LONDON (Reuters) - Glencore (GLEN.L) is seeking to increase oil trading with Libya, Iran and Iraq to beat what looks to be a much tougher trading environment compared with last year, Glencore’s global head of oil Alex Beard told the Reuters Commodities Summit.
Crude trading in places such as Libya or Iraqi Kurdistan have been the cornerstone of trading activities for many trading houses in the past few years, generating good returns when oil majors were hesitant to enter those places.
Beard said Glencore would be seeking to trade more crude from the Middle East, including Iraq and Iran, as well as from Libya and Russia.
“We are currently lifting products from (Iran‘s) NIOC and private firms and are looking to expand into crude,” Beard said, adding he was looking into pre-financing Iranian exports.
Glencore’s trading divisions have been in the spotlight for the past two years during the commodities price collapse as the company told the market its trading serves as a cushion when the mining division suffers.
After strong oil and coal trading results in 2015, Glencore reported a 47 percent drop in core earnings for the energy trading division in the first half of 2016 to $252 million citing coal hedging writedowns and less positive oil marketing conditions.
But oil trading volumes rose 33 percent to 4.4 million barrels per day, putting Glencore on track to regain the world’s No.2 spot among independent traders ahead of Trafigura and behind Vitol this year.
“Volume is not really a metric that we look at,” Beard said. “In 2016, you’ll see the energy segment not as good as 2015.”
Success in 2015 was attributed to the steep contango market structure, which encourages traders to store crude to resell it at higher prices later, high freight rates and strong refining margins.
“In the first half of 2016, you had certainly the contango element, but declining. Wet freight rates were very poor and getting poorer and refining margins ... were nowhere near as good as the first half of 2015,” Beard said.
Contango is a market structure when forward prices are higher than prompt prices. It has flattened over the past year after prompt oil prices rose steeply on hopes that OPEC would help rebalance the market quicker while forward prices failed to catch up with that pace due to modest demand growth expectations.
Beard said trading houses had to stay opportunistic, which implies higher risk taking when supplying oil and pre-financing producers or refiners in distress or difficulty.
In Libya, where Glencore reached an exclusive deal with state-owned NOC to take all exports of the Messla and Sarir grades a year ago, volumes are rising.
Production for the two crude streams stands at around 330,000 bpd, Beard said.
“We’re very happy with our relationship with NOC and we’ve been very pleased to support them through some difficult times in the last 12 months and we’re open to do more business there.”
Libyan oil production stands at just over 500,000 bpd, more than doubling after a deal last month to reopen key ports in the east of the country.
Going into difficult places in search of higher margins will remain a risky business.
For instance Glencore, and several oil majors and trading houses, are owed over $1 billion by Morocco’s Samir refinery, which they supplied with crude and products but failed to receive payments for after the government ordered it into liquidation in 2015.
“Pre-finance has always been a good part of our business... We have seen defaults before and we will see more in the future,” said Beard, when asked about Samir. He said the firm was still hoping the plant will restart.
Beard also sees rising opportunities for Glencore in the liquefied natural gas trading business in supplying a rapidly growing base of gas end-users.
“The end-users of LNG are increasing in volume and number all of the time. There are more and more, whether it’s floating LNG, regas vessels or whether it’s gas-fired power stations or new gas distributors in China,” he said.
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Additional reporting by Karolin Schaps; Writing by Dmitry Zhdannikov; editing by Susan Thomas