Fitch: Oil Trading Houses To Benefit From Volatility In 2015

Trading houses such as Glencore, Vitol and Trafigura are likely to report healthy earnings in 2015 as they benefit from volatile oil prices, Fitch Ratings says. But this will not have a significant impact on our assessment of the sector's credit risk, which will remain driven by intense competition and the potential for large annual swings in performance.

Our analysis shows that periods of volatile oil prices and wider spreads are more favourable for traders when they are able to capitalise on increased arbitrage opportunities. For example, when forward oil prices are higher than spot, the market is known as contango. This enables oil traders to play the "storage game" - buying oil today while selling futures at a higher price. They can then lock in a profit equivalent to the difference in price minus the cost of storage.

Brent has been in contango since July 2014, after more than three years of the opposite situation, known as backwardation. The forward curve is not as steep as it was in January, meaning storage costs could eat up any profit, but other arbitrage opportunities are still there.

Volatility is likely to remain in the market throughout 2015, before oil recovers and the market finds an equilibrium. We therefore believe oil traders' earnings will grow significantly in 2H14 and 2015, compared to 2011-2013 results, when Brent averaged USD110/bbl and was much less volatile. Volatility today is similar to that in 2005-2007, but lower than in 2008-2009. Profitability is therefore not likely to reach the peaks of 2008-2009.

Many oil traders also have a stake in downstream operations and they are therefore also likely to benefit from the increase in refining margins. This has resulted from the price of crude falling quicker than that of oil products, but we believe higher refining margins are unlikely to be sustainable, especially given the overcapacity in European refining.

But all these positives do not mean that our perception of the sector has fundamentally changed. High volatility of earnings remains the key rating constraint. In addition, competition has intensified in recent years, with new entrants, such as Mercuria and Gunvor, quickly winning a significant market share. There is also an increased desire among oil companies, including national oil companies, to control their sale channels. Aramco, Saudi Arabia's NOC, has launched a trading arm focused on refined products. Some major oil companies, such as BP, Royal Dutch Shell, Total and Lukoil, also have trading arms of their own.