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European banks have grown wary of financing commodity traders, raising borrowing costs and endangering smaller firms in the market for raw materials.

ABN Amro Bank NV is pulling out of trade and commodity finance altogether. ING Groep NV will likely enforce stricter monitoring and control over commodity deals it finances to reduce risks, said a person familiar with the matter. BNP Paribas SA, formerly a powerhouse in commodity-trade finance, is scaling back, a person familiar with the company said.

Banks are responding to the rout in oil prices, a spate of alleged frauds, a drift into riskier forms of lending and investor pressure over climate change. Their retreat is likely to concentrate the business of transporting oil, metal and grain in the hands of large traders that still have access to cheap funding.

Smaller traders, in contrast, are finding it increasingly difficult to borrow from banks, prompting some of them to seek out new sources of financing. That could come from their larger rivals or from trade-finance funds. Some will be pushed out of business altogether, according to industry executives, bankers and lawyers.

“The biggest impact will be on smaller players,” said Jarek Kozlowski, chief financial officer at power-and-gas trader TrailStone Group. “They will have difficulty finding funding.”

Banks fund traders through traditional forms of trade finance such as letters of credit—a payment guarantee to suppliers—as well as revolving-credit and borrowing-base facilities. In doing so, they grease the supply chains that ship oil, metal and grain from producers to consumers. Trading houses rely on borrowed money because the cargoes they handle can be worth tens of millions of dollars. Higher funding costs pose a danger because they run on thin margins.

Commodity trading is already dominated by a clutch of global players, including European traders Vitol Group, Trafigura Group Pte. Ltd. and Mercuria Energy Group Ltd., and U.S. agricultural giants Archer Daniels Midland Co., Bunge Ltd. and Cargill Inc. Banks will keep competing to lend to large traders, preventing a large rise in their borrowing costs, said Philip Prowse, a partner who specializes in commodities trade finance at law firm HFW in London.

“The big traders are very resilient and will always be well-supplied by the big banks,” said Mr. Prowse. “There will be very little left for the traders beneath that very large size.”

A drop in competition could help boost margins at the largest traders by enabling them to charge more from oil refiners, copper smelters and other customers while paying less for commodities, said Craig Pirrong, a finance professor at the University of Houston. Doing so could raise prices for end consumers and put more pressure on commodity producers, such as miners and energy companies.

Smaller traders are more exposed. Banks have become more cautious about lending to them since a series of blowups earlier this year, said Marie-Christine Olive, Citigroup’s head of natural resources for Europe, the Middle East and Africa.

“There’s a flight to quality,” said Ms. Olive. “How many [commodity traders] will be left?”

Singapore energy trader Hin Leong Trading Pte. Ltd. was placed under judicial management in April, owing $3.5 billion, mostly to banks. Founder Lim Oon Kuin was charged with abetment of forgery in August.

Other traders to hit financial trouble include GP Global Group, a trading, refining and logistics company in the United Arab Emirates. In July, GP said it would restructure after finding itself “unable to get full support from a few financial institutions” despite constantly seeking credit lines to fund its trading activity. An external restructuring officer at FTI Consulting is hopeful that an agreement with creditors will be reached, a GP spokesperson said.

Several of this year’s implosions—including those of Hontop Energy (Singapore) Pte. Ltd. and ZenRock Commodities Trading Pte. Ltd.—have taken place in Singapore. That has raised concern about the city-state’s oversight of trading firms.

Regulations designed to make the financial system safer after the 2007-2009 crisis have made low-risk, high-volume trade finance less attractive, according to John MacNamara, chief executive of consulting firm Carshalton Commodities Ltd. This prompted banks to take greater risks by lending on an unsecured basis, skimping on due diligence, and insuring a smaller portion of their loans.

“Banks have rather dropped their trousers to get new business in terms of trade finance,” Mr. MacNamara said. “The unintended consequence of Basel III was we took more risks.”

The threat of sanctions has also prompted banks to retreat, said Mr. Prowse. BNP Paribas shrank its business after pleading guilty to crimes of violating U.S. sanctions in 2014.

