Two Top Commodity Traders Bet Big On The Future Of Oil

Two commodity trading giants are betting big on a Russian oil project in a rare move that could make or break the oil traders’ fates - and oil market observers should be