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Glencore Sees ‘Blowout’ Year for Oil Trade as Volatility Surges

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March 3, 2015

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By Andy Hoffman and Angelina Rascouet

(Bloomberg) — Glencore Plc, the world’s biggest listed commodities trader, said 2015 could be a boom year for oil amid the biggest price swings in six years.

“It is looking very well structured for oil trading,” Chief Executive Officer Ivan Glasenberg said in a conference call with analysts Tuesday. “If it continues like this, oil could have a blow-out year.”

Volatility in Brent crude rose to the highest since 2009 last month, creating bigger gaps between prices that traders need to make a profit. Crude oil plunged 61 percent from June to January because of oversupply, before paring some of that slump. Glencore, based in Baar, Switzerland, and Vitol Group, the largest independent trader, will benefit from bigger price swings in 2015, said Fitch Ratings Ltd., a provider of financial information.

The increased volatility stems from the highest U.S. crude output in three decades combined with sustained production from OPEC, which pumps about 40 percent of global supply and previously curbed output to balance the market. Qatar estimated the glut was as high as 2 million barrels a day.

“Volatility is likely to remain in the market throughout 2015, before oil recovers and the market finds an equilibrium,” Dmitry Marinchenko, an analyst at Fitch, wrote in an e-mailed report Tuesday. “We therefore believe oil traders’ earnings will grow significantly” in the second half of this year compared with the past two years.

No Contango

The price slump also prompted traders to book dozens of tankers with a view to storing cargoes. Companies appear to be dropping those trades, said Alex Beard, the head of Glencore’s oil business.

“There were lots of reports of floating storage a few weeks ago,” Beard said on the same conference call. “Some of those vessels have been dropped. Some of them are being used in the normal market.”

Companies booked tankers with the capacity to store as many as 65 million barrels on 34 ships, according to data compiled by Bloomberg on Feb. 13. The trade becomes viable when future prices are so far above immediate ones that traders can more than cover all the costs associated with keeping crude on vessels.

Vitol Chief Executive Officer Ian Taylor said on Feb. 10 that for traders hoping to profit from the contango “that window is now shut.”

Brent crude oil for July costs $2.46 a barrel more than supplies in April, according to data from the ICE Futures Europe exchange. The gap expanded to $4.24 on Feb. 12. The costs associated with storing in Europe for three months were about $4.70 at that time, according to data from E.A. Gibson Shipbrokers Ltd.

“The super contango and the super profit in the crude oil market is just not there at the moment,” Beard said. “When you see current spread conditions, they are attractive. They pay for land-based storage and a small profit on top of that. They are by no means, at current spread levels, attractive enough to encourage large amounts of floating storage.”

–With assistance from Sherry Su and Grant Smith in London.

Copyright 2015 Bloomberg.

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