Commodity Traders Warn Mega Profits Probably Won’t Be Repeated

(Bloomberg) -- Top commodity traders have been reporting record profits for last year after cashing in on the fallout from Russia’s war in Ukraine and the global energy crisis. Now they’re starting to warn the blockbuster numbers probably won’t be repeated.

The war upended supply chains for crucial raw materials such as oil, gas and grains, driving up prices and fueling volatility that traders crave. That helped companies including Trafigura Group, Mercuria Energy Group Ltd. and Glencore Plc to book record profits last year.

And though many are only just reporting those windfall figures, some are cautioning that results likely won’t be as spectacular for this year.

After a rush to secure commodities supplies, products like Russian fuels are ultimately finding their way to willing buyers and disruptions to crop cargoes have eased — curbing price swings. Plus, oil markets have priced in much of the lost Russian supplies in the wake of sanctions and revived demand from China’s reopening.

This year “is going to be very different from 2022 in all likelihood, both in terms of price volatility and in terms of profitability and margins,” Vitol Group Chief Executive Officer Russell Hardy said at the FT Commodities Global Summit in Lausanne, Switzerland. “It’s a much more conservative market going forward.”

His warning was echoed by Mercuria CEO Marco Dunand, who also pointed to Europe now having more gas capacity. Gunvor Group chief Torbjorn Tornqvist said it’s hard to see a plausible event that could create the type of oil volatility as already seen.

Less Opportunity

As commodity markets normalize a year into the war in Ukraine, it becomes harder for traders to rely on extreme dislocations in fundamentals to put on positions and benefit from arbitrage possibilities. There’s also a view in the energy sector that the tug-of-war between tight supplies and the impact of high borrowing costs on demand will keep markets largely steady for most of 2023.

Volatility was among the most mentioned topics during a three-day marathon of oil parties and meetings that gathered at least 600 traders, marketers and brokers in San Antonio, Texas, last weekend. The prospect of oil rising back to $100 seems to be losing steam in the face of recent financial market turmoil, suggesting that the price range will be much narrower this year.

Still, it’s unclear what the rest of this year will actually bring and traders’ 2023 earnings could well remain historically strong. 

For example, oil has been whipsawed recently as the market digests the sudden banking crisis and how US interest rates may play out. And in the grains world, there’s still uncertainty over Ukraine’s future shipments even with the latest renewal of an export deal.

“I’d be surprised if we get the same levels this year,” said Ernst Frankl, who leads consultancy Oliver Wyman’s global commodity trading and risk practice. But “compared to what it was like before, it just takes a small disruption to create volatility and opportunities for the traders.”

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