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Why 2020 Could Be A Record Year For Oil Trading Giants – OilPrice.com

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Why 2020 Could Be A Record Year For Oil Trading Giants | OilPrice.com

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Alex Kimani

Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. 

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Retail investors with long positions in crude oil markets had little to cheer about in 2019 as the market failed to maintain the early-year rally as pipeline outages, geopolitical tensions and dramatic changes in ship fuel regulations shook up the global oil market leading to high volatility.

It was an annus mirabilis, though, for large oil traders, who took full advantage of the choppy markets and a spike in volatility to make a killing through oil trades.

Bloomberg has reported that dozens of large oil traders made billions of dollars in profits in the year, with many posting record earnings thanks to a rocky oil market. According to Marco Dunand, CEO of Mercuria Energy Group Ltd., one of the five largest independent oil traders in the world, 2019 was among the best years ever for the energy trading industry.

The good news for oil traders: the trading bonanza could be set for a repeat in 2020.

The current oil market could be headed for an encore as many of the catalysts that shaped last year’s market remain in force.

Rich pickings

Independent traders were among the biggest winners, with the likes of Vitol Group and Trafigura posting record profits.

Trafigura, one of the largest commodity trading companies on the globe, was the first to provide an early glimpse into the rich pickings at its fiscal year ending report in September. The company revealed that its oil unit delivered a record gross profit of $1.7 billion for the full year.

Vitol, the world’s largest independent oil trader, is expected to report earnings near $2 billion, one of its best ever, while Mercuria’s CEO revealed that it also enjoyed a “very good year”. 

But it’s not just independent traders that enjoyed last year’s bonanza. 

In-house trading units of oil giants such as Royal Dutch Shell Plc, BP Plc and Total Plc

also pocketed billions of dollars in profits in the volatile market. These oil giants probably made the biggest bucks considering their oil trading divisions dwarf those by independent players. For instance, Shell trades the equivalent of 13 million barrels of oil per day, nearly double the 7.5Mb/d by Vitol. 

According to a person knowledgeable in the matter cited by Bloomberg, Shell and BP made several billions of dollars apiece from oil trades last year.

A series of catalysts conspired to create the kind of volatility that these oil traders thrive on.

First off, scores of supply outages boosted the premiums that oil refiners pay over the benchmark price. 

In 2019, Washington imposed fresh sanctions on Venezuela, disrupting flows.  Related: Can Seawater Batteries Replace Lithium?

Then in April, several countries halted Russian shipments into Europe via the key Druzhba pipeline amid concerns of contamination with pollutants. 

The biggest supply disruption, however, came after Saudi exports were cut off following a major terrorist attack on the country’s key petroleum facilities in September.

Then there was the IMO2020 rules that force the shipping industry to use fuel with a lower sulfur content. The rules, which came into force in January, have resulted in increased volatility in the price of fuel-oil and marine diesel. 

Shell is rumored to have made at least $1 billion in trades linked to the IMO2020 changes.

There were other factors at play, too. 

Gunvor CEO Torbjorn Tornqvist said that 2019 was “up there among the best years ever” for the trading house, thanks to the company’s expansion into LNG, super-cooled natural gas that can be transported by vessel.Most of the world’s LNG is transported by LNG carriers in onboard, super-cooled (cryogenic) tanks.

The bumper trading profits for publicly traded companies is expected to soften some of the blow by low energy prices and asset write-downs that have overtaken the industry. Shell is expected to report 4th quarter and fiscal 2019 earnings on 30th January before market open while BP is expected to do the same on 2nd February.

More of the same?

So far, the current year is displaying the same kind of uncertainty that created turbulent oil markets last year.

The China coronavirus outbreak and continued inventory builds in the US market have been depressing prices. 

Only a few weeks ago, nobody foresaw the epidemic risk factor with the first case reported in December. Second, crude stocks gained 3.5 million barrels in the week to Jan. 24– more than 7x market expectations with gasoline stocks rising to a record high for the 12th consecutive week to 261.1 million barrels pointing again at weak demand.

