Challenging Oil Market Drags Trafigura’s Profit Down 53%

One of the world’s biggest commodity traders, Trafigura, reported on Wednesday a 53-percent decline in profit for the six months ending March 31, 2018, as the oil market structure radically changed at the end of last year in response to OPEC’s production cuts.

Despite higher traded volumes, Trafigura’s profit plunged by 53 percent to US$222 million in the first half of the financial year ending September 2018, after the oil market structure flipped to backwardation from contango—a major shift in the structure that makes holding oil stocks costly. The increased profit in its metals division was unable to offset the profit decline in the oil and petroleum products trading division.

The drop in net profit was also partly due to the necessary re-measurement of deferred tax assets following the U.S. tax overhaul, the commodity trader said.

Trafigura’s gross profit in the Oil and Petroleum Products trading division dropped to US$299 million from US$652 million for the same period a year ago. The Metals and Minerals trading division saw gross profit rising 16 percent to US$680 million.

Trafigura’s traded volumes in oil and petroleum products grew by 16 percent from the same period a year ago to an average of 5.8 million bpd, while the traded volumes of metals and minerals surged by 48 percent, mostly driven by minerals.

“The fall in profitability was the result of a major shift in the oil market during the period from a contango structure, where forward prices are higher than spot prices and act as an incentive to hold inventories, to the opposite condition of backwardation, where holding stocks is costly. The oil market became backwardated in October 2017 as a consequence of rising spot prices in response to production curbs led by OPEC,” Christophe Salmon, Trafigura’s Group Chief Financial Officer, said.

Related: OPEC’s Second Biggest Producer Faces Instability

“When it became apparent that backwardation was likely to continue for a prolonged period we undertook a substantial restructuring of our trading books, reducing costs by shrinking inventories and radically adjusting our storage commitments. Before this overhaul could take full effect, trading margins came under significant pressure,” Salmon added.

Looking ahead, Trafigura thinks that “the restructuring of the oil trading positions and current increased volatility across commodity markets should have a positive impact on the second half of the 2018 financial year.”

By Tsvetana Paraskova for Oilprice.com

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