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The billionaire CEO of Gunvor Group told staff the firm thrived during the oil market meltdown caused by the Covid-19 pandemic as trading and shipping operations boomed, offsetting potential refinery writedowns.

Torbjorn Tornqvist, the co-founder and chief executive officer of Gunvor, one of the biggest independent energy traders, told employees in an internal email that earnings from trading oil and ship chartering excelled during the second quarter, according to people familiar with the email’s contents.

“Gunvor managed to navigate very well through the downs and ups and got it basically right,” Tornqvist wrote, according to the people who asked not to be named because the email is private.

Gunvor’s strong performance is the latest example of energy traders racking-up profits during the market crash, which saw oil prices in New York briefly trade below zero in April.

The Geneva-based trading house took full advantage of a market structure called contango to fill tanks with cheap oil and sell forward futures contracts for delivery later at higher prices.

The closely-held company, which owns or manages more than 100 ships, also profited from soaring chartering rates during the crisis as traders and producers rushed to secure tankers to store and transport oil and products.

“Given our sizeable fleet of ships under management, this allowed for substantial earnings for the quarter,” Tornqvist wrote.

A Gunvor spokesman said the company doesn’t comment on internal communications.

Refinery Woes

The memo wasn’t all good news. Tornqvist said he expected brutal refining margins, which have devastated the industry, to persist for “many years.”

Gunvor has previously said it is considering mothballing its refinery in Antwerp, Belgium because the facility continues to lose money.

Tornqvist, who has a personal connection with the plant having worked there more than three decades ago, said if the company does shutter the plant, trading and chartering profits during the first half would more than offset any impairment charges.

The company’s strong second quarter represents a dramatic rebound from a tough first quarter where it earned only about $20 million in net income, according to people familiar with the trader’s results.

Rival energy traders Trafigura Group and Mercuria Energy Group have also thrived amid the market sell-off. Mercuria told bankers on a recent loan call it made a record $425 million in net income in the first half of the year while Trafigura reported record results from trading in the first six months of 2020.

Oil traders in Geneva, one of the world’s biggest hubs for commodities trading, have largely returned to their offices after conducting business from home amid the early stages of the pandemic.

“I am impressed how you all have managed your work under the rules of social distancing and got on with business in such a formidable manner,” Tornqvist said in the email.

By Andy Hoffman and Laura Hurst, Bloomberg, July 15, 2020,
Photo by M. B. M. on Unsplash

Oil traders make investment decisions based on various inputs. Some use charts to predict future price moves, others look at supply and demand data, and in the 1920s some traders actually thought that the dialogue bubbles in comic strips revealed the future price move of stocks and commodities. New technologies brought more complex methods including the use of thermal cameras to track pipelines and storage tanks. And according to Reuters, many oil traders thought that thanks to Apple, they had discovered the “holy grail” of forecasting gasoline prices.

Oil traders find lack of a solid correlation between Apple’s mobility data and the demand for gasoline

In the middle of April, Apple announced that it was releasing data from its Maps app based on the number of requests for directions made by iPhone users. This so-called mobility data was created to track the spread of COVID-19. But oil traders decided that by studying the data from Apple, they could come to some conclusions about how fast demand for gasoline and crude oil was recovering after drying up from the global pandemic.

Traders who used the mobility data in their trading systems were hopeful that it would provide them with useful and accurate information. But the report notes that this backfired; using the mobility data as an additional tool, traders purchased gasoline futures heading into the Memorial Day weekend back in May. The U.S. Energy Information Administration (EIA) announced that its data indicated a 6% decline in demand for gas, and futures prices declined creating red ink for many traders. Considering that 70% of the demand for oil is for vehicles, traders were upset not only because they took a hit to their accounts, but also because this exciting new tool that traders thought would tell them the future was not working.

What caused the disconnect? Some say that the problem lies with the fact that Apple’s mobility data is based on search requests and not on actual miles traveled. Apple explained on its website how it calculates the data: “Using aggregated data collected from Apple Maps, the new website indicates mobility trends for major cities and 63 countries or regions. The information is generated by counting the number of requests made to Apple Maps for directions. The data sets are then compared to reflect a change in volume of people driving, walking or taking public transit around the world. Data availability in a particular city, country, or region is subject to a number of factors, including minimum thresholds for direction requests made per day.” So the information used by traders only reveals how often an iPhone user looked up directions to a location. Instead of discovering a tool that provided them with real-time demand data for oil, the traders simply saw hypothetical demand for fuel.`

Matt Sallee, managing director of investment firm Tortoise Capital Advisors, says that the data generated by Apple does not correlate to oil demand as well as other indexes do. Sallee says that he still uses Apple’s mobility data but adds other data including real-time traffic congestion information from mapping firm TomTom. He also uses the Dallas Federal Reserve Bank’s mobility and engagement index which tracks how far user devices travel in a day and how long they remain away from home.

