Glencore Sees Record Oil Trading Volumes as Margins Shrink

Glencore looks set to cement its position as the world's second-largest oil trader as it tries to offset low volatility and tight margins with record volumes this year, its global head of oil, Alex Beard, told Reuters.

 

The London-listed commodities trader and miner will shift around 6 million barrels per day (bpd) of crude and refined product this year, up 25 percent from last year.

 

The figure represents around 6 percent of global supply and only rival Vitol trades more oil, at some 7 million bpd. Most merchants are being forced to ramp up volumes to protect profits in an environment of low volatility.

 

"We don’t set targets in terms of volumes," Beard told the annual Reuters Global Commodities Summit.

 

"Our ultimate objective is to make more money and if you can do that with smaller margins and bigger volumes or smaller volumes and bigger margins - we are indifferent to that."

 

Beard said trading conditions had become difficult this year due to low oil price volatility and a reversal in the oil price curve, which has stopped encouraging oil storage after backdated prices flipped from a premium to a discount to prompt prices.

 

"Margins are tight ... whenever the market moves from contango to backwardation, that's a slightly distorting effect," Beard said.

 

"It's a mixed bag in 2017 ... 2018 looks good for demand growth. In terms of structure, rather than a flat structure, we would like to see a stronger backwardation."

 

Backwardation describes a market condition in which it is more attractive to sell oil immediately rather than storing it for later sale. It is seen as an indicator of a tight market, as opposed to the condition known as contango, in which it is more profitable to store oil for sale in the future.

 

The market has been in a backwardated structure since early September after being in relatively persistent contango since 2014.

 

Beard said he expected oil prices to remain rangebound near their current levels, as OPEC producers curtail output to reduce the global oil glut while recovering oil prices encourage new production from the United States.

 

"It is an extremely complex equation and towards the end of this year we will trend towards $60 a barrel," Beard said.

 

Beard said trading houses such as Glencore (GLCNF) would still see plenty of growth opportunities even if oil demand flattened in coming years. Those opportunities would come in high-growth markets and thanks to constantly changing global oil flows.

 

In oil, Glencore mainly focuses on trading and upstream but last week it acquired a major refining asset when it outbid China's Sinopec to buy Chevron's South African and Botswana businesses for just under $1 billion.

 

The deal gave Glencore control of a major refinery in Cape Town, retail stations and access to a key storage hub in South Africa's Saldanha Bay.

 

"We look at those assets as attractive for synergy with our mining assets down there but also to trade around, to supply the refinery and to have a refined products position in southern Africa," Beard said.

 

In South Africa, Glencore mines coal, vanadium, platinum and chrome. It also has smelting and warehousing interests.

 

"In terms of synergy, we will be supplying our mines with fuel, diesel and lubricants to run machinery."

 

Beard said Glencore could bring in a partner in the South African project to share the cost burden on top of the existing local shareholders that hold the remaining 25 percent.