Analysis: BP, Brightoil vie to lead fuel oil as dynamics shift

By Yaw Yan Chong

SINGAPORE (BestGrowthStock) – China’s Brightoil (0933.HK: ) is wrestling with top players BP (BP.L: ) and Shell (RDSa.L: ) for leadership of the world’s largest fuel oil market, in a tough trading climate that makes it difficult for any one player to hold market dominance.

Plentiful storage capacity and the gap left by a less active BP, which had led Asian fuel oil trade for over a decade, have shifted market dynamics, resulting in poor margins and limiting traders’ ability to wield influence over prices.

While Brightoil has shown appetite for large and potentially risky positions in the swaps market in the last two months, it needs to build the same physical infrastructure and credit worthiness as the largest traders to be viewed as a major player.

“The market and trade volumes have grown significantly larger that it would be very difficult to any single player to assume the mantle of leadership,” said oil consultant Yeo Ek Thoe.

“There are simply too many big players on the scene now, particularly the Chinese, such as PetroChina and Sinopec, whose volumes are growing, never mind all other traditional players.”

BP has reduced its presence and trade volume, after it lost some 20 staff from its global fuel oil and Asian bunker trading teams since May, most of whom crossed over to Brightoil.

Six of them, including the Chinese firm’s new CEO Quek Chin Thean, have been sued by the oil major for breach of contract.

Spokesmen from BP and Hong Kong-listed Brightoil declined to comment on their plans and trading activities.

Fuel oil, used mainly for ships and power generation, makes up the bulk of product trading volumes in oil hub Singapore, totaling 5 million tons of physical cargoes a month and long dominated by a clutch of five trading firms other than Brightoil.

SHELL EXPANDS

Oil major Royal Dutch Shell has also increased its trading in the swap market in the past two or three years, using a 300,000-350,000 cubic meter commercial storage facility outside its Singapore plant to improve its trading flexibility.

Storage allows market participants the flexibility to buy more oil than they need when prices are cheap and to sell when the market rises. But storage-backed trading plays become more difficult when several players hold similar-sized facilities, as is the case in the Asian fuel oil market.

“A bull player could end up drowning in oil or a bear player can be squeezed for every single drop he has, before either of them can achieve their price objectives,” said a Singapore-based Western trader, who declined to be named due to company policy.

In the last three months, Shell has emerged as the largest player in the swaps market, which is at least thrice the size of the physical market. Since June 1, Shell has traded 3.2 million tons of swaps, as part of a trading play in fuel oil’s viscosity spread — the price difference between the 180- and -380-centistoke grades, Reuters data show.

But none of the other three big players — Glencore (GLEN.UL: ), Vitol (VITOLV.UL: ) and PetroChina (601857.SS: ) — have since June mounted any aggressive and extensive trading plays aimed at impacting prices, save for short-term pricing activities, due to the tough market environment.

The three have been less active during the daily Platts pricing window period, trading less volumes in the physical and swaps markets.

Fuel oil storage capacities in Singapore, including onshore and floating tanks, have more than doubled to about 10 million tons since 2006, while demand has lagged at around 5 million tons during the same period.

Although demand from the Singapore marine fuel market has grown 8-10 percent annually for the past five years, the gains have been offset by less demand from China’s utility market and regional bunker ports such as Hong Kong, South Korea and China.

BRIGHTOIL’S ASCENT

To meet its ambitions to compete with big players, Brightoil is planning to build nearly 15 million cubic meters of storage capacities in China. It is also seeking additional tank space in Singapore.

The firm, which began trading in Singapore four years ago, aims to base its global trading business in the city-state to also trade distillates and crude, with a projected worldwide trading staff of 85. It has been on an acquisition trail in the past year.

While most of the traditional leaders are taking a guarded approach, Brightoil has increased activity in the pricing window since June, trading some 1.9 million tons of fuel oil swaps. BP’s trading volumes since June 1 are marginally more than Brightoil’s.

But the bulk of the Chinese firm’s volumes — 1.7 million tons comprising mainly front-month, fixed-price contracts — were transacted more recently in July-August, indicating their higher profile, Reuters data show.

In contrast, most of BP’s volumes totaling 1.6 million tons were traded in June-July, a spillover from a bull trading play that began before the resignations. The major’s trade activities have since slowed.

Brightoil has also been the most active player in the past one month — even eclipsing Shell — trading 990,000 tons, including taking a fresh long position totaling 455,000 tons from August 13, buying the September contract from a high of $452.25 a ton to a low of $436.25, up till last Tuesday, and sold a slight 25,000 tons on Monday.

Its average buying price for these volumes are $449.45 a ton, according to Reuters data, versus Monday’s close of $449.50, and resulting in a position that is theoretically marginally balanced.

Traders said Brightoil’s current buying spree is not a trading play but that it is speculatively long on the fixed-price September contract.

“The only one that has made any waves in the market in the past two months has been Brightoil,” another Western trader said. “It would seem that they are raising their profile and positioning themselves to be a market leader.”

BP’S ABDICATION?

It was too soon to conclude BP has yielded its market leadership as it rebuilds its once-feared fuel oil team, traders said. BP has already replaced some of the staff, appointing new global and Asia trading heads and hiring two traders externally.

But traders see the new team as short on experience versus the previous group, most of whom had been with BP for more than 10 years and had been through many of its bold trading plays.

As well as a tough market, the new team must also contend with tightening trading policies at BP against a backdrop of stricter oil market regulations in the West and the losses the major has faced in the wake of the Gulf of Mexico oil spill.

In court documents filed by former BP trading staff, they said their resignations were prompted by the changes that made their work more difficult.

The moves also diminished their roles, while compliance officers were focused on policing and penalizing individuals for breaches, a practice some traders deemed oppressive, the filings showed.

“The question is also whether BP, as a company, wants to, or can, continue trading in the style that it has before, under the more rigid internal climate,” said a veteran Asian trader.

BP’s message is clear — it expects to remain a key player in Asia. Clive Christison, Director and CEO of its Eastern Hemisphere Integrated Supply & Trading division, said in an email to team leaders in the wake of the resignations that the firm’s strategy stays the same and it will rebuild and move on.

(Additional reporting by Jasmin Choo; Editing by Ramthan Hussain)

Analysis: BP, Brightoil vie to lead fuel oil as dynamics shift