Meanwhile, tensions in the Middle East have somewhat dissipated but remain high. There are rumours that ISIS is taking advantage of the US-Iran crisis to make a comeback, though the United States has been downplaying the threat. The unlikely coalition between the US and Iran was responsible for pushing ISIS back, and expulsion of US troops from Iraq could give the jihadist group an upperhand and could lead to a another flare up in tensions in the region. The signing of the Phase One Trade Deal between Washington and Beijing also partly removed a major risk overhang from the oil market.

The ongoing events seem to support a rather bullish thesis by a leading industry prognosticator.

Two weeks ago, the US Energy Administration (EIA) published its latest short-term oil outlook where it predicted that inventory builds in 2020 and draws in 2021 would lead to Brent prices averaging $65/b in 2020 and $68/b in 2021. That’s considerably higher than the current Brent price of $57.44/barrel. The EIA says it expects, ‘‘…global oil prices to be affected by both the downward price pressures of relatively weak oil market balances and by the upward price pressures of geopolitical risk.’’

But that’s just part of the story. Related: U.S. To Become Net Oil Exporter This Year: EIA

This forecast assumes that Brent crude oil prices will decline in early 2020 through May 2020 as risk premiums slowly fade then climb from mid-2020 and into 2021 due to tightening market fundamentals. However, the EIA failed to account for a key supply disruption: Libya. As ING recently cautioned, outages in Libya–where production has been steadily declining amid a blockade–should not be discounted and could swing the market into a deficit as early as in the first quarter despite continuing lackluster demand.

It’s this sort of rocky backdrop that created excessive volatility in the markets in 2019 and led to record profits by oil punters.

Source: Investng.com

Crude Oil Volatility Index, or Oil VIX (OVX) is a popular volatility indicator for oil traders. OVX tends to spike near market bottoms while lulls are more commonly seen near short-term market tops. After falling steadily in December, volatility in the oil market is once again spiking suggesting a bottom might not be far off.

Source: Investing.com

Hedgers and professional traders tend to dominate the energy futures market, with hedge funds speculating on long- and short-term direction while industry players are taking positions to offset physical exposure. Retail investors tend to exert less influence in oil futures markets than in more emotional markets, like high beta growth stocks and precious metals.

That said, retail’s influence can rise considerably when crude oil trends sharply by attracting small players who are drawn into energy markets by table-pounding talking heads and  front-page headlines. 

Waves of greed and fear can intensify underlying momentum, thus contributing to epic climaxes and collapses while printing exceptionally high volume. Tight convergence between positive catalysts can generate powerful uptrends while the opposite rings true for negative elements.

With the oil futures market being extremely liquid and low margin costs offered by many brokers, retail traders with their fingers on the pulse, a keen eye on the charts and plenty of gumption can also partake in some of the oil profits the majors have been enjoying.

By Alex Kimani for Oilprice.com

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How RBC pulled off its highly-coveted $13.5-billion deal for HSBC Canada — with some unintended help from Ottawa

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A combination of external and internal factors made RBC’s HSBC deal a reality.Duane Cole/The Globe and Mail

He’ll never want to admit it, but Royal Bank of Canada RY-T chief executive Dave McKay can thank Prime Minister Justin Trudeau, at least in part, for landing Canada’s most coveted bank deal in decades.

Like many of his industry peers, Mr. McKay has been frustrated with Ottawa for slapping an additional, permanent tax on bank and life insurance company profits in the most recent federal budget, something Ottawa has attributed to clawing back some of the financial relief it provided during the COVID-19 pandemic.

While the federal government can taketh away, it can also provide, and seven months later, another pandemic financial policy has proven to be quite helpful to RBC – even if the assistance is unintended.

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Because there was so much economic uncertainty when Canada entered its first COVID-19 lockdowns in March, 2020, the federal government and the country’s banking regulator wanted banks to preserve cash as a buffer against any shocks. To enforce this, they prevented the lenders from hiking their dividends, something they often did annually.