TomTom’s data is preferred over Apple’s data by RNC analyst Michael Tran. The latter says that most people do not use apps to map out their outings. RNC uses TomTom’s data along with its own in-house geolocation data. While Apple declined to comment on the Reuters report, the company claims that its data captures everyone who owns an iPhone. That works out to about 100 million people in the United States alone.

With millions of dollars at stake, traders are always searching for a tool that will give them an edge.

by Alan Friedman, phonearena.com, July 4, 2020,
Photo by Medhat Dawoud on Unsplash

LONDON (Bloomberg) –Royal Dutch Shell said it will write down between $15 billion and $22 billion in the second quarter, as the company gave investors a wider glimpse of just how severely the coronavirus crisis has hit Big Oil.

The impairment is the firm’s largest since Royal Dutch Petroleum Co. and Shell Transport & Trading Co. merged in 2005, and shows how the pandemic has left no part of the energy giant’s sprawling business unscathed. Shell lost money from pumping oil, fuel sales fell and shipments of everything from liquefied natural gas to petrochemicals suffered.

The lockdown-induced slump has permeated through the entire industry, which is reassessing both the value of its assets and longer-term business models. Shell’s large LNG business, which is central to its vision of the future of energy, is seen taking the biggest hit.

Big Charges

“We see material downside for second-quarter earnings,” Banco Santander SA analyst Jason Kenney said. Despite a possible weaker performance relative to its peers, the Spanish bank still sees potential upside in the stock, as the bad news was largely anticipated.

The drop in demand comes as little surprise. Oil majors’ earnings took a beating in the first quarter, and the companies warned that things would only get worse as the full impact of the pandemic started to be felt in March. Despite a recent rebound in consumption in some of the worst-hit countries, resurgent waves of the virus show the recovery remains fragile.

Oil-product sales volumes will be 3.5 million to 4.5 million barrels a day in the second quarter, down from 6.6 million a year earlier, driven by a “significant drop” in demand because of the pandemic, Shell said Tuesday in a statement ahead of quarterly results on July 30.

Shell also flagged that its upstream unit, traditionally the company’s core business, will suffer a loss in the second quarter. The division, which is responsible for pumping oil across the world, will take an impairment charge of $4 billion to $6 billion, mostly from North American shale and Brazilian assets.

Shell said it has revised its mid- and long-term pricing and refining margin outlook, and expects gearing — a measure of debt — to increase by as much as 3% due to the impairment charges.

The company’s B shares fell as much as 2.6% and traded down 2.3% at 1,241.40 pence as of 1:26 p.m. in London.

Drastic Changes

The coronavirus has exposed the vulnerability of some of the world’s biggest oil and gas companies, but also given them an opportunity to make investors swallow some unpleasant remedies. Since the pandemic started, Shell and BP Plc have made drastic changes to their businesses, from multibillion-dollar writedowns to big cuts to dividends and jobs.

They explained these moves as responses to the dual threats of the lockdown-induced oil slump and the growing pressure to cut carbon emissions. BP has said oil and gas prices will be lower than expected in the coming decades as the virus hurts long-term demand and accelerates the shift to cleaner energy.

Second-quarter performance at Shell’s in-house trading unit, which can be a boon when other parts of the business are hurting, is expected to be “below average,” the company said. Still, trading and optimization will offset “significantly lower” refining margins.

When Shell reports its results next month, the market will be focused on the company’s outlook and any green-shoot developments, said Jefferies analyst Jason Gammel. The market is getting closer to balancing, he said, and while this isn’t necessarily bullish, “it’s better…it’s bad but it’s better.”

The company indicated there was more pain to come from LNG sales, which have a price lag of three to six months compared with oil. The impact of crude prices on LNG margins became “more prominent” from June.

Longer term, Shell is optimistic about the LNG market, with Chief Executive Officer Ben van Beurden telling Bloomberg in an interview in May that he expects the market to recover to pre-virus levels.

In April, Van Beurden cut the company’s dividend for the first time since the Second World War. Last month, the Anglo-Dutch major said it would be well-placed to boost shareholder payouts again once the oil market recovers.

“This morning’s announcement will cement the view that dividends will take longer to get back to their pre-crisis level than originally thought,” said The Share Centre analyst Helal Miah.

Worldoil.com, Laura Hurst, June 30, 2020,
Photo by Marc Rentschler on Unsplash

MOSCOW (Reuters) – Russian oil exports to Europe are set to hit their lowest levels in two decades in July, with an output cut deal prompting other suppliers to fill the gap left by Moscow, data from traders and Refinitiv Eikon shows.

Russia is set to slash seaborne Urals supplies to Europe to 3.8 million tonnes (900,000 barrels per day) next month, its lowest since 1999, when President Vladimir Putin first came to power as prime minister.

“This is a shock for everyone … Even the American oil is currently more profitable to refine … Requests for oil supplies from the United States have increased,” a trading source said.

