Canada's Biggest Oil Casualty To Date: Calgary's Nexen Shutters Oil Trading Desk

Tyler Durden's picture

Last December, traditionally permabullish energy trader Andy Hall shocked the world when he became the first casualty of the oil crash after Phibro, his 113 year old employer then owned by Occidental Petroleum after its sale by Citigroup, would liquidate in the US after it failed to buy a buyer. He wouldn't be the last. Overnight, Nexen Energy, a wholly owned subsidiary of China's CNOOC Ltd, reported it too would close its crude oil trading division following a round of job cuts announced last week, four market sources said on Monday.

It appears that unlike money-losing shale producers, who still have some balance sheet capacity to eek out funding for a few more weeks/months of operations and product dumping (which sends prices of oil lower not higher which is what those same producers need), oil traders who largely are self-funded no longer have that luxury, and as a result of the failure of oil to bounce, have no choice but to fold it in.

From Reuters:

The Calgary-based company, which was acquired by state-controlled CNOOC in 2013 for $15.1 billion, cut 400 jobs last week in North America and the United Kingdom in response to plunging global oil prices.

 

Three sources said Nexen was closing down its trading operations worldwide, although the majority of activity takes place in Calgary. The company will continue to market its own crude.

 

Nexen did not immediately respond to requests for comment.

Just how big is Nexen's oil trading desk? It's huge. Or was. "In Canada, Nexen's crude oil desk is the biggest trading casualty so far of the global oil price rout. One market source said Nexen was among the top five physical crude trading shops in Calgary and the move would impact liquidity in the Canadian market. "There will be some unhappy brokers in town," the source said. "But this is more consistent with the business model that CNOOC has."

In 2010, Nexen sold its North American natural gas trading book to Goldman Sachs  for an undisclosed sum after Nexen earlier said it wanted its business to reflect production weighting toward crude oil. The deal gave Goldman a business that Nexen said was one of the top 10 in gas trading on the continent.

The good news is that with ever more levered speculators who trade puerly in the derivatives space, while hardly if ever actually taking physical delivery, the likelihood that oil will trade based on actual supply and demand dynamics of the underlying commodity grows by the day, which is to be expected: after all it was the relentless surge in oil price in the early 2000 that led to the explosion in commodity traders. Now, it's payback time.

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PartysOver's picture

With each Shuttering brings closer to the day $100 oil.  Only a matter of time before Saudi wins this oil econ war.

wrs1's picture

What does win mean? That they lose the most money?

PartysOver's picture

 

Putting the marginal producers out of business (shale, sands, deep water, etc) thereby taking back control of price via supply metrics.  Pretty simple concept.   Put your compititors out of business and take their market share.

wrs1's picture

That hasn't happened and they have been losing mpney hand over fist the last 8 months now.  They need oil over $90.  You guys on ZH aren't in the oil business and the traders who thought it would just belly up if they forced the price down, miscalculated the situation badly.  There is far more oil promised for delivery on the NYMEX than will be made available. What do you think that will do for the price when delivery is due and the oil isn't there?  Furthermore, the Saudis only export about 7mbbl/day and the world consumes over 80mmbbl/day of crude oil so they are a marginal producer at best.  What market share have they gained?  Their production is up far less than the US which is continuing to rise despite all the wild claims made about shale oil being a sham on this blog and others.

gmak's picture

Unfortunately, as with precious metals, paper beats rock.  Being able to sell unlimited paper oil and roll it forward creates the same situation as for gold. The price does not appear to reflect reality (supply / demand) and yet it continues to stay low. Occasionally, there are lurches upward as adjustments are made in the paper market - but for the most part the paper price trumps the real price.

wrs1's picture

Then why all the yip yap about supply if paper is all that matters?

Au Member's picture

Propaganda, disinfo, smoke and mirrors, mocking bird?

aVileRat's picture

It matters because Nexen trading had a huge lease book and generally did marketing services for many juniors in the area who lacked their own ability to market volumes or fill local line capacity on their own. It also matters since they had a major stake in Buzzard, which is one of the last pricing points for the 40's and by extension the Brent pricing point. Its mostly all market depth related, and impacts the ability for local, regional producers to get better netbacks should major trading brokerages elect to not pick up the market slack caused by Nexen exiting this marketplace.

If paper never stands for delivery, then you are ok as it just rolls over. However on the off chance a major outage or market disruption suddenly calls all contracts to delivery, and sudden physical shortages in a just-in-time scheduling contract are unable to fill, then those on the delivery side will need to panic and buy spot. Which will lead to a massive blow out in arb to benchmarks. And if you are a major local or regional price point, that could be a very bad day for the brokerage, and all who are hedged off that price point.