Commodity-trade finance isn’t the money spinner it once was. Revenue has slid over the past five years, and the coronavirus pandemic dealt another blow. Turnover from commodity-trade finance dropped to $1.7 billion in the first half of 2020, down almost a third from the same period last year, according to Coalition, which tracks data on banks.

Then there is pressure from investors on European banks to reduce the amount they lend to carbon-intensive industries, a particular issue for companies that earn most of their money from coal. Natixis SA, for example, in May said it would withdraw from the thermal-coal sector in members of the European Union and Organization for Economic Cooperation and Development by 2030.

Société Générale SA remains committed to the business of financing natural resources, but it is consolidating in Asia to serve key clients from Hong Kong, said a person familiar with the matter. The move was earlier reported by Bloomberg News.

ING is likely to raise borrowing costs and reconsider lending in the absence of collateral, the person familiar with its planning said. A spokesman said the Dutch lender currently has no plans to exit from the business.

WSJ, Editor: Joe Wallace, September 6, 2020, Photo by Sharon McCutcheon on Unsplash

Poor distillate consumption and margins are weighing on refiners’ demand for crude, in turn hampering efforts by OPEC+ to rebalance the oil market and push crude prices higher

LONDON: Global distillate markets remain heavily oversupplied, sending margins tumbling to multi-decade lows, despite refiners’ efforts to restrain crude processing and switch to maximising gasoline production.

Poor distillate consumption and margins are weighing on refiners’ demand for crude, in turn hampering efforts by OPEC+ to rebalance the oil market and push crude prices higher.

Production of distillates, including diesel, jet fuel, gasoil and heating oil, is running head of consumption, mostly because of the downturn in manufacturing and aviation, with a resulting increase in inventories.

In an effort to reverse the oversupply, US refiners have restrained their crude processing, limiting throughput to 13.5 million barrels per day last week, almost 19 per cent below the five-year average.

Refineries have also adjusted the set points on their equipment to maximise production of gasoline at the expense of distillates, pushing the gasoline-distillate ratio to 1.7:1, up from 1.4:1 a year ago.

Even so, US distillate inventories are stuck at 179 million barrels, close to their highest since the early 1980s, and 32 million barrels above the five-year seasonal average.

For the next several months bloated inventories will restrain refiners’ crude processing and buying as they try to reduce distillate stocks to more normal levels.

The problem is not confined to the United States. Distillate stocks are well above normal around the world as the coronavirus pandemic disrupts manufacturing, construction and passenger transportation.

In Northwest Europe, margins for transforming Brent crude into gasoil have tumbled to just $3 per barrel, down from more than $6 a month ago and $16 at the start of the year.

Until there is a clear signal excess distillate inventories are being absorbed, they will continue to limit upward moves in crude prices.

Reuters September 18, 2020

LONDON (Reuters) – After extreme oil volatility that provided traders with bumper profits in the first half of the year, the market is now stuck in a lower gear, fatigued by the realities of COVID-19.

Lower overall oil supplies after production cuts implemented by the OPEC+ group of producers, as well as tepid fuel demand, are dampening price movements.

“If you look at market liquidity, paper activity, ICE futures volumes or gasoil or jet swaps … everything had a very active Q2, but activity seems to have reduced in Q3,” Russell Hardy, chief executive of the world’s biggest trader, Vitol, told Reuters.

“Is that because the market is tired and has been at $40 a barrel for so long, because everybody is working from home or because oil demand is significantly less than what it was and so there is less activity to hedge?”

Major trading firms see an uncertain path as the world economy flatlines after a stunted V-shaped recovery served to subdue speculative trade and hedging for physical oil assets.

The United States and India are battling runaway rates of contagion while large European economies are experiencing second waves of COVID-19 infections, potentially leading to national lockdowns

For the first time in years, major trading houses are not going to post a rise in year-end traded oil volumes.

“Obviously, with crude trading, it’s difficult to maintain business volumes because there is less crude to market and trade; there’s less being produced,” Hardy said.

On refined products, meanwhile, the trading firms that thrive from market disconnects between regions – known as arbitrage – see fewer ways to make a buck.

