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Mercuria crude-trading boss retires with a warning for industry

[GENEVA] After almost three decades on the front lines of global oil trading, the head of crude at Mercuria Energy Group is retiring with a warning about the consequences of the industry's dramatic growth.

Kurt Chapman, a Harvard-educated former US marine who bought and sold North Sea crude, expressed pride in the way trading houses including Mercuria vaulted from relative obscurity to handle millions of barrels a day. Yet he also voiced concerns that the industry, by extending its tendrils deeper than ever into the global market, is likely to draw increased regulatory scrutiny.

In the first interview since his retirement late last year, the 55-year-old Chicago native said it was "time for a break" after 29 years of the physical and mental rigors of oil trading. Speaking during a family ski holiday in Verbier, Switzerland, he reflected on the dramatic transformations in the North Sea market, which underpins international benchmark Brent.

"I certainly have concerns about the Brent benchmark," Chapman said. "We are seeing more and more financialization of Brent and a movement away from what the underlying physical value of the commodity is."

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Changing Market

Crude futures have recently experienced huge and unexpected price swings. After hitting a four-year high above $86 a barrel in October, Brent plunged below $50 on Dec. 26 and has since surged back to $66. The 30-day historical volatility jumped to the highest in more than two years in the closing days of 2018.

The surge in electronic trading, once dominated by investment banks, is now led by hedge funds, Chapman said. This means futures markets are becoming disconnected from the trade in actual cargoes of North Sea crude.

"Now everybody is happy to come in and trade electronically on the exchange without having a real understanding of the real business," he said.

A difficult market has prompted overhauls at crude desks at rival trading houses including Gunvor Group Ltd. and Socar Trading SA. The challenge of adapting to volatile markets will be among the topics of discussion as the world's biggest oil traders and producers gather in London in the coming days for International Petroleum Week, one of the industry's biggest events.

Dramatic Expansion

After earning an economics degree and serving as an infantry officer with the Second Battalion, Ninth Marines for four years, Chapman joined Morgan Stanley's once mighty commodities division in the late 1980s. Starting on Wall Street and soon moving to London, he also did stints at Koch Supply & Trading and Elf Trading -- now part of Total SA. In 1999, he joined ex-Goldman Sachs Group Inc. traders Marco Dunand and Daniel Jaeggi at Sempra Energy in Geneva.

In 2004, Dunand and Jaeggi left Sempra to team up with a group of traders with Russian and Polish connections, forming Mercuria. Chapman joined as an equity partner and global head of crude-oil trading in 2006. The Swiss firm grew rapidly to become a top five independent trader, handling more than 2.2 million barrels of crude and petroleum products a day. The firm entered the big league in 2014 when it bought JPMorgan's physical oil trading business for about $800 million.

"It was very rewarding to be a part of a company that was dynamic and growing, that could respond to market conditions and make decisions quickly and capture the opportunities," Chapman said. "The oil markets expanded dramatically at that time and trading companies expanded dramatically. I don't know if we just hit the sweet spot -- there is always a bit of luck in it."

A Mercuria spokesman in Geneva confirmed Chapman's departure and said he was a "foundational component of the company and will always remain a friend."

Military Preparation

The daily life as head of crude-oil trading is both physically and mentally taxing, Chapman said. That only intensified as real-time market information became available 24-7 on traders' mobile phones. He credits his time in the marines as "the greater contributor to my success as a trader" and the best preparation for the unique demands of the job.

"The exposure to stress, challenging physical and mental environments, decision making and having other people relying on you to make the right decision, that was certainly the best training ground I could have had for trading," Chapman said.

Mercuria and other big trading houses have expanded in recent years to invest in oil exploration and production, as well as energy infrastructure assets, in response to shrinking profit margins for traditional trading models. The firms have also evolved to take on commodity trade-finance roles that were once the sole domain of banks. The result, Chapman said, is more scrutiny for the once-publicity shy sector.

"When you are handling that much of the world's resources, people are going to take a look," he said.

Chapman may return to the oil industry, most likely in the private-equity investment space. In the meantime, he's joined the board of Zenith Energy Management LLC, a closely held oil-terminal operator with assets in Europe and the U.S. that is backed by Warburg Pincus LLC.

"There continues to be a demand for crude oil and product logistical assets, particularly in light of the continued growth of shale oil and the fact that the primary outlet for that will be export to Europe and Asia," Chapman said.

BLOOMBERG