A greater focus on trading can be extremely beneficial to a broad range of companies in today’s environment.
Among the businesses that would particularly benefit are complex refineries operating in Asia. These companies can process many types of crude oil and should be quick to take advantage of significant price differentials between sweet and sour and heavy and light grades. Few of these refineries are doing so, however. Instead, most maintain a highly conservative approach, with far greater emphasis on security of supply than on optimization of sourcing. We consider this stance suboptimal, given the oil market’s relatively high liquidity and the potential economic cost of this policy to these companies’ bottom lines. Indeed, our studies indicate that such conservative oil-supply policies can cost refiners’ margins as much as $1 to $2 per barrel.
Large oil-producing companies and countries, including those operating in the Middle East, could also benefit significantly by reconsidering the role that trading plays in their business. Many of these players have shunned or underemphasized trading, believing that it runs counter to their goal of becoming respected, reliable suppliers of crude.
We have a somewhat different view. In our opinion, being a reliable, predictable producer is largely a function of being transparent with regard to production and its evolution. An increased focus on trading is not inconsistent with this, nor does greater emphasis on trading preclude honoring politically driven volume regulation, such as OPEC targets. Trading could thus be highly advantageous to these businesses. Indeed, by placing greater emphasis on it, and increasing their focus on spot trading versus long-term contracts, these players could boost their returns significantly. We have determined, for example, that SOCAR, the State Oil Company of Azerbaijan Republic, increased its revenues by $1.70 per barrel by shifting its emphasis from marketing to trading.
All companies, however, should consider the potential gains to be obtained by increasing their emphasis on trading, given the potential upside. Many European and U.S. oil majors are thinking along these lines and have already invested to increase the professionalism of their trading divisions. Some players in Asia are now in the process of doing so as well (China National Petroleum, for example, created a trading arm in recent years), as are some national oil companies (including those of Azerbaijan and Oman) in various regions.
Admittedly, the business model required for success in asset-backed trading is significantly different from the model necessary for success in exploration and production, refining, and marketing and is therefore not suited to all companies. But trading’s benefits can be material and, for many players, will more than compensate for the challenges of implementation. Not only can trading expand companies’ margins, it can stabilize portfolio returns and make a company more responsive to market opportunities. Oil companies that view trading solely as a source of supply for refineries could be leaving an important source of value creation idle.
To Contact the Authors
See SOCAR Trading Performance Review
, BCG report, May 2014, on SOCAR’s website