OPEC member Kuwait plans to start trading energy and not just producing it, joining other Middle Eastern producers eager to claw back some of the profit traders like Vitol Group and Glencore Plc earn by buying and selling the region’s oil.
State-run Kuwait Petroleum Corp. is in talks with both commodities dealers along with some international oil companies about forming a joint venture to trade refined products as early as next year, a KPC official said. Saudi Arabia and Oman already have trading units, and Abu Dhabi National Oil Co. said earlier this month it may seek partners as it expands into trading. Iraq’s state oil-marketing company in May began selling crude in a venture with the trading unit of Lukoil PJSC.
National oil companies in the world’s biggest crude-producing region prospered for decades by supplying the raw commodity to refiners and independent traders. Now they’re expanding into refining and petrochemicals to add value to their main export. By trading their oil and refined products, these companies hope to squeeze more money from each barrel they produce, with help from partners like Glencore and Vitol — or in competition with them.
“The playing field is changing,” said Olivier Jakob, an analyst at consultant Petromatrix GmbH in Zug, Switzerland. “Greater competition means there’s less room for traders. There’s less of a market for those traders that don’t have assets.’’
KPC is discussing its plans for a trading venture with oil producers BP Plc, Royal Dutch Shell Plc and Total SA, as well as with Vitol and Glencore, the Kuwaiti company official said on Monday. The venture would help sell fuel from refineries KPC is building, including one at Duqm in Oman, the official said. The international companies and traders all declined to comment.
The regional trend toward trading began with Oman, the biggest Arab oil producer that’s not a member of the Organization of Petroleum Exporting Countries. Oman formed a trading company with Vitol in 2006, then bought out its partner in 2015.
Saudi Arabia’s state oil giant, known as Saudi Aramco, started a trading unit in 2012 as the country planned adding more than 1 million barrels a day of refining capacity. The unit has tripled its trading volume since then to about 1.5 million barrels a day, and it targets increasing that by about a third after the kingdom opens a new refinery next year.
Click here to read about Aramco Trading’s expansion plans
Iraq is selling 2 million barrels of crude each month through its venture with Lukoil and has sold 8 million barrels of crude in auctions on the Dubai Mercantile Exchange. The exchange sales earned Iraq a premium of $4.2 million above its official prices, and the country has scheduled another for this week. State producers in China and Azerbaijan have also set up energy-trading businesses.
At stake for state-run traders in the Middle East is a share in the region’s 7 million-barrel-a-day market for refined products. Regional fuel demand is poised to grow almost 2 percent a year on average through 2025, according to David Wech, managing director at Vienna-based consultant JBC GmbH.
With demand rising and the world’s biggest traders boosting profits, state producers may have picked a good time to get into the business. The market for refined products will tighten starting in the next decade, Wech said.
What’s more, volatility in oil prices — which creates opportunities for traders to profit — will intensify over the next year, driven by geopolitical tensions and uncertainty about OPEC’s efforts to cut supplies, Rashid Al Ghurair, head of Dubai-based trader MENA Energy, said in an interview.
“It’s a good time to be a buyer,’” said Den Syahril Mohamed, an analyst at consultant FGE in Singapore. As more state players buy and sell oil, this “could hurt traders since competition will be greater and will pressure margins,” he said.
Even so, established middlemen will continue to play a role in the Middle East, and it may take several years for risk-averse state companies like KPC to develop an expertise in the free-wheeling business of trading, according to Mohamed at FGE and Jakob at Petromatrix.
“Independent traders will keep doing business, since state oil companies are still focused on supplying their main local markets,” Al Ghurair said. “The state companies are building their capabilities, but they’re not there yet.”
Peter Grauer, the chairman of Bloomberg LP, is a senior independent non-executive director at Glencore.
— With assistance by Fiona MacDonald, Andy Hoffman, Rakteem Katakey, and Francois De Beaupuy