London crude trading’s ‘Good Old Days’: Dawn of a new century
Colin Bryce continues his oil markets story, taking in the last 20 years up to the present day
The greater part of the crude markets' last 20 years has been dominated by the rise of asset-based trading. The mining of the optionality inherent in a portfolio of production, refining, logistics and distribution, and contractual obligations (especially ‘shorts’) over time, space and across all products and qualities, has offered the optimisers a level of profitability that seemed impossible in earlier periods.
Wall Street (Morgan Stanley under Neal Shear and Goldman Sachs under Isabelle Ealet) again led the way, and its most profitable firms were by all accounts returning bottom line pre-tax profits in excess of $2bn by the time of the financial crisis in 2008.
However, this group were to meet their nemesis in the post-crisis form of US regulators, most especially the Federal Reserve. For them, the 2010-15 period was one of winding down the businesses that had been so lucrative since their inception in 1985—exiting the physical oil world while remaining front and centre in the client risk management provision business.
In the regulators’ new harder-line view, banks had no place toying with the ‘black stuff’. Nor did the watchdogs have any experience or understanding of that business. So it was easier just to shut that particular shop entirely.
The independent traders and, to some extent, NOCs have filled the void in the asset optimisation business. Vitol, Glencore, Trafigura, Mercuria and Gunvor are all leaders and have, at times, returned outsized profits from their integrated models. These tend not, incidentally, to include the client risk management business, which remains with the banks and other major oil company providers.
Vitol with their Vivo and Varo interests for much of the period, Trafigura with Puma, Gunvor with its close relationships in Russia, Glencore under industry legend Ivan Glasenberg, and Mercuria, built from virtually nothing by the twin talents of Daniel Jaegi and Marco Dunan, have all excelled. They have been joined, latterly, by state-controlled outfits such as Rosneft, Aramco Trading, Unipec and Petrochina.
The last pair have been the international representatives of the growth in importance of China; the explosion in Chinese oil requirements in the course of the last 15 years has underpinned the global demand picture through the period. As US oil exports have become possible and then grown rapidly, it has been the Chinese—at least until recently—who have led the way as importers.
The modern oil market has not been entirely scandal-free, most recently the Hin Leong group in Singapore has taken a substantial hit. But, given the size and scope of the international oil industry in its present form, credit events have been mercifully few.
The usual culprits of lack of leadership, fear, greed and outright nefariousness require firms to—rightly—focus primarily on strong risk management and exceptional culture and conduct. Mostly, they have become competent at those necessary specialities, critically important as they are to good practice and the regulatory agenda.
Markets have now embarked upon another new era, far removed from the business that kicked off in the early 1980s and sustained many a 40-year career. The algorithms and price path trading that has arisen with the enhanced power of computing and almost perfect information offer strategies beyond the bounds of human rationality. They will appeal to a very different—and possibly less colourful—milieu.
Those that have survived the market’s evolution have been able to transform themselves across the 40 years. They are those who have recruited, challenged and rewarded the best people, those that understood their competitive advantage, and that executed a strategy borne of clear objectives.
In the regulators’ new harder-line view, banks had no place toying with the ‘black stuff’. Nor did the watchdogs have any experience or understanding of that business.
Traders will still, however, require the same traits at the sharp end—a cool head, humility to understand that the market is bigger than the individual, an innately quick arithmetical mind and a disciplined approach.
Only then can the few good traders survive in the long run—when doing more than executing on free optionality—and outweigh the 40/60 (at best) odds of success, given the pure chance odds of 50/50 are moderated by human behavioural flaws.
Luck only lasts so long and, at the end of the day, there needs to be a clear competitive advantage at play, a well-thought-out strategy and—these days—scale and integration along the value chain. While such considerations were superfluous for the pioneers, they are critically important today.
Traders are still puppets on a string—'one day up in the air, next day down on the ground'. It remains a hard school in which to succeed mentally. Yet it retains much of the allure that attracted so many characters to the industry over the years.
Recent asset write-downs are an admission that the future of oil demand is not as rosy as it once was. But the renewable agenda cannot yet provide the complete answer to the future of transport and static power demands. Fossil fuel-based supply will remain important for many years to come to keep the lights on and the car ticking over.
Continuing relatively high fossil fuel prices will encourage the development of renewable solutions just as much as declining costs in that sector and public preference. Indeed, given the importance of economics in the energy transition—particular in a monetary climate battered by the coronavirus pandemic—carbon trading could be the new thing for this era’s eager young traders. One senses, though, that they would be less of a cavalier band than were the boys and girls of the 1980s!
And this is why it is unfortunate that, although there are interesting tomes and articles to be read covering oil over the last 40 years, accounts of the trading activities of the period remain a gap to be filled. Rumour has it that two highly regarded professional oil journalists may have something at the printers—it is eagerly awaited!
Colin Bryce is a founder of consultancy Energex Partners and has 42 years of experience in oil trading. If you have enjoyed his London crude trading’s ‘Good Old Days’ series and feel that you too could help fill this gap, please reach out to email@example.com to discuss how to contribute.