I think the last time this 'end of days' happened was when Iran had their revolution, but the details around how this actually affected people not booking ships at the time are hazy to me. Someone else can fill in the blanks here.

 

Augustus's picture

As long as physical oil is going into storage there is little that paper trading can do to raise prices.  Someone is holding inventory that is costly to hold if there is no immediate need for it.  Producers have all the inventory they need in the form of reserves.  Someone in the paper trade market is getting delivery while the spot price will be declining.

wrs1's picture

Physical oil always goes into storage.  There is plenty of storage to continue to add but the fact is, the refineries will be ramping up gasoline production and draining that storage soon.  Then the refined product will be moved to refined product storage tanks and an argument about the price of gasoline can ensue.  The crude storage tanks are nothing more than a buffer between raw material production and the producers of refined products which drive the economy.  How much is in the storage isn't a good proxy for the value of the raw material.

junction's picture

Just as in the rest of the world, the organizational oil pyramid is shedding middle man jobs.  These commodity trading desk jobs were a great deal for the guys who had them, no heavy lifting and a good salary.  Oil will go back up in price, first to about $65, but the oil trading jobs are gone forever.  

Carpenter1's picture

P.O. is deeply confused about what's going on here.

101 years and counting's picture

get rid of speculators and oil will finally start to resemble economic value.  somewhere in the low-mid 30's.

wrs1's picture

You know this how?  It's your made up price for the value of oil?  

Seasmoke's picture

That was a long time for payback. Guess revenge really is best served up cold.

wrs1's picture

This also means that liquidity in the derivatives markets will fold up like a house of cards and the ellers of  those 550m barrels of futures  through december based on 50m bbl of Cushing storage will find that they have  a small problem with delivery upcoming.  No one ever asks how Cushing can support 550m bbl of delivery committments apparent in the futures sold through december when the current storage is only 1/10th of that.

gmak's picture

Good point. Maybe the day of reckoning is at hand.  It's a little harder to lease / borrow oil against promises than the games played with gold and the central banks.  Can there be re-hypothecation of oil?

Kayman's picture

wrs1

The paper world delivers paper. Or more accurately electronic digits deliver electronic digits- it can/will all be washed through.

Kayman's picture

wrs1

The paper world delivers paper. Or more accurately electronic digits deliver electronic digits- it can/will all be washed through.

wrs1's picture

Then why trumpet the supply build at Cushing if it's only about paper or bits in a computer?

Augustus's picture

Cushing does not have to supply the 550m barrels.  Every day there is another 9,000,000 bbl produced and delivered to someone, somewhere.  If there is more being produced than consumed, inventory builds above ground.  someone took delivery of that excess supply that is costly to store.

wrs1's picture

They are the delivery point for the contracts mentioned.  So you can't have it both ways.  Either the NYMEX CL contract is a paper sham and what is in Cushing doesn't matter or it does.  So which is it?  

Dubaibanker's picture

I guess it is a move by the Chinese to withdraw trading as well as liquidity from North America at the same time when they are just about to start oil trading in Yuan/Renminbi.

Smart long term planning, some would say.

China Opening Crude Futures to World in Quest for Influence
gmak's picture

Bring in the algos. Let them fake liquidity. It seems to work everywhere else.  heh.

firstdivision's picture

...and just think how there was a "shortage" of natty last winter

In 2010, Nexen sold its North American natural gas trading book to Goldman Sachs  for an undisclosed sum after Nexen earlier said it wanted its business to reflect production weighting toward crude oil. The deal gave Goldman a business that Nexen said was one of the top 10 in gas trading on the continent.

The beauty was how much GS was bothering us to go into long term contracts that would make us long natty as the price was spiking above $4 last summer.  I knew those assholes were the reason for the problems experienced in the NG market last winter, which nearly brought down the grid in the entire NorthEast.

astoriajoe's picture

Maybe you should relate your story to Mr. Tsipras. It would probably be quite valuable to him.

wrs1's picture

Yes there was but in Feb 2012 it was projected that NG storage was going to fill up by Nov and the people that bought puts on that basis were slaughtered by September as NG rose 50% over the next 6 months.

wrs1's picture

Interesting that refiners don't really want the stuff coming from Cushing.

 

http://www.firstenercastfinancial.com/news/story/62107-us-refiners-turn-...