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.
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.