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In a highly challenging and volatile market, Trafigura had its strongest trading year on record and further secured its position as one of the world’s leading independent traders of crude oil, refined products and natural gas in 2020.

Market overview

2020 was a year like no other for the oil markets. The start of Trafigura’s financial year, in October 2019, saw prices continue to drop sharply as supply recovered following the attacks on Saudi Arabia in September 2019. Following a truce in the US-China trade war and further unrest in the Middle East, macro conditions began to pick up again, but then came the biggest demand shock of all time. The emergence of COVID-19 split OPEC+ (OPEC plus Russia and other affiliated producers) in early March and saw prices drop by around 25 percent in two days from the mid USD40s to the mid USD30s range. Prices then drifted further down to the USD20 mark at the close of the first half of our financial year at the end of March, as more and more areas went into lockdown or quarantine.

Despite having fallen 70 percent from their peak in January 2020, oil prices were in for an even bigger shock in April. As markets headed into the expiry of the May WTI contract, it became apparent that there was simply not enough available storage capacity at the main physical delivery point for WTI, in Cushing, Oklahoma. This led to a first for oil markets: negative prices for one of the major marker contracts. And once prices went negative, they continued to fall, so that a contract that had opened the day at USD17.73 per barrel closed at USD-37.63, a drop of over USD55, the largest swing ever witnessed in either dollar or percentage terms. However, the negative prices allowed physical traders such as Trafigura to create and implement solutions that rapidly alleviated the bottleneck at Cushing, eventually restoring order to the market.

Following that shock, prices began to recover strongly, helped by OPEC+ cuts and the gradual removal of lockdown restrictions. The demand recovery in China in particular has been very strong, helping pull up other parts of Asia. Europe recovered well, but the US remains weak, particularly with regard to jet and gasoline demand. Both regions are now experiencing a second wave of lockdowns.

2021 is likely to bring more refinery expansions in emerging markets and a recovery in both OPEC and non-OPEC supply, but demand remains a problem that is unlikely to be resolved until a COVID-19 vaccine is widely made available.

Trafigura performance

Extremely volatile conditions and market distortion throughout much of FY2020 created increased demand for the services of a large physical trading house like Trafigura in helping to manage the disruptions resulting from imbalances in supply and demand. Accordingly, our Oil and Petroleum Products Trading division had a very strong year.

Three themes emerge from the division’s performance in 2020. First, we benefitted greatly from an intense focus on our customers’ rapidly changing needs, ensuring that we could always be relied on for consistent and efficient service and execution, based on our global presence and real-time insights on market developments. This enabled us to deepen existing business relationships and establish significant new ones, while investing in an expansion of our global storage infrastructure.

Second, we continued to see a flight to quality and financial strength in the trading marketplace as some of the weaker counterparties were not able to fulfil contracts or provide customers with much-needed support during the first wave of the COVID-19 pandemic. This led to increased demand for larger merchant companies with strong financial backing, including Trafigura.

Third, we saw continued benefit from a renewal of our oil trading teams over the last few years. What was a relatively young and untried group two years ago has matured into a cohesive and highly collaborative trading division, which is well placed to operate effectively in volatile and fastmoving markets. The year was also marked by the quality and intensity of communications and information-sharing between different trading desks.

Looking ahead, we expect volatility and market distortion to continue, while demand will be slow to recover from the effects of COVID-19. Therefore, our focus will be on long-term collaboration and maintaining our reliable service to help us to continue to build market share.

Oil and Petroleum Products volumes traded (mmt)
2020
2019
Biodiesel
0.5
0.6
Bitumen
0.8
0.4
Condensates
1.9
1.5
Crude oil
127.5
122.6
Fuel oil
27.0
28.3
Gasoline
21.6
25.3
Liquefied natural gas (LNG)
12.9
10.2
Liquefied petroleum gas (LPG)
5.9
6.3
Middle distillates
40.0
35.4
Naphtha
12.0
14.7
Natural gas
17.4
16.0
Total
267.7
274.9

Crude oil

In the global crude market, 2020 was a truly extraordinary year in which the economic shock and unprecedented demand destruction caused by the COVID-19 pandemic coincided with a battle for market share between key producers. The result was significant over-supply, a major build-up of stocks and a precipitous fall in prices – with WTI crude prices briefly in negative territory – followed by a gradual, though only partial, recovery to levels just above USD40 per barrel by the end of September 2020.

