Some will have to admit failure
Oil prices are likely to stay highly volatile over the year. A clearer picture of the market will only emerge by late 2016, says Tony Hughes, CEO of the London-based oil trading arm of MET Group.
For one reason or another, MET has always received media attention for its gas deals and as a gas trader. When did it branch into oil trading?
The oil trading desk was formally set up in 2013 when MET’s management made a decision to draw up a strategy for the oil segment. In the over two years that have passed since the decision, we have worked out that strategy and built up the division. We put together a special team of experts at our London headquarters, with professional histories at major international industry players such as BP or Trafigura.
What do these traders do exactly in London?
We focus on two main areas, both are real physical trade: we buy crude oil from different sources, from the Black Sea to the Caribbean, and deliver it to consumers. Our second department focuses mostly on the CEE region, delivering tailor-made solutions to serve our customers’ needs. Fundamentally, what we do is wholesale trading. Essentially, we provide access to all the segments of the industry, the whole supply chain, from refining and different financial solutions to deliveries.
MET started out as an affiliate of MOL, which still holds a major stake in the company. Weren’t these new activities seen as an intrusion into the domain of a major shareholder? Did they change the two groups’ business relationship in any way?
Not really. Basically, we still have different roles. MOL is an integrated oil company, while MET is a growing oil trader. Our operations are rather complementary. There is no overlap.
What do you mean? Where are the connections?
MOL’s refining capacity exceeds the amount of oil the region produces. So it also buys crude, then refines and sells it. Some integrated oil companies buy crude themselves, while others outsource that activity. That’s where traders, such as MET, enter the picture. For instance, I recently visited Colombia and the Gulf of Mexico looking for sources to buy cheap oil. Each market needs specific types of oil products so crudes of different quality and origin are blended in so-called blending pools to make the desired end product. We also try to come up with competitive offers to companies that have their own refining capacity.
Does that mean you also sell oil to MOL?
Yes, but MOL’s ownership in this case does not entail any kind of exclusivity or special treatment.
Talking of company relations, why did you choose London for headquarters? MET has strong roots in Switzerland and Geneva is one of the largest global oil trade hubs.
That is correct, but as I said, the most important task of our first two years was to pick a capable team. As important as Geneva may be, companies that control real physical processes in the industry, such as Shell, Total or BP, still have their headquarters in London. This way it was also much easier to recruit our staff. Of course, this doesn’t mean we’re only active in London. We spend quite a lot of time in Switzerland and Budapest.
How big is the division at the moment?
Out of MET Group’s team of 400, the oil trading desk has 20 staff globally. Our contributions to the group’s revenues and profit is small at the moment and, as a new business arm, we make up only a small portion of the company’s turnover. But this is going to change in a couple of years.
How much? What are your goals?
Our most important goal is to expand our activities to a global scale. Current market trends actually offer great opportunities to that end as oil industry has recently undergone a rather turbulent period. For one thing, we see a huge potential in transatlantic oil trade. Price differences between the United States and Europe are set to boost oil trade between the two continents and we aim to be a part of that. But I’d be unwilling to limit ourselves by setting specific target figures – our growth will depend on the opportunities we find.
MET chief Benjamin Lakatos said in an interview with Figyelő that ultimately it is not the price that matters to trading companies but market movements and volatility. Is that what you’ve been referring to when you mentioned the current state of the market?
Yes, absolutely. And these large-scale swings actually benefit us in a number of ways. On the one hand, we create added value for conventional oil companies as they seek to mitigate risks. On the other hand, customers in our CEE retail business are also looking for flexible solutions that can reduce uncertainty.
Do you still expect high volatility on the market? Right now the price of a barrel of crude oil hovers around USD 40 but some forecasts still project a drop to around USD 25.
Good question. It would greatly improve our market position if I knew which direction prices will move. Joking aside, a lot of developments on and particularities of the market make forecasting difficult. The oversupply we see today, the rise and the subsequent troubles of the shale oil industry, the recent steps by OPEC, the reaction of companies providing ancillary services such as logistics, just to name a few. But I think these are not the only ones that will likely be affecting the prices the most over the short term.
Logistical and ancillary services and the bearing down of the major traders have been a major contributing factor to the reduction in the oil price. Competing with any oversupply recovery affect, I'd expect to notice the expiry of some producer hedging. These deals protect producers whilst the hedge term remains, but if they expire before prices return to a tolerable level we could see some more pain in the producer segment, having seen public records of some producers with hedge books valued at extraordinary levels compared to market cap. I would expect that steadily over the back end of 2016, the physical markets will progressively realise the pain of an oil price around USD 30, and if not a moderate recovery to prices tolerable, there could be some further pain.
And how do you think the market will respond? Will prices start to climb slowly?
Someone once said the best remedy for low prices are low prices. The oversupply cannot last long with prices such as now. Market players who cannot turn a profit at prices this low will be eliminated from the supply side, while some new players are likely to emerge on the demand side. As soon as these market trends kick in, a steady price increase will become more likely and prices could eventually plateau near USD 60.
That all sounds reasonable, but it seems these market rules currently do not apply on the supply side of the oil market. OPEC, for instance, will not cut production.
That’s true, but falling oil prices cannot be blamed exclusively on OPEC’s or Russia’s reluctance to curtail their exports. It is an important factor indeed, but there are about 15 others that have led to the current state. And, regardless of this, supply is set to decline. Some companies will be simply unable to compete and will perish.
Do you think some shale oil producers in the US will be among them?
Not necessarily. With current price levels, some of these companies are bound to turn belly up but some traditional oil companies are facing the same fate too.
Going back to OPEC for a moment, a number of conflicts seem to plague the organisation. Could that eventually lead to a break-up?
Dialogue between OPEC members has always been fraught with conflicts. What is interesting now is that the group has until recently been united under a single banner to keep oil prices high. That principle was practically laid to rest last year. But that only means that today we cannot rely on oil as a guidance on which direction the organisation is going to move. This was never an easy task to begin with, even at times when, in principle, that common goal was still recognised. After a few decades in the business, you just give up on trying to find out how this collective mentality works and what OPEC will do in any given situation. Despite all that, I do think the organisation will exist in the future.
Tony Hughes (42)
University College, University of London, Research Fellowship/Ph.D, Physics Department
From 2002 Trader at oil company BP for eight years, book lead on the Global Derivatives desk
From 2010 to 2013 Global Head of Energy Options at Noble Group
CEO of MET Commodities since late 2013
Kids keep him busy. Teaches karate.
Source: Figyelő business weekly (Hungary)