Oil majors ditch third party crude trading, focus on own volumes in flooded market
By Olga Yagova and Devika Krishna Kumar
MOSCOW/NEW YORK (Reuters) - In a market oversupplied with crude and related products, traders at big oil companies are focusing on placing their own production and refusing to deal with third party volumes as the cost of storage soars.
Oil companies worldwide are scrambling to find a home for their output as they grapple with the fastest and deepest ever collapse in demand, with the coronavirus pandemic shuttering industry and keeping much of the world at home with little need to drive or fly, while both floating and inland storage is fast filling up.
Majors including ExxonMobil <XOM.N>, BP <BP.L>, Total <TOTF.PA>, and Russia's Lukoil <LKOH.MM> are among those shutting out third parties in an attempt to move their own output and avoid cutting production, five trading sources familiar with the companies' strategy told Reuters.
"We're instructed to focus on our group production as a priority and have to cut most of the trading activity due to the risks," a source with a European major said.
ExxonMobil, BP, Lukoil and Total did not immediately respond to a request for comment.
Refining consultants and traders say the industry will need to cut output by 30% or more within weeks, while smaller and financially weak oil refiners may not emerge from the crisis.
NO TRADING
According to three market sources, Lukoil's trading arm Litasco, which has been active in trading third party oil and products, has slashed such activities to focus on placing barrels produced by the Lukoil group of companies.
"The focus is to place all Lukoil's volumes, other projects are not a priority now", one of the sources familiar with Litasco's business strategy told Reuters.
A source in the U.S. oil market said that Litasco was clearly reducing third party trades, in line with other majors.
"It's a new trend we clearly see. Those who have production try to place the oil with their own refineries," a source in the Mediterranean oil market said.
Smaller oil producers and refiners which rely on oil majors to purchase their volumes face more difficulties, traders said.
"Crude is simply not needed here and there. You're lucky if you place anything at all", a trader in the European oil market said.
Those majors tied into term contracts with other producers are taking as little volume as is possible under the agreements, two traders said.
"We cut our purchases to minimum volumes...but we send most of it to storage anyway. There is a ban on any new buy contracts", a source in a European oil company told Reuters.
Another source at a large merchant in the U.S. oil market said that if the majors stopped buying third party crude entirely, the non-integrated producers would likely suffer first, while another source at a shale producer said smaller U.S. producers were struggling because of the pullback by the majors, especially as credit lines dried up.
(Additional reporting by Dmitry Zhdannikov in London and Bate Felix in Paris; Editing by Kirsten Donovan)
