Cheap Oil Drives Trading Volumes

Some of the world's biggest oil trading houses say they expect increased volumes this year as a fall in oil prices ties up much less capital for trading than a year ago.

Trading oil is expensive and requires big players to have billions of dollars of credit lines with dozens of banks, but a steep drop in oil prices means the value of a mid-sized cargo of crude oil has fallen from $115 million to $60 million and has therefore become cheaper to finance.

The development has a slight downside, as traders are under-utilising banking lines and banks generally don't like maintaining unused credit lines.

Traders therefore need to come up with some solutions, including increasing volumes they trade, to help keep credit lines open for when they could badly need them in full again, if and when oil prices recover.

"The relation with banks is always important for us especially at the time when utilisation of credit lines has dropped due to the drop in prices," Jacques Erni, chief financial officer of Gunvor, one of five top global trading houses, told the FT Commodities Summit on Wednesday.

"I think (to keep) the good relations we have to make sure that we do utilise (the lines) that we have, we have to make sure that we have the volume," Erni added.

The top five traders, Vitol, Glencore (GLCNF), Trafigura and Mercuria as well as Gunvor, already trade more than a tenth of global oil and products, with their total annual turnover in oil and commodities well in excess of $0.5 trillion.

Jeff Dellapina, chief financial officer of Vitol, the world's biggest trader, said the issue of unused lines would not necessarily have an impact on his firm, as banks are used to market fluctuations and are not in a rush to pull liquidity back as they know oil prices will ultimately rise.

However Guillaume Vermersch, chief financial officer of Mercuria, said the issue of unused banking lines was encouraging a growth in trading activity. "It means more trades and more volumes," he said.
By Dmitry Zhdannikov and Silvia Antonioli