 compared with the same period last year, as a result of the market trending up and down because of the volatility.

It has been in contango at times and backwardation at others, he told The Business Times, referring to the exact opposite market conditions where the future price of oil is respectively higher, or conversely lower, than spot prices.

"Volatility is good," agreed the oil trading boss, though he believes that "trading volumes here haven't really increased significantly in Q1".

The emergence of new Gulf oil refineries has closed off oil product markets both there and in the West, including for middle distillates such as diesel and jet fuel, he said, with this leaving Singapore traders with just the regional Asian market play.

An oil terminal source concurs. "Trading volumes here have been down for the past year, and traders have had to share their storage space which they have leased with others to optimise its use," he said. "Trading volumes have not been sustainable."

Oil markets have also been reacting to Russia's annexation of Crimea as well as oil industry issues in Libya, with Gunvor - one of the world's largest oil traders with global offices including in Singapore - drawn into the political confrontation over Ukraine, after the US Treasury slapped sanctions on Gennady Timchenko, a Gunvor co-founder.

Switzerland-based Gunvor issued a statement, including to the Singapore Exchange (SGX), on March 21, that Mr Timchenko had sold his entire Gunvor stake (43.5 per cent) to co-founder Torbjorn Tornqvist "to ensure . . . the continued and uninterrupted operations of Gunvor", in anticipation of potential economic sanctions.

Trading sources here said they are continuing to do business with Gunvor, but are exercising some caution given the US action. Earlier London reports suggested that US oil companies would be especially wary of trading with Gunvor.

"But as long as the banks are still supporting trades with Gunvor, there is no problem," the trading boss here said.

In an industry-wide shake-out here caused by the generally lacklustre market, Gunvor, as well as several other trading houses including Lukoil and PetroChina, saw some traders exiting their doors recently.

"The physical oil market has been especially difficult to trade," the trading executive said, pointing for instance to Arcadia Energy's withdrawal from physical oil trading in Asia.

The international banks too have been withdrawing from the commodities market. Earlier this week, JP Morgan Chase, one of the so-called "Wall Street refiners", sold off its entire physical commodities trading operations, including in Singapore, to Swiss trader Mercuria for US$3.5 billion.

"While the market has been more favourable in Q1, it's nevertheless still a challenging market," the trading executive said. Underlining this, the trading firm boss remarked: "It's never been easy."