Category: Insights

Asset optimisation and the rush to the middle

The situation surrounding regional supply tenders in Latin America offers a live illustration of the majors and refiners moving into third-party trading as traders reach for asset-backed business

Big trading houses’ implication in bribery scandals – and notably those in Latin America – are problematic for operations involved in regional supply tenders and have led in some cases to office closures. But another side of the picture is that competition for tenders has grown steadily over the last three years as asset-backed companies including refiners and majors have stepped in to bid. Trading houses such as Glencore, Vitol and Trafigura are in the running for Latin American business with twice as many competitors as before, with companies including ExxonMobil, P66 and Valero now regularly active in the space. This increased acticvity will drive additional demand for the limited pool of Latin America originators and business developers, and notably for those with clean track records. The trading houses, whose profits are being dented, are responding to increased competition by picking up distribution and terminal assets.

Trading houses have been losing their appetite for regional supply tenders because of the sharp increase in competition. To make matters worse, the Petrobras corruption scandal that blew up in recent years has spread to trading operations, and the PDVSA data-breach case has added fuel to the fire. These events and others are shining a light into business done in emerging economies such as Brazil and Venezuela, and that light is not expected to be extinguished with the conclusion of investigations. In a market in which value-chain optimisation has become the key focus, asset-backed businesses are taking the opportunity offered by the disruption.

Trading houses have been losing their appetite for regional supply tenders because of the sharp increase in competition.

The majors’ and refiners’ move into supply tenders is part of the broader trend of their move into third-party trading. This is putting pressure on the trading houses, and the pressure is set to increase with time. A notable example of this growing threat is the current development of ExxonMobil’s trading operation, which suggests that the supermajor is in the early stages of implementing a global strategy. The company has hired a handful of traders and around 12 analysts over the last year and is now active in gasoline and crude trading, with veteran talent in training positions. ExxonMobil’s move into trading its own product is worrying to third-party traders because they stand to lose the low-hanging fruit that represented the base of their market positions. But the development of ExxonMobil’s broader strategy is of more concern, as a company with such a massive physical footprint could take a controlling position in the market.


Trading houses have already been having a difficult time in oil markets. Algorithmic systems have been disrupting technical trade, volatility and shifting time structures have increased risk and the drive to greater transparency is forcing the industry to clean up its act. These issues have caused attrition of trading talent over the past year as businesses retool operations to match the changed environment. We are representing dozens of senior oil traders globally at present. A large proportion of them were working in asset-light operations in which value became increasingly difficult to capture. The natural home for such traders in the current market is in asset-backed companies with exposure to production and/or refining, but there are only so many vacancies to go around. Positions in producers’ and refiners’ new trading operations will appear gradually as desks are built out, and those already with such companies are unlikely to be creating vacancies any time soon. Trading houses are hiring optimisers with less experience in speculative trade but extensive experience in running assets. This raises the question of how compensation will change as focus shifts from risk-taking to optimisation.

Trading houses’ movement toward asset-backed business and asset-rich companies’ shift into trading suggest a point in the future when the big names on both sides will run integrated models. The situation in Latin America, with the trading houses now facing stiff competition for supply tenders, illustrates this convergence. Time will tell, but it is likely that the two sides will one day find themselves in a shared market environment where only the asset-backed will prosper.