Light oil flows from the United States to Europe were close to 3 million tonnes in both May and June, just 1 million tonnes lower than a record high in March, Refinitiv Eikon data shows.

Supplies from the United States to Europe remain ample despite oil production decrease in the U.S. by 2.1 million bpd from March, as oil prices have plummeted due to overproduction and the fallout from the coronavirus crisis.

Through May to July, Russia produced 2 million bpd less due to the global oil output cut deal, which Washington is not part of. With less Urals available, its prices have spiked, hurting the demand further.

Urals have traded at a hefty premium of more than $2 per barrel to dated Brent, global benchmark, since April, up from a discount of around $4 per barrel.

Russian crude sales have also been hit by recovering oil production in Europe, where output had been stagnant for decades until Norway launched the huge Johan Sverdrup oilfield last year.

The new grade, JS Blend, has lower sulphur content than Urals, making it more attractive to some refineries. Norway is not part of the global cuts either and production at Johan Sverdrup is seen rising to 440,000 bpd this summer.

“There is a high risk of not finding a (Urals) cargo at all, so we are looking for alternatives from the start,” a trader at a European refinery said.

Reuters, Gleb Gorodyankin, Olga Yagova, June 30, 2020,
Photo by Irina Grotkjaer on Unsplash

From a super contango in April, the Brent Crude futures curve has flattened and flipped to backwardation for the nearest months, wiping out was is seen as one of the most lucrative oil trades Production cuts from Saudi Arabia to the U.S. shale patch, combined with recovering oil demand, have changed in recent weeks the oil futures curve more to the liking of the OPEC+ group.

From a super contango in April, the Brent Crude futures curve has flattened and flipped to backwardation for the nearest months, wiping out the most significant financial incentive for oil trading houses to profit from the price structure a when oil demand crashes.

During the ‘peak lockdown’ period when every major economy except China was under lockdown in late March and early April, the oil market was in a state of super contango. In this market situation, front-month prices were much lower than prices in future months, pointing to a crude oil oversupply and making storing oil for future sales profitable. Traders rushed to charter supertankers for floating storage for several months to a year so they could sell the oil at higher prices later.

In the middle of June, production cuts and an uptick in oil demand helped the Brent Crude price structure flip to backwardation, signaling a tightening of the physical oil market.

Backwardation – the opposite of contango – is the market situation that typically occurs at times of market deficit. In backwardation, prices for front-month contracts are higher than the ones further out in time.

Backwardation is currently only seen for the next two to three months, but analysts expect the full Brent futures curve to be in backwardation by the end of the year thanks to recovering demand. Bank of America (BofA) Global Research, for example, sees inventories in most regions beginning to draw down in the second half of this year, and the full Brent futures curve could flip by the end of the year to backwardation.

A backwardated futures curve is definitely the preferred market structure for OPEC and its allies, which rely on higher front-month prices to help draw down excess inventories and record floating storage, which would push oil prices higher if demand continues to improve.

At the same time, the new shape of the oil futures curve is already discouraging what was the most lucrative trade in the oil market two months ago at the peak of the demand loss.

“Quite simply the contango is no longer there, so it does not make any economic sense to enter into a new floating storage trade, unless the deal was locked in when the contango was sufficient to cover freight costs,” Richard Matthews, an analyst who monitors the trade at E.A. Gibson Shipbrokers, told Bloomberg.

This new phase in the oil market is in stark contrast to the wild rush for chartering oil tankers, either for floating storage incentivized by the super contango, or for the record volumes of Saudi oil that flooded the market in April.

Floating storage has started to recede from record-highs in April in almost every region as demand began to recover from the record plunge.

According to estimates from the International Energy Agency (IEA), floating storage of crude oil dropped in May by 6.4 million barrels to 165.8 million barrels, from its all-time high of 172.2 million barrels in April.

Estimates by Bloomberg showed earlier this month that floating storage of North Sea oil had started to shrink as most of Europe lifted their lockdowns.

Tanker operator International Seaways said last week that it estimates 160-180 million barrels are being stored on ships currently. The strong oil contango earlier this year made it profitable to store oil, “creating a demand for time chartered ships for storage, further reducing ship supply and increasing rates,” the tanker operator said in a presentation to its annual meeting of stockholders.

In recent weeks, however, the contango has decreased, and the short-term floating storage of crude oil is declining, International Seaways notes.

For tanker owners, the vanishing of the contango and the record cuts from OPEC+ is bad news for tanker demand and rates. They knew that the super trades with the super contango would not last long and would have to eventually face a new market reality with OPEC+ withholding supply to decrease the glut and increase oil prices.

For OPEC+ and for tanker operators alike, continuous demand recovery would be excellent news – if it holds.

Oilprice.com, Tsvetana Paraskova, June 29, 2020,
Photo by Kevin Harris (Unsplash)