Lausanne traders losing no sleep

On the streets of Lausanne, on the shores of Lake Geneva, protesters demonstrated at the weekend against commodity trading firms’ use of the country as a base for their activities, and the limited transparency of their operations. On Monday, the bosses of the world’s leading commodity trading firms gathered at the 5-star Beau-Rivage Palace hotel in Lausanne to discuss the market outlook, following a period of high volatility and dramatic price falls.

The oil price bullishness on display amongst the trading firm executives at the FT Commodities Global Summit in Lausanne this week was, surprisingly, near unanimous.

“The down market is behind us,” Gunvor chief executive Torbjorn Tornqvist said.

“We have seen the bottom,” Trafigura’s chief executive Jeremy Weir said.

Mercuria chief executive Marco Dunand sees oil prices at “$50/bl-plus next year”.

The consensus is that global oil stocks will stop building before the end of this year. But this is not the same thing as the market rebalancing, as the chief executives recognise, leaving high crude and product inventories to work through. And this assumes no significant increase to supply in the meantime.

Talking of supply, one of the big topics at the FT Commodities Global Summit, especially on the sidelines, was the Doha producers’ meetings, and what it would mean for oil prices. Opec and non-Opec countries meet in Doha this weekend to discuss a multilateral output freeze. Crude prices have rallied this month, partly on hopes around an output freeze coming from the meeting. But there is plenty of scope for a bearish outcome.

Even an agreement to cap production at January or March levels would do little to ease the surplus. Glencore’s oil chief executive, Alex Beard, said there is huge opportunity for a positive surprise from the Doha meeting, and a chance of disappointment. Then there’s the question of Iran’s participation, opt-out, or otherwise in any agreement, as the country would like to reach output of 4mn b/d before considering self-imposed constraints after the lifting of nuclear-related US and EU oil sanctions early this year. Trading firms are finding it frustrating dealing with post-sanctions Iran. On the sidelines, trading and shipping executives complained about other countries’ opposition to the use of tankers that have called in Iran, and about lingering US financial measures that make transactions with Tehran difficult.

The political winds of change in Saudi Arabia provided another Doha-related talking point among trading executives in Lausanne, as they attempted to second guess what the country will propose at the producers’ meeting, and to determine who is really deciding oil policy in Riyadh.

Looking back, the oil trading firms in Lausanne said 2015 was one of their most profitable years on record, as volatility and a contango market generated trading opportunities. But they grumbled about regulation, and counterparty and credit risks, as usual, while companies in the agriculture sector were not so upbeat. Lucrative trade in agricultural commodities has been more difficult to find than in oil, with slumping prices and relatively low volatility. Trading firms trumpet the liquidity that their participation brings to markets, and volatile markets draw them in. “We need volatility to generate trading margins,” Cargill agricultural supply chain president Gert-Jan van den Akker said.

Higher food prices a few years ago helped trigger the Arab Spring. And the worsening geopolitical tension in Middle East, wracked by sectarian conflict, was a source of concern for many of the company executives at the conference.

And worries about politics and the economy were more widespread. Lower commodity prices should be good for consumers and the economy. But Vitol chief executive Ian Taylor explained that, although “lower oil prices are a global tax reduction”, the impact on the economy is limited because as the stimulus “comes off the back of the financial crisis of 2008-09, a lot of people got very worried about debt and people are cautious”. As a result when they get “that extra £20 they save from filling up their car, I am not 100pc sure they spend it”.

The executives spent time discussing the US presidential election and the risk of a Donald Trump victory, the refugee crisis on the edges of Europe, and the possibility of Brexit — a UK exit from the EU — all of which are potential causes of instability in global markets. Taylor is personally helping to fund the UK anti-Brexit campaign. “I passionately believe it is better for the UK to stay in Europe,” he said.

The mood, especially among the oil-oriented conference delegates, was up-beat. But scratching below the surface, plenty still troubles the trading community and they have many reasons for caution.

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