How Trafigura Made Record Profits from Oil Market Carnage

Trafigura, one of a clutch of privately held oil trading firms, reminded the world last week how good it is to be an oil trader when oil markets are imploding. 

Thanks to its ability to buy oil at low prices, store it, and then sell it later once prices have returned to more normal levels, Singapore-based Trafigura posted its best result in its 27-year history, emerging from this year’s oil market carnage as one of its clearest winners. 

It wasn’t alone. Other oil traders that bet on oil by buying it on the cheap in April and May — when oil demand cratered amid pandemic lockdowns — and storing it on land or at sea also racked up generous profits.

Trafigura’s net profit jumped to $1.6 billion — 84 percent higher than the previous year — on revenues of $147 billion, and its gross profit margin, a measure of money netted per dollar of costs, tripled to nearly 5%. (For comparison, ExxonMobil’s
XOM
revenue in 2019, a much better year for the oil market, was $255 billion.)

Trafigura had “stellar revenue, profit and cash flow from operations,” said George Voloshin, a director at Aperio Intelligence, a research firm, in emailed comments. 

Even more surprising than Trafigura’s strong results, however, is that they may not be very surprising at all. 

Like clockwork, Trafigura’s profits have consistently risen during or just after volatile periods when oil prices fall. This year’s oil price implosion in April vaulted the firm to its highest gross profit margins in at least the last dozen years. The 2008 oil price collapse delivered its second-highest margins over that period. And the 2015 price collapse resulted in its third-highest margins.

What explains this remarkable consistency? The reason has to do with the way oil is bought and sold. In the wake of any large oil price drop, the price of oil for purchase immediately (the “spot” price) is often lower than the price of oil for purchase later (the “forward” price). Traders have a name for this type of price disparity between spot and forward prices: contango. And for those who can take advantage of it, contango offers an alluring possibility: buying oil now on the cheap, storing it, and selling it later for a higher price. 

“It is like sailing with the wind in your back,” the trading consultant Jean-François Lambert told the Economist earlier this year.  

The jaw-dropping oil price drop of March and April this year, as oil demand cratered amid pandemic lockdowns, resulted in an extreme version of contango, at least for a while. Prices dropped so far — bottoming out at negative $40 per barrel — that investors were willing to pay generously for anyone simply to take the oil off their hands, lest they be forced to store the odorous stuff in their backyards. 

For companies with the ability to store oil, it was manna from heaven. Working feverishly from home, oil traders sprang into action. Shipping data show that Trafigura was among those rushing to secure floating storage — often in the form of oil tankers — to hold onto oil in April and early May as prices languished. Trafigura increased the size of its fleet by almost 70 percent over the course of the year, at the peak controlling more than 220 owned and time-chartered vessels (not including liquefied natural gas tankers), Trafigura said in its annual report. Its inventories ballooned from $13.4 billion to $20.2 billion at one point, well beyond the $6 billion of stocks required for its regular trading activities, said Lambert, the consultant, in emailed comments.

Having bought up literal boatloads of oil, Trafigura simply waited, and then “released [it] to the market at much higher prices, netting huge profits,” said Voloshin of Aperio Intelligence.

Trafigura says that the credit for its large profits belongs not to the markets alone but to its fleet-footed traders. “You will hear that contango makes it easy for trading houses to make money because all you have to do is buy storage,” said Saad Rahim, Trafigura’s chief economist, in a phone interview. But the reality is more complicated, he said. The logistics involved in storing and moving oil around the world — “our raison d’être” — are incredibly complicated, Rahim said. “We have this global network….and that is what allows us to store crude” and pull off the complicated logistics that the market required, he said. 

Still, for those who know what they are doing, the profits seem to come easily enough. The oil trading departments of even staid energy majors Shell and Total made out like bandits earlier this year, saving their traditional crude production operations from abysmal half-year results. The publicly traded commodities giant Glencore made roughly as much money in the first six months of this year, thanks to a bonanza in April and May, as it did across all of 2019, Bloomberg News reported in July. (Other oil traders, among them Vitol, Mercuria, and Gunvor, are privately held and don’t publish annual accounts; Trafigura is the rare exception. But reports suggest that they, too, raked it in.)

To some extent, price volatility is a boon to traders in any market. The trading desks of Wall Street banks often thrive when prices of stocks or bonds shudder, even when the market is falling.

Still, the large capital requirements of the oil business, traditionally the exclusive terrain of mega-firms, ensures that the ranks of those with the ability to summon up a fleet of oil tankers at will remains small. For the oil traders who specialize in the buying, selling, transporting and storing of oil, that made 2020 a good year.

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