Occidental Petroleum’s deal to acquire Citigroup’s in-house commodities unit solves regulatory problems for the bank and could add a group of savvy arbitrageurs to an oil company not known for its trading prowess.
It marks the latest episode in an exodus of specialised commodity trading talent from banks coping with greater government say over compensation.
Oil groups such as BP, Royal Dutch Shell and Total were able to blunt the slide in crude prices earlier this year through extensive oil-trading operations, taking advantage of extensive storage and shipping assets to exploit idiosyncrasies in the futures prices.
Occidental, based in Los Angeles, “has not been an aggressive trader, and has not been an aggressive hedger”, said Ben Dell, energy analyst at Sanford C. Bernstein in New York. “This is a significant break with company strategy and will come as a major surprise to investors.”
Phibro’s departure from government-backed Citi will probably relieve the bank from criticism over a potential $100m pay-out to star trader Andrew Hall . Occidental said Mr Hall and other employees would remain with the company, adding that senior management plans to make a “significant investment” in the group.
“There obviously was some pressure from the government” to sell, said Stephen Chazen, Occidental’s chief financial officer. “[Citi] called and asked if we were interested.’’ He called Occidental’s existing trading business “sizeable”.
The move could shelter Citi from the Commodity Futures Trading Commission, the US regulator that is threatening a crackdown on energy market speculation. Citi is also under Federal Reserve oversight for the risks associated with Phibro’s oil and natural gas trading.
If the CFTC imposes new limits on speculators’ participation in futures markets, “by moving over to Occidental, Phibro essentially will probably not be subject to any of these”, said Phil Verleger, an energy economist and longtime acquaintance of Mr Hall. Over the past five years Phibro had earned an average of $371m annually, Occidental said.
The split from Citi is the latest evidence of a trend in which commodities traders are walking out of Wall Street banks to join trading houses, oil groups and hedge funds amid the regulatory clampdown on bonuses, reversing a flow of traders joining banks between 2003 and 2008.
“Who wants to be trading commodities in Wall Street where a regulator is going to set your salary?” said the head of oil trading at a major commodities bank.
Bankers said that traders from banks with large commodities business – including Goldman Sachs, Morgan Stanley, Barclays Capital or Deutsche Bank – had left their positions to join the leading independent oil trading companies such as Vitol, Glencore, Trafigura, Gunvor and Mercuria.
BP and Shell have also recruited traders from investment banks. Noble Group, the Hong Kong-based trading house, has been taking a “significant number” of traders from banks as it builds its oil trading business, headquartered in London. George Stein of Commodity Talent, a New York-based headhunter group, said there was no question “looming compensations …have triggered a move of commodities traders from banks into trading houses and hedge funds that were less likely to come under regulatory scrutiny”.
The deal signals the latest ownership change for Phibro, which bought Salomon Brothers in 1981 for $554m, later becoming part of Citigroup. The controversy over Mr Hall’s pay was also not Phibro’s first. Marc Rich, the commodities trader and later fugitive who was pardoned by President Bill Clinton, left Phillips Brothers in the early 1970s after being unhappy with his share of the company’s profits, taking with him other top executives.
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