With the price curve showing a steep contango for much of the year, 2020 was a favourable environment for trading and the Trafigura crude team delivered a strong profit for the year. The team has been significantly strengthened over the past three years with a focus on global alignment and coordination, backed by superior market intelligence. These changes have enabled our traders to move oil quickly around the world this year – notably from the US and Europe to Asia – in response to price signals, and to deliver seamless customer service despite the difficult working conditions created by the pandemic. Key to our performance, as in 2019, was our strength in the US, where we maintained our position as the leading crude exporter, thanks in part to our access to the Cactus II pipeline from the Texas shale fields to the coast. We were also able to win increased business by providing producers access to our established relationships, global logistics network and with working capital by way of pre-payment finance.

The team managed the fall in demand and the subsequent resumption well, backing their judgment by taking substantial long-term tankage positions in Asia, the US and Europe. We expect this significantly expanded infrastructure position, and the term contracts it has helped us win, to continue to play in our favour during 2021.

Gasoline

The gasoline trading team entered the 2020 financial year prepared for higher volatility arising in part from the IMO 2020 rule change on sulphur in shipping fuel. But the advent of the COVID-19 pandemic in March caused wholly unexpected and unprecedented shifts in supply and demand, with structural arbitrage reversing as traditional importing countries started to export. The magnitude and speed of the changes caught many market participants by surprise.

Trafigura reacted quickly, capitalising on its front-line position in physical trading to understand how refinery run cuts were affecting demand. Volumes handled decreased slightly, while profitability matched the already strong level achieved in 2019. Successful coordination and risk management in such a fast-changing market while traders, operators and Deals Desk professionals worked remotely was itself a significant achievement, bolstered by the close co-operation with other trading desks that is a hallmark of Trafigura’s operating culture. The book’s most important strategic move was to take on significant additional storage in order to take advantage from the contango price curve, notably in Asia.

In 2021, we expect the gasoline market to remain extremely volatile, with many refiners under severe margin pressure and some facing inevitable closure. For Trafigura’s gasoline team, continuing to optimise activity between regions and with other trading desks will be crucial to understanding the resulting shifts in supply.

Naphtha and Condensates

Normally a by-product that refiners try to produce less of, naphtha experienced great dislocations throughout the year, becoming one of the best performing hydrocarbons in 2020. Global supply was seriously impacted by lower refinery runs, while consumption was driven by strong demand for plastics, especially in medical equipment and consumer goods packaging, and a rapid recovery in China. The condensates market broadly tracked the fall in demand and over-supply experienced by crude.

Trafigura’s trading team was prepared for a volatile market at the start of our financial year, with a strategy to diversify risk. Therefore, it was able to react quickly to the unexpected events of March and April, consolidating its leading position in this market. Volume handled showed a small decrease in response to the reduced size of the market, but profitability was stronger than in 2019. This is a testament to strong teamwork and coordination, as well as a relentless and flexible focus on the needs of customers, all of whom were affected by the pandemic in different ways.

The outlook for 2021 is uncertain. We see continuing problems on the supply side for naphtha, with refinery margins under severe strain, while demand for petrochemicals is expected to be impacted by the weakness of the global economy. The net effect is likely to be continued volatility, and we will stay nimble and responsive to fast-changing trends.

Fuel oil and Middle distillates

2020 was a tale of two halves in the global gasoil and fuel oil (GOFO) business. The start of the year was characterised by strong gasoil prices and very weak fuel oil prices as the market adjusted for lower sulphur bunker specifications required by the IMO 2020 rule change. The second half was dominated by the impact of the COVID-19 pandemic. Quarantines impacted jet demand which forced refiners to manage their jet yield into the diesel pool, significantly weakening gasoil. In addition, OPEC cuts of heavy crude supplies and refinery run cuts drastically reduced the supply of heavy sulphur fuel oil. The subsequent oversupply of finished grade products across the barrel as demand collapsed saw the market trade to levels not seen since 2008, and was only resolved through floating storage and subsequent refinery run cuts.

