Trafigura has warned of further challenges for the energy, and metal, markets, with higher prices for some time, although also reporting record profits.
Commodity inventories are “perilously low”, the company said in its interim report. Demand is outstripping supply and this comes after a “sustained period of structural under‑investment in natural resources production over several years”.
Signs of trouble emerged in Europe’s gas markets over the winter but Russia’s invasion of Ukraine triggered price spikes. Oil prices have followed a similar trend, it noted.
One area of concern is that while oil has become more expensive, it has not triggered a supply response.
OPEC+ members have been adding production in order to reverse cuts imposed at the start of COVID-19, in 2020. However, while the group has a policy of adding 400,000 barrels per day per month, it has only actually been able to add around half this.
Trafigura attributed this to “years of under-investment”, in addition to political turmoil in places like Libya.
“Most countries were already producing at their maximum sustainable capacity well before the invasion,” the trader said. Only Saudi Arabia, Iraq and the United Arab Emirates are able to add meaningful volumes at this point, it continued.
Russia expects production to drop by more than 15% this year, as sanctions bite.
Meanwhile, the US has also been slow to add more production. The country’s output has reached 11.9 million bpd, still substantially below the 13.2mn bpd before the pandemic. Since the end of 2020, the US rig count has increased 115%, but production is up only 8%.
There is a need “for significant further spending in order to raise production levels back to pre-pandemic levels”.
At some point, high prices will reduce demand. Trafigura noted that governments had chosen to provide subsidies and tax cuts in order to shield their populations from the impact of high prices. As a result, demand may hold up “for some time yet”.
Amid this, trading conditions have also been challenging. Trafigura said “market risk management” was difficult as a result of more margin calls and position limits. As a result, hedging is more expensive and difficult.
Reduced access to derivatives puts pressure on traders’ abilities to move physical commodities.
Trafigura said it had built up a liquidity buffer in order to “weather the unprecedented turbulences in both the physical and derivatives commodity markets in late February and March 2022”.
Despite these concerns, Trafigura said it expected “robust profitability” in the second half.
The trader reported its strongest ever profits in the six month period to the end of March, reaching $2.66 billion. Revenues were up 73%, to $170.6bn, while EBITDA was up 26% at $4.71bn.