Oil trading is a tough business.
Glencore Plc, the world's largest commodity trader, marketed about 672 million barrels of oil in the 12 months through June, roughly equivalent to the annual crude production of Norway or Angola. Yet first-half adjusted Ebitda from energy trading came to just $276 million, 6.9 percent of the group total.
In Ebitda terms, Glencore makes more money buying and selling metals, and much more from producing oil, coal and minerals. Oil trading margins will only get above 1 percent or so in an absolute banner year. So why bulk up in such an unprofitable industry?
Glencore, along with its largest shareholder the Qatar Investment Authority, will spend 10.2 billion euros ($11 billion) on a 19.5 percent stake in Russia's largest oil producer, Rosneft PJSC, Glencore said late Wednesday. The deal, President Vladimir Putin said on state television, will be one of the world's largest oil and gas acquisitions this year.
Two details help clarify what's going on. First, Glencore is a markedly junior partner in the deal. It's contributing just 300 million euros of the purchase price and will end up with a 0.54 percent equity stake in Rosneft. The real prize is not ownership of the Russian giant's oil production, but the right to trade it.
Secondly, margins in oil trading are likely to get even tighter over the year ahead. When that happens, it's a good idea to increase volumes to compensate. The five-year offtake agreement will provide 220,000 barrels a day to Glencore's marketing business, enough to lift volumes by about 10 percent from levels in the year through June.
Take futures curves. One easy way to make money trading oil is to work the difference between prices for delivery in the short and long term. Contango, the condition in which near-term contracts are cheaper, can be particularly lucrative: Glencore parked about 8 million barrels in tankers close to Singapore earlier this year when the cost of floating storage fell below the differential between contracts.
Unfortunately, the sharp backwardation (the opposite of contango) that prevailed until mid-2014, and the contango that has been in place since, seem to be disappearing. At the start of 2015, the differential between next-month and 12-month Brent crude futures was more than $11.33 a barrel. Last Thursday, it was as little as $2.03.
It's a similar picture if you try to arbitrage geography, rather than time. When Glencore listed back in 2011, the U.S. shale oil boom was still in its adolescence. A local glut and export restrictions on crude meant the national benchmark, WTI, at times traded at a $20 discount to Brent. That discrepancy, too, has all but gone away.
Even the spreads to be gained from processing crude into gasoline and other products are looking tight -- 3:2:1 crack spreads, a rough proxy for refinery profits, are below $10 for major Asian and European benchmarks and have tightened in the U.S. as well.
For all the low Ebitda margins in oil trading, the lack of significant depreciation costs means it's still a key business once you drop down to the Ebit level, making up about 29 percent of total adjusted Ebit in the first half.
With arbitrage opportunities disappearing and OPEC's first coordinated price cuts in eight years threatening to reduce even price volatility, volumes will have to compensate where margins can't.
Peter Grauer, the chairman of Bloomberg LP, the parent of Bloomberg News, is a senior independent non-executive director at Glencore.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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