The Trafigura GOFO team managed risk and exposure, and ensured minimal disruption in performance for trading counterparties, whether in lifting term commitments, supplying customers, or operational execution on the water. The desk significantly increased its global storage capacity, both on land and via floating tanker solutions, to manage the oversupply and provide customers with additional flexibility. The team registered record volume and a strong profit.

A key priority, alongside managing the IMO transition, was the launch of a new bunkering business, TFG Marine (see page 29), which places the company at the cutting edge of the change in end-user specifications. The desk also launched a broader push into biodiesel trading to enhance our capabilities in renewables and to integrate biodiesel into the existing traded portfolio. We expect these business lines to continue to drive growth of the trading book over the next 12 months.

Biodiesel

Trafigura broadened its focus on trading biodiesel in 2020. We remained active in the US and started to build new business lines in Asia and Europe, as consumers and regulators continued to call for increased penetration of renewable fuels in the energy mix.

The US market gained a measure of stability with the adoption of the blender tax credit until the end of 2022. Despite this tax credit, the price relationship between fossil fuels and biofuels eliminates the opportunity for discretionary blending. As such, US market demand is effectively capped by the US Renewable Fuel Standard volumetric requirements. With abundant domestic production capacity, US production margins remain slim. Trafigura maintains key business relationships with the major independent US producers for well over 100 million gallons per year (380 million litres) of biodiesel production.

In Europe, we are adopting an arbitrage and breakbulk model, leveraging existing Trafigura and Puma Energy infrastructure, logistics and relationships to penetrate a market in which we have not been active for several years. With new hires joining the team, we expect the biofuel business to become an increasingly important element of our gas oil and fuel oil book in 2021.

Liquefied petroleum gas

The COVID-19 pandemic made for a volatile year in the liquefied petroleum gas (LPG) market on both demand and supply sides. Commercial and auto gas consumption were negatively affected, but petrochemical cracking and household consumption increased. At the same time, fluctuating refinery runs and a drop in crude production greatly affected the availability of LPG worldwide. This created volatility in prices with a steep drop in flat price in April and May, and a subsequent recovery from June onwards.

In 2020, the Trafigura LPG book went through an important transformation, creating a structure that enabled the trading of volatility via large positions in all pricing centres and optimising between them. Volumes remained flat at close to six million metric tonnes and profitability also remained comparable to 2019 figures.

The outlook for 2021 is complex, with possible refinery closures likely to continue to weigh on supply. One theme we will be pursuing actively in the coming year is the environmental sustainability of LPG, for example, as a substitute for wood in domestic cooking.

Liquefied natural gas (LNG) and Natural gas

Substantial LNG supply overhang remained a key theme as we entered the financial year. Coupled with significant demand destruction in early 2020 caused by COVID-19, we saw record low prices, large scale cancellation of US cargoes and a subsequent fall of LNG production from 2019 levels despite production capacity actually increasing.

In this challenging environment, Trafigura demonstrated the benefits of having a fully integrated LNG and natural gas team. Close coordination between regional gas traders, physical LNG traders and charterers ensured that information was shared instantaneously to enable a prompt and effective response to volatile markets.

In LNG, we went from strength to strength, growing volumes, delivering to new markets and sustaining profitability. Relationships are at the heart of our business and we were able to work with our key counterparties to rebalance deliveries and take account of the changed situation, strengthening trust between us and our end-users.

The vast majority of our US LNG output flowed to Europe, benefitting our growing European natural gas operation. Coupled with favourable spreads, this enabled us to build out storage positions and expand into new countries in Eastern Europe. In the Americas, it was a year of building up our Texas business and increasing the volume of gas traded in Mexico and Argentina.

We expect the LNG market to remain structurally oversupplied for at least another year, but the lack of final investment decisions on new projects, as a result of weak prices and COVID-19 uncertainty, is likely to result in a substantial tightening of both the LNG and US gas markets from 2022/23. Gas remains the critical transition fuel to achieve the decarbonisation goals adopted in the Paris Agreement; therefore, we expect the pace of activity and the number of participants in these markets to increase over the coming years.

Ben Luckock, Jose Maria Larocca, Hadi Hallouche

Co-Heads of Oil Trading

2020 Annual Report
2020 Annual Report

2020 Annual Report

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