“In the Atlantic basin, refiners are running to meet relatively poor downstream demand. The result is that refineries are importing and exporting less. Consequently, the local market presents fewer opportunities,” Hardy said.

The Vitol boss told a conference in Singapore last week that he did not expect gasoline and diesel demand to return to previous levels until the fourth quarter of 2021.

While BP BP.L and others posit scenarios that peak oil demand may have been reached already, Vitol believes that there is still significant growth to come in Asia. Last year the trader forecast peak global oil demand to be reached around 2034.

“We haven’t revised our 10-year view since COVID,” Hardy said. “When we redo the study, we’ll probably come up with lower peak oil demand than before … but we think Asian demand growth will pull through and take us beyond 2019 in the years to come.”

Reuters, September 2021, by Julia Payne, Dmitry Zhdannikov

LONDON (Reuters) – Royal Dutch Shell is looking to slash up to 40% off the cost of producing oil and gas in a major drive to save cash so it can overhaul its business and focus more on renewable energy and power markets, sources told Reuters.

Shell’s new cost-cutting review, known internally as Project Reshape and expected to be completed this year, will affect its three main divisions and any savings will come on top of a $4 billion target set in the wake of the COVID-19 crisis.

Reducing costs is vital for Shell’s plans to move into the power sector and renewables where margins are relatively low. Competition is also likely to intensify with utilities and rival oil firms including BP and Total all battling for market share as economies around the world go green.

“We had a great model but is it right for the future? There will be differences, this is not just about structure but culture and about the type of company we want to be,” said a senior Shell source, who declined to be named.

Last year, Shell’s overall operating costs came to $38 billion and capital spending totalled $24 billion.

Shell is exploring ways to reduce spending on oil and gas production, its largest division known as upstream, by 30% to 40% through cuts in operating costs and capital spending on new projects, two sources involved with the review told Reuters.

Shell now wants to focus its oil and gas production on a few key hubs, including the Gulf of Mexico, Nigeria and the North Sea, the sources said.

The company’s integrated gas division, which runs Shell’s liquefied natural gas (LNG) operations as well as some gas production, is also looking at deep cuts, the sources said.

For downstream, the review is focusing on cutting costs from Shell’s network of 45,000 service stations – the world’s biggest – which is seen as one its “most high-value activities” and is expected to play a pivotal role in the transition, two more sources involved with the review told Reuters.

“We are undergoing a strategic review of the organisation, which intends to ensure we are set up to thrive throughout the energy transition and be a simpler organisation, which is also cost competitive. We are looking at a range of options and scenarios at this time, which are being carefully evaluated,” a spokeswoman for Shell said in a statement.

Shell’s restructuring drive mirrors moves in recent months by European rivals BP and Eni which both plan to reduce their focus on oil and gas in the coming decade and build new low-carbon businesses.

The review, which company sources say is the largest in Shell’s modern history, is expected to be completed by the end of 2020 when Shell wants to announce a major restructuring. It will hold an investor day in February 2021.

Speaking to analysts on July 30, Shell Chief Executive Ben van Beurden said Shell had launched a programme to “redesign” the Anglo-Dutch company.

LOW-CARBON FUELS

Teams in Shell’s three main divisions are also studying how to reshape the business by cutting thousands of jobs and removing management layers both to save money and create a nimbler company as it prepares to restructure, the sources said.

Shell, which had 83,000 employees at the end of 2019, carried out a major cost-cutting drive after its $54 billion acquisition of BG Group 2016, which has helped boost its cash generation significantly in recent years.

Shell’s operating costs, which include production, manufacturing, sales, distribution, administration and research and development expenses, fell by 15%, or roughly $7 billion, between 2014 and 2017.

But the sharp global economic slowdown in the wake of the COVID-19 epidemic coupled with Shell’s plans to slash its carbon emissions to net zero by 2050 have led to the new push.

Shell cut its 2020 capital expenditure plans by $5 billion to $20 billion in the wake of the collapse in oil and gas prices due to the pandemic amid warnings it could have lasting effects on global energy demand.

