Retail investors with long positions in the oil markets saw nothing encouraging in 2019 as the market failed to maintain rally from the beginning of the year amid multiple pipeline disruptions, geopolitical tensions and dramatic changes in shipping regulations. All of this has shaken the global market, leading to severe volatility.
But the major oil traders, who made the most of the bifurcated markets and the rise in volatility, still managed to make a profit. According to the analysts, tens of major oil traders made billions of dollars in profit during the year, many of which achieved record profits thanks to a robust market.
According to Marco Dunand, CEO of Mercuria Energy Group Ltd., one of the five largest independent oil traders in the world, 2019 proved to be one of the best years for the energy trading industry.
The good news for oil traders: this success can be repeated in 2020.
The current oil market may be an encore, as many of the catalysts formed during last year’s market remain in place. Independent traders were among the biggest winners, with companies of the Vitol Group and Trafigura recorded record profits.
Vitol, the largest independent oil trader in the world, is expected to report nearly 2 billion USD in revenue, one of the highest for the company in history, while Mercuria’s CEO also revealed that he is enjoying “very good year”.
But not only independent traders are making such a profit.
Commercial divisions of oil giants such as Royal Dutch Shell Plc, BP Plc, and Total Plc also reported billions of dollars in profits. For example, Shell trades the equivalent of 13 million barrels of oil per day, which is almost double the Vitol’s 7.5 million barrels per day.
First, a number of supply interruptions have raised the risk premiums that oil refineries pay above the reference price. In 2019, Washington imposed new sanctions on Venezuela, disrupting oil supplies to the country. Subsequently, several European countries stopped Russian deliveries of oil via the key Druzhba pipeline amid concerns over raw material pollution.
The biggest supply disruption, however, came after drone attacks against Saudi Arabian facilities in September.
This event was followed by the introduction of IMO2020 regulations that force shipping to use lower sulfur fuels for commercial ships. The rules, which came into force in January, led to increased volatility in the price of fuel oil and diesel used in shipping.
It is rumored that Shell has managed to make at least 1 billion USD in transactions related to changes since the IMO2020.
So far, 2020 begins with the same volatility that 2019 sent.
The spread of the coronavirus and the continued accumulation of US oil stocks have lowered oil prices.
Meanwhile, tensions in the Middle East have to some extent dissipated but still remain.
The signing of a first phase trade deal between Washington and Beijing also partially eliminated a large dose of risk from the global oil market.
Ongoing events seem to support the thesis about bullish sentiments.
Two weeks ago, the US Energy Information Administration (EIA) released its latest short-term oil projections, sharing the expectation that inventories will increase in 2020 and fall in 2021, with Brent prices reaching an average of 65 USD per barrel this year and 68 USD per barrel in 2021. These are significantly higher than the current average of 57.44 USD per barrel.
This forecast suggests that Brent oil prices will decline in early 2020 to May 2020, as risk premiums gradually fade and then rise from mid-2020 and into 2021 due to tightening market conditions.
However, the EIA failed to report a key supply disruption – this in Libya. As ING recently warned, disruptions in Libya – where production is shrinking amid domestic turmoil – should not be dismissed and could put a deficit on the market as early as the first quarter, although demand is still lagging behind supply.
Professional traders intend to dominate the energy futures market, while hedge funds speculate in the long and short term and industrial players are gearing up to offset physical exposure. Retail investors tend to split off some of their influence in the oil futures markets, focusing on more emotional ones such as high beta stocks and precious metals trading.
This can lead to a significant increase in the impact of retailers when oil trends start to attract small players, driven by the latest events.