BP, Shell help lift profitability of oil trading to 6-year high

[LONDON] The trading arms of Royal Dutch Shell Plc and BP Plc enjoyed their best year ever in 2015, helping push the combined gross margins of oil merchants to a six-year high, according to a closely watched report.

Oil traders last year "stormed ahead, thanks to low, volatile spot prices that created cash-and-carry opportunities," consultancy Oliver Wyman said in its annual review of the commodities-trading industry published Wednesday.

These oil traders' gross margins - a rough measure of profitability - rose to a combined US$19 billion, the highest since 2009, when traders thrived off of big price swings and oversupplied markets.

For commodities traders in general, total gross margins stagnated at US$44 billion for the second consecutive year as natural gas, power and other markets underperformed oil.

The Oliver Wyman report is closely watched in the commodities industry as several of the world's top traders, including units of major oil companies such as Shell, BP and Total SA, don't disclose their profitability. Shell and BP have said they had a very strong year in 2015.

Independent energy traders including Vitol Group and rivals Trafigura Group Pte, Glencore Plc, Gunvor Group Ltd and Mercuria Energy Group Ltd profited last year from the increase in volatility as oil prices plunged below US$50 a barrel, from US$100 in mid-2014.

The oil traders filled tanks to take advantage of contango - a relatively rare situation where contracts for future delivery are trading higher than spot prices, allowing them to buy oil cheap, store it and sell the commodity at a profit later by locking in their income through derivatives.

Oliver Wyman noted that profitability also increased last year as the top independent traders boosted volumes to an average of 4 million barrels per day each, while the trading arms of oil majors handled between 5 million and 10 million barrels a day each.

The trading conditions have since changed, with contango narrowing and even disappearing in some markets and volatility dropping.

The report, co-authored by Graham Sharp, one of the founders of top trading house Trafigura, warned that the number of commodities trading houses will "shrink" in the next few years as competition increases and margins continue to drop.

The commodity-trading industry is about to undergo major changes in how it uses technology to manage shipments, the consultancy said in the report, adding that "digital contenders" will exploit advances including artificial intelligence to automate processes.

"Managing fleets of vessels, optimising credit risk, aggregating internal and external intelligence on cash flows, and even making freight decisions accounting for cargo flows in relation to the market, weather, congestion, and other factors will soon all be assisted by machines as often as by man," Oliver Wyman said.

"Vastly fewer people will be required, compared to today's standards, because artificially intelligent systems will manage the bulk of volume."

BLOOMBERG