Van Beurden said in July that Shell was on track to deliver $3 billion to $4 billion in cost savings by the end of March 2021, including through job cuts and suspending bonuses.

He said travel restrictions during the pandemic had accelerated the digitalisation of Shell while machine learning was being rolled out to minimise outages and shorten maintenance time at refineries, oil and gas platforms and LNG plants.

Besides cutting costs at its downstream retail business, Shell is pressing ahead with plans to reduce the number of its oil refineries to 10 from 17 last year. It has already agreed to sell three.

The review of refining operations also includes finding ways to sharply increase the production of low-carbon fuels such biofuels, chemicals and lubricants. That could be done by using low-carbon raw materials such as cooking oil, one source said.

Reuters, Ron Bousso, September 21

It’s been a wild and bumpy ride for OPEC+ this year. The consortium, consisting of the traditional members of the Organization of the Petroleum Exporting Countries plus oil and gas superpower Russia, was largely responsible for the huge collapse in oil prices toward the end of April. After a huge drop in oil demand corresponding with the devastating spread of the novel coronavirus around the world, an OPEC+ strategy meeting turned into a spat between Russia and Saudi Arabia which then turned into an all-out oil price war and massive global oil glut. The oil storage shortage created by this glut would go on to push the West Texas Intermediate crude benchmark into previously-unthinkable negative territory, closing out the day on April 30th at nearly $40 below zero per barrel.

OPEC+ has since reconciled and once again banded together to address the oil market crisis, making myriad pledges and severe production cuts to bolster crude oil prices. But many of the countries that made those pledges have fallen far short of their promises. “OPEC reached a historic deal to cut output by 9.7 million barrels per day in April, but a number of countries fell significantly short in meeting their production targets,” reports Markets Insider.

But, just this week Iraq, OPEC’s second-biggest member just made a huge commitment to cut its oil production in the coming months. After a Thursday night conversation between Iraqi and Saudi leadership, Baghdad “made a commitment to cut oil production by 400,000 barrels per day in August and September,” a massive uptick from the nation’s relatively paltry July production cut of 11,000 barrels per day.

But while the oil market is now recovering and countries like Iraq are starting to fall in line, this may not indicate smooth sailing for the international oil consortium. “Rebounding oil prices have the potential to show the cracks that already exist in the delicate cooperation between the powerful oil-producing nations,” the Wall Street Journal reported this week in an article entitled “How a Tenuous Saudi-Russia Oil Alliance Could Melt Down.”

The article recounts OPEC’s rough, tough year(s), remarking that “Saudi Arabia, the dominant force of OPEC, might as well have been herding cats in recent years trying to bring order to the unruly cartel.” At first, the addition of Russia to bring the “+” to OPEC+ was a godsend for the group and a boon to oil markets, but now Riyadh and Moscow’s extremely different ambitions could spell doom for the cartel.

In light of the fact that many OPEC+ members have been complying with production cuts and that these cuts seem to be working, in mid-July, the cartel actually agreed to let OPEC members’ overall production to increase by a considerable 1.6 million barrels a day. “The latest adjustment was a reflection of a demand picture that seems to be improving,” reports the Wall Street Journal. “Yet that very development could hobble cooperation between Saudi Arabia and Russia going forward.”

As history has taught us over and over, alliances more often than not require a common enemy–in this case a floundering oil market. “Under $40 [a barrel], they were able to come together. The higher the price, the harder it will be to get Russia to go along with continued production cuts—especially once you get to $50 a barrel for Brent Crude,” Gary Ross, Chief Executive Officer of Black Gold Investors told the Wall Street Journal.

And now, there’s not enough to keep Saudi Arabia and Russia’s diverging visions from, well, diverging. The two nations at the helm of OPEC+ publicly claim vastly different break-even prices and the recent easing of austere production measures could be the harbinger of doom for the already delicately-balanced cartel. And a dramatic failure for OPEC and its consortium of precarious oil autocracies could spell serious geopolitical turmoil for the Middle East, and by extension, for all of us in this global village.

By Haley Zaremba for Oilprice.com
Photo by Mohammed Hassan on Unsplash