There was no way to know it then, but Canada’s banks kept churning out profits, even through multiple lockdowns. That meant all the cash they would have normally put toward dividend hikes piled up on their balance sheets.

RBC wasn’t the only lender that saw its coffers swell, but because it is Canada’s largest bank by profit, it was able to hoard large amounts each quarter. Ultimately, that money was deployed to win the HSBC Canada auction, in the form of a $13.5-billion, all-cash bid.

At the same time, HSBC Canada’s parent, London-based HSBC Holdings PLC, must have seen all that money piling up. So, even though HSBC’s global management team had long said it was committed to Canada, if there was any time to sell, this was it. All that excess cash gave HSBC a greater chance of selling for top dollar – and, crucially, an exit before any potential recession.

The second element of RBC’s winning strategy, and arguably the most important, is an internal one, and it is rooted in something so often overlooked in business: discipline.

Ever since Mr. McKay acquired California-based City National Corp., which specializes in banking for high-net-worth clients, for US$5.4-billion in 2015, just five months into his tenure, there have been endless questions from investors and analysts about what RBC would do next. Often, they centred on growth in the United States.

Mr. McKay has been batting these away for years, suggesting RBC isn’t all that interested in establishing a large retail banking footprint in the U.S. Doing so requires scale, which means it would take one or two large deals to make an impact. To his mind, it just isn’t worth it, considering where RBC is starting from, and because retail banking isn’t as profitable in the U.S. as it is in Canada.

But the questions kept coming, especially as the Big Six banks started accumulated gobs of cash during the pandemic. Then two of RBC’s Canadian rivals, Toronto-Dominion Bank and Bank of Montreal, splurged on deals of their own. Late last year, BMO bought California-based Bank of the West for $17.1-billion, the largest U.S. deal in Canadian banking history, and early this year TD bought First Horizon for US$13.4-billion.

Standing pat is incredibly tough when rivals are writing big cheques. The fear of missing out is real, and investors tend to be myopic, too, so they have a habit of rewarding short-term revenue growth.

RBC, though, never wavered. “Patience is really important,” Mr. McKay said on a conference call with reporters Tuesday.

Royal Bank wasn’t necessarily waiting for this precise opportunity. “We didn’t know [the HSBC Canada sale] was going to happen, or the timing,” he said. But sometimes executives get lucky. And having all that excess capital allowed RBC to splurge on what Mr. McKay called a “more sure-footed transaction” relative to rivals’ deals.

He didn’t go into specifics, but based on its financials, Bank of the West is a fixer-upper for BMO. It is also based in a state where BMO has almost no footprint. First Horizon, meanwhile, may not have even been TD CEO’s first choice for its most recent U.S. retail banking deal, after TD was reported to be in the auction for Bank of the West just a few months prior. HSBC, by contrast, is a very profitable bank, with a 14-per-cent return on equity over the past 12 months, rather healthy by global standards.

What RBC will have to prove now is that it hasn’t overpaid. Just because it had the cash to burn doesn’t mean it needs to use it all.

The bank’s executives are stressing that after making some adjustments, it’s paying about nine times HSBC Canada’s forward earnings, which is below the long-term average trading multiple for Canadian lenders. However, bank deals are also priced off of a multiple of the target’s book value, and at 2.5 times HSBC Canada’s, RBC is paying a healthy premium.

That isn’t necessarily a bad thing. In fact, during Mr. McKay’s tenure, it’s become a bit of a standard. When RBC bought City National, it paid 2.6 times book value, and at the time, almost everyone on Bay Street wondered if the bank overpaid. All those fears have subsided over the past seven years.

What’s become clear is that RBC is willing to pay up for quality. Some bankers chase cheap assets, and may get lucky and find a diamond in the rough. RBC, though, has tried that before, and it resulted in a disastrous acquisition of North Carolina-based Centura Banks Inc. in 2001. Unwinding the deal took a decade, and when RBC ultimately sold the division in 2012, it took a $1.5-billion charge in the process.

“We bought a franchise that had to be transformed and changed – it wasn’t the ‘Tier 1′ franchise,” Mr. McKay said about Centura in a 2015 interview with The Globe and Mail. “Our biggest [lesson] from that failed venture was that you have to buy the highest-quality franchise and build on it.” Sound familiar?

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Oil Prices Jump On Major Crude Draw

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Transneft

Russia’s pipeline oil exports to China via the Eastern Siberia—Pacific Ocean (ESPO) oil pipeline were flat between January and October compared to the same period of 2021, according to China National Petroleum Corporation’s (CNPC) Vice President Huang Yongzhang.

Russia sent 33.26 million tons of oil to China via pipeline in the first ten months of this year, Huang was quoted as saying by Russian news agency TASS at a Russia-China energy forum.

While pipeline oil deliveries were basically unchanged this year, China has significantly increased its seaborne imports of Russian crude as Beijing and India have now emerged as the top buyers of Russian oil after the Russian invasion of Ukraine, as Western buyers shun Russia’s crude and prepare for the EU embargo on imports of Russian oil as of December 5.

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Just ahead of the ban and the G7-EU price cap on Russian oil, some Chinese buyers have been hesitant to purchase Russian cargoes, as they wait for details on how the price cap would be enforced.

Yet, both China and India are now demanding huge discounts for the Russian oil they are willing to buy, Bloomberg oil strategist Julian Lee wrote in a recent analysis.

Currently, China and India account for around two-thirds of Russia’s crude oil exports by sea, and the Asian buyers are exercising the negotiating power they have over Russia, Lee notes. If Russia wants to continue selling its oil to its new top customers, it must contend with the deep discounts the two buyers demand.  

As of the end of last week, Russia’s flagship crude grade, Urals, traded at $52 per barrel—a $33.28 discount to Brent Crude. This compares with the 2021 average discount of Urals to Brent of $2.85.

The huge discount costs the Kremlin some $4 billion in lost revenues every month, according to estimates from Bloomberg’s Lee.

By Tsvetana Paraskova for Oilprice.com

 

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The Advantages of a Fast and Safe Business Website: Optimizing Your Web Hosting

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The Advantages of a Fast and Safe Business Website: Optimizing Your Web Hosting

These days, nearly every business has some sort of online presence. Whether it’s a simple website with your company’s information or a more complex e-commerce site, businesses need to have a web presence in order to compete. However, simply having a website is not enough – it needs to be fast, reliable and secure in order to give users the best experience possible so they can come back. This is where web hosting comes in.

Web hosting is a service that provides businesses with the server space and resources they need to host their website. There are many different web hosting providers out there, but most people choose providers that are in the region their businesses are located. For example, a business located in Canada would prefer to choose a Canadian hosting provider. No matter which provider you choose, it’s important they provide fast speed, reliable uptime and robust security.

How can web hosting optimize the safety and speed of business websites?

First, web hosting providers can make sure that the servers that host the websites are properly configured and secured. Additionally, they can monitor the traffic to and from the website and take steps to ensure malicious traffic is not able to access the site. Finally, they can work with businesses to ensure their website content is optimized for speed and safety.

The advantages of a fast and secure business website

In this day and age, a business website is one of the most important tools that you can have in your marketing arsenal. It’s a great way to reach out to potential customers and clients, and it can be a powerful tool for promoting your brand online. Some of the advantages of having a faster, more secure business website are:
– It will help you rank higher in search engine results pages.
– It will make your site more user-friendly.
– It will increase your conversion rate.
– It will give you an edge over your competition.

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What are some other benefits of using an optimized web hosting service?

One benefit is that you can get more traffic to your website. This is because an optimized web hosting service can help you improve your website’s search engine ranking. This, in turn, can lead to more people finding and visiting your website.

Another benefit of using an optimized web hosting service is that you can improve the speed and performance of your website. This is because an optimized hosting service can provide you with a faster server and better resources. This can help your website load faster and run more smoothly.

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