ExxonMobil Trading Strategy Shift Focuses on Refined Products
Seismic strategic changes are in progress for the world’s largest oil major, ExxonMobil.
The company is much more aggressive and strategic than it was under the aegis of Rex Tillerson, who essentially maintained the steady course that was pursued by predecessor Lee Raymond for both Exxon and the subsequently merged ExxonMobil.
Both CEOs steered the world’s largest oil company on very conservative paths that emphasized oil and gas production, refining, petrochemicals and marketing. But notably, those leaders eschewed the trading-for-profit segment that often delivered compelling results for competitors like BP, Shell and Total.
ExxonMobil Trading Heads Back to the Future
In many ways, ExxonMobil in 2018 looks more like Mobil did in 1997 and 1998 before the merger. Prior to the deal, Mobil had a stable of traders and embraced the futures market with teams that would regularly tie sales to NYMEX contracts.
For nearly 20 years thereafter, ExxonMobil largely avoided trading futures or even physical oil, save for the occasional deals needed to balance its broad system. It was not uncommon in the late 1980s or 1990s to have a single Exxon supply executive managing multiple products through all the U.S. bulk markets, avoiding risk but also ignoring the potential that trading as a profit center afforded other multinationals.
Riding the Global Trade Tide
Global trading (on both a paper and wet-barrel basis) has exploded in the last 15 years, and plenty of observers believe that it will continue to grow far faster than actual petroleum demand. Global demand expansion will help, with most number crunchers expecting world consumption to surpass 100 million b/d in some peak months in 2018.
It’s uneven growth, however, with demand in developing countries far outpacing sleepy upside in the U.S. or Europe. And U.S. refiners, particularly along the Gulf Coast, look to be advantaged because of the oil shale boom, complex processing equipment and cheap natural gas.
ExxonMobil already has three world-class refineries in Texas and Louisiana (Beaumont, Baytown, Baton Rouge) that collectively process about 1.45 million b/d of crude. The company has hinted that it might add more than 300,000 b/d of additional capability at Beaumont, and with $50 billion earmarked for U.S. Gulf Coast properties, funding won’t be an issue.
So not surprisingly, ExxonMobil’s new emphasis on trading as a profit center is seen most dramatically in that region.
Refined Products Trade Transformation
Consideration of a full-scale worldwide trading division was first reported by the Financial Times (FT) in October 2016 when Rex Tillerson was in his final months at the helm. It was thought then that the company might focus on crude oil, but OPIS sources have subsequently observed ExxonMobil solely in the refined products arena. Current ExxonMobil CEO and Chairman of the Board Darren Woods headed up global refining before taking the top job, so he may have played a key role in the company’s recent transformation.
With nearly 5 million b/d of global refining capacity, ExxonMobil has a structurally long position in refined products markets, whereas they tend to be net buyers in crude oil, despite fast-growing production in the Permian and throughout the world. ExxonMobil occasionally shows up on U.S. deal sheets for crude, but sources ascertain that transactions are largely tied to system balancing. Feedstock markets show a similarly still-conservative tack. Trading refined products is where the company is turning heads.
Growth, Value, Simplify
Those three terms, embodied by the acronym “GVS,” are said to be the three corners of ExxonMobil’s new opportunistic philosophy. However, companies that have often transported ExxonMobil gasoline, diesel or jet fuel to other ports suggest that what is “growth” for ExxonMobil might represent “disintermediation” for some well-heeled independent trading firms.
Until recently, it was rare for ExxonMobil to move product directly to Latin American countries. The company would instead sell fuel FOB its Gulf Coast refineries to trading companies like Glencore, Gunvor, Mercuria, Trafigura and Vitol. Those companies would then take the barrels to destinations around the world, making for a simpler sales process for the major, but limiting the opportunity as well.
More recently, ExxonMobil is doing business with plenty of South American and Central American companies and doing so on a delivered basis. Some countries have even been offered assistance in financing terminal construction so they could take products more ratably in the future.
But the effort isn’t limited to the Western Hemisphere. Earlier this month, OPIS reported that ExxonMobil chartered a tanker for gasoline delivery from Singapore to the Pacific Northwest. There are reports that the company plans to opportunistically move other cargoes across the Pacific Ocean this spring.
“You would never hear ExxonMobil mention ‘arbitrage’, but it looks like they now have a new focus,” one global trader told OPIS, noting that kind of activity might be expected from BP, Shell or more veteran cargo traders.
Stateside, there are also reports that ExxonMobil has secured bulk tanks in New York Harbor (specifically, Linden, N.J.) for a gasoline blending operation. The company wouldn’t comment on the plans, but BP and Shell learned long ago that sturdy profits could be generated by gasoline blending in the region. Exxon would not comment on the reports of a nascent blending operation.
Back at the Gulf Coast, there have been substantial additions to the supply and trading staff at the sprawling Spring, Texas, ExxonMobil campus. Supply staff this month moved about a half dozen cargoes of Gulf Coast refined jet fuel to Europe, but it wasn’t clear whether the transshipment was for system needs or for sales motivated by an arbitrage opportunity.
Futures and Derivatives Not Emerging as Profit Generator
The FT story published in 2016 hinted that ExxonMobil might even look to use futures and derivatives to generate profits, in the manner by which BP, Shell and Total use their international expertise to “directionally trade.”
OPIS could not, however, find any evidence that the company was employing futures and derivatives for anything beyond traditional hedges. Examination of a recent SEC filing does include mention that the “Corporation uses commodity-based contracts, including derivatives, to manage commodity price risk and for trading purposes.” Such disclosure would have been viewed as anathema a decade ago.
Looking Ahead to Downstream Earnings Growth
Most observers believe that the more ambitious emphasis on physical oil trading is long overdue and can be specifically tied to the desperate need for gasoline, diesel and jet fuel from developing countries that do not have refining capacity. The collapse of the Venezuelan refining industry puts the onus on Gulf Coast refiners, where ExxonMobil has a dominant position.
Most OPIS queries to ExxonMobil were answered with reference to disclosures made in an “Analysts’ Day” presentation earlier this month. That presentation projected downstream earnings would double between 2017 and 2025 thanks in part to strategic investments at refineries in Baytown, Beaumont and Baton Rouge. It also mentioned projects slated for Rotterdam, Antwerp, Singapore and Fawley, U.K.
The company boasts 22 refineries worldwide in 14 countries, with a distillation capacity of 4.9 million b/d.
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