Every day the world oil market trades 38 million barrels of crude oil and 16 million barrels of refined products, according to the latest available official figures. This business is continuing to grow and is gradually shifting its centre of gravity towards Asia. New players and financial tools are changing a very dynamic business which is crucial for Spain, one of the main oil importers in the world.
International oil trading, commonly referred to as simply trading, grew by one million barrels in 2011. The import and export of crude oil and its derivatives meets 62% of global consumption needs, while the remainder comes from countries' self-sufficiency in oil. Repsol operates in this market and each year trades 60 million tonnes (1.2 million barrels per day) and has 1,200 sea transport shipments or fleets that transport the goods across the globe.
The trading business is conducted based on three elements: arbitrage, information and risk. Arbitrage is the imbalance that arises from the supply and demand of crude oil and petroleum products. These imbalances are what trigger this business, "which creates trading opportunities", explains Ignacio Egea, Repsol Trading Executive Director, referring to a global, complex business where it may be more profitable to transport and sell goods in another continent rather than in a neighbouring country.
Managing the information about these imbalances determines the opportunities that arise for arbitrage. Each company's interpretation of this information, how quickly they react and their credibility in the market means that the same arbitrage may be managed differently, depending on the arbitrageur. Finally, the level of risk that each company is willing to take is another element that plays a decisive role in this business.
This market trades 24 hours a day, 365 days a year, operating across the world with transactions being made in real time. "The trading business has changed dramatically in the last three decades," continues Ignacio Egea. 30 years ago, this business was dominated by trading houses (independent companies that were actively present in the various commodity markets), who acted as intermediaries between crude oil and petroleum product producers and consumers. Advances in communication, the emergence of new players and the use of derivatives and futures have altered this market.
The spectacular development of communications is, probably, the factor that has led to the current situation whereby both NOCs (National Oil Company) and IOCs (Independent Oil Company) have acquired an increasingly central role in this market. Repsol is an example of a company that has been developing its trading business in recent years and has set the development of this business as one of its challenges for the future.
International oil and oil product prices are by definition volatile, therefore risk management has become a key factor for the business. This is why the use of derivatives and futures instruments has become a crucial element. In Egea's opinion, "the development of the derivatives and futures market has meant that things that previously could not be done are now possible and that it is easier for each company to manage the risks they want to take."
With the participation of new financial players such as banks and investment funds in the world trading market, oil is now a commodity with liquidity levels which has turned it into just another investment option for non-oil business investors. “This is not confined to this market; the same is true of the gold market and several other commodity markets". Egea believes that "provided that these financial instruments have liquidity and are transparent, the playing field should be open to all”.
“The oil market does not just respond to the balance between supply and demand in the business, it is also affected by geopolitical variables”. By way of example, the embargo on Iran, imposed by the US and other countries, which has been in effect since mid-2012, has removed more than half a million barrels per day, since the conflict began. That's why the traders "diet" of information would be incomplete if these type of events were not factored in. In other words, "we are as interested in the information CNN provides as the information we obtain through sector channels and publications.”
The Repsol Trading team has around 160 people who work in offices in Madrid, Houston, Singapore, and Lima
The Repsol Trading team has around 160 people who work in offices in Madrid, Houston, Singapore, and Lima. Their role is twofold, adds Ignacio Egea: on the one hand, the development of the supply and marketing business, that involves “the purchase and sale in international markets of crude oil, other commodities and refined products that are required or produced in our production, refinery and marketing area." On the other hand, the trading business: "generating value for the company through purchasing and selling that is unrelated to the needs of our system, using market knowledge that the supply business provides.”
Repsol Trading's business is primarily in Europe, North Africa, and America while presence in Asia is still incipient. “Latin America (Brazil, Colombia, Chile, Ecuador, Peru, Venezuela, etc.) in recent years has become one of the regions where we have developed most and it must be one of the cornerstones for our future growth. Another vector for growth will be the US, which is why we recently set up Repsol Trading USA,” says Egea.
Of the 1.2 million barrels per day that the company trades, the business related to crude oil accounts for 0.7 million barrels and petroleum products for 0.5 million barrels. Conversely, 350 of the 1,200 fleets annually are related to the crude oil business and 850 to the petroleum products' business.
The energy company supplies itself primarily with heavy crude oils and has designed its entire industrial structure to refine them, because once the investment has been made, “you can obtain greater economic yield." A large percentage of the crude oil refined is Mexican Maya crude oil; crude oils are also bought from Colombia and Venezuela, Russian crude, and "some crude oil from the Persian Gulf, especially for the production of lubricants.”
In 2011, two thirds of the growth in the world oil trade came from China. The economic crisis in Europe and to a lesser extent, in the US, has accentuated a trend that started a decade ago whereby Asia is gaining greater clout in the international movement of crude oil and its derivatives. The US and the European Union still account for over one-third of global demand however, according to data in the Statistical Review of World Energy, China has doubled its consumption in the last 10 years reaching 11% of the total world figure and the Asia-Pacific region already accounts for 32.4% of this consumption. Saudi Arabia, Russia, United Arab Emirates, and Nigeria are the main exporters of crude oil.
“The crisis in Europe means there are less products and crude oils being traded and in terms of trading, we are all looking towards Asia," says Egea. "As a company, our short term objective is to be more active in the US where we have a strong presence and Latin America. Asia is still behind them. Clearly, that's where the growth is."
“As a company, our short term objective is to be more active in the US where we have a strong presence and Latin America. Asia is still behind them. Clearly, that's where the growth is”