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Haley Zaremba

Haley Zaremba

Haley Zaremba is a writer and journalist based in Mexico City. She has extensive experience writing and editing environmental features, travel pieces, local news in the…

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Paper-Thin Profit Margins In Oil Push Traders To LNG

With thin profit margins growing even thinner in the crude oil sector, commodity trading houses have been looking for the next big movement in the energy industry to sink their teeth into, and they’ve found that new horizon in the liquefied natural gas sector. Some of the biggest commodity trading houses around the globe have recently gotten involved in boosting liquefied natural gas and remodeling the energy industry as a whole to fit this new focus.

Among these commodity trading giants are the companies Gunvor Group Ltd., Trafigura Group Pte. Ltd. and Vitol SA, which have all gone from simply trading liquefied natural gas to investing vertically into ships and terminals involved in the chain of production. The injection of investment dollars from big trading houses such as these has majorly catalyzed the growth of the liquefied natural gas sector, helping physically move much more product than the industry’s infrastructure has been able to transport before.

Since the 1970s when big commodity trading houses moved away from Big Oil’s traditional model of long-term binding contracts, the market has changed drastically to become the rapid-fire system we see today, where cargoes change hands at lightning speeds. Now, this kind of spot trading is on the rise in in liquefied natural gas more than nearly any other sector. This development has given considerably more flexibility to a vast range of utilities like Centrica Plc and RWE AG to buy more gas and therefore move away from much dirtier and high-polluting coal. “It looks like a much younger crude oil market,’’ said chief executive officer of Vitol Russell Hardy, as quoted by Bloomberg. “It is an area that can grow and that is a positive for us.’’ Related: New Middle East Alliance Shakes World Powers

In fact, the top three commodity trading houses that have become active players in the liquefied natural gas industry, aggressively raising their delivered volumes by a factor of more than two over the past couple of years, leading to these three companies comprising nearly 9 percent of the total global trade in 2018. This being said, commodity traders still have not come close to eclipsing the industry leader Royal Dutch Shell Plc, which remains on top by a wide margin, taking 22 percent of the global trade as well as stakes in liquefied natural gas plants and import terminals.

When it comes to independent liquefied natural gas traders, the industry leader is Switzerland-based energy trader Gunvor. The company earned this title last year when it increased its delivered volume by a whopping 60 percent from the previous year to a total of 11 million mt. "I think gas shows strong growth and also fits into the transition to something cleaner, both for the air and for CO2. So if you can replace coal with gas a lot of things will be achieved, so that's attractive," Gunvor CEO Torbjorn Tornqvist said in an interview with S&P Global in Lausanne, Switzerland. Related: China’s Power Play To Get Its Hands On Foreign Oil

Where there were just 150 people working in liquefied natural gas trading and sales ten years ago, there are now a whopping 800 according to data from industry insider and hiring firm for trading houses, producers, developers and utilities Connexus Search--and that’s a conservative estimate. As Connexus Search managing director Alex Lee told Bloomberg, “Five to 10 years ago, it was really immature. Now we see LNG become a much more of a traded commodity, like oil, like metals, as the market becomes more liquid.”

The rush toward natural gas is not simply a reflection of how promising and dynamic that industry is, it’s also a direct result of the razor-thin margins in the crude oil sector. Whereas commodity traders could depend on the profitability of oil just a decade ago, earnings from the crude industry have remained flat, even as commodity trading houses now trade as much as two and even three times the amount of oil they did ten years before. Even as the oil business continues to loom large, with physical crude deliveries totaling at least $2.3 trillion each year, liquefied natural gas is seeing much more rapid growth than it’s bigger and slower competitor. In fact, according to Shell, liquefied natural gas will be the number one fastest-growing part of the fossil fuel industry by next year, when LNG volumes will be more than triple what they were just 20 years ago.

By Haley Zaremba for Oilprice.com


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