© FT montage; Bloomberg

For physical oil traders who have grown used to churning out big profits during the crude slump, BP’s chief financial officer summed up the new reality: the market, Brian Gilvary told investors after its fourth-quarter results, has turned “flat as a pancake”.

He was referring not just to BP’s lacklustre results for the period, in which its integrated supply and trading unit slipped to a small quarterly loss, but to movements in the shape of the oil forward curve, which for the past two years has provided an easy source of profits for the world’s biggest traders.

During the price crash that began in 2014, a glut of barrels forced prices in the spot market down so there were at big discounts to those for later delivery — a market structure known as contango — allowing traders with access to storage to buy them up cheaply and lock in profits through futures contracts using so-called “carry” trades.

BP and other big oil traders, from rivals like Shell and Total to the independent giants such as Vitol, Glencore, and Trafigura, were all able to use this tactic to boost profits during the slump, with some throwing billions of dollars at the trade.

But the recovery in oil prices to around $55 a barrel from $30 this time last year, helped by supply cuts from Opec and Russia, has almost wiped the contango structure out, flattening the forward curve as spot prices and later dated contracts converge.


Chart: Brent crude price

1. Brent crude price hits 12-year low

2. Doha talks end in failure

3. Opec reaches agreement on how to distribute output cuts

4. Non-Opec producers such as Russia agree to join oil deal

5. Opec oil production cuts due to take effect


“A large contango structure is always a gift to anyone trading physical oil,” said Olivier Jakob at Petromatrix, an oil trading consultancy. “With the current structure they’ll now have to work a little bit more for their money.”

The shift is important as higher trading profits have been one of the few shields for oil companies during the crash, alongside stronger refining margins that were also boosted by cheaper crude. Shell said last week that trading results had “flattened” in the fourth quarter.

While the companies no longer break out separate figures for trading, the sums involved are substantial. In 2005, the last year BP published trading results, profits from oil, gas and power dealing reached $2.97bn before tax and interest.

Two years ago BP allocated its trading division an extra $1.4bn in working capital, when Brent crude oil was trading at a $7.50 discount in the spot market compared with prices just six months later. That year trading contributed to record downstream pre-tax earnings, including BP’s major refining operations, of $7.5bn.

But the cash taps are now being tightened for trading, partly as the six-month Brent spread has shrunk to just $1 a barrel today.

“We keep a discipline on how much oil we use in contango trades,” Mr Gilvary, who ran BP’s trading unit between 2005 and 2009, said on Tuesday. “We want significant returns way above working capital.”

The flattening of the oil curve may now shift the balance towards financial traders. Investors who want to bet on oil’s recovery have paid a premium due to contango, as rolling future positions each month required them to sell spot contracts at a discount before buying a higher-priced replacement.

Hedge funds have already established the largest-ever bet on rising crude prices and Goldman Sachs has forecast the forward curve could soon move into backwardation — when spot prices trade above those for later delivery — if Opec’s cuts succeed in tightening the market.

“This would create a positive carry for commodity investors,” analysts at Goldman Sachs said. “But [it] would be negative for companies, including the integrateds, that benefited from lucrative storage trades over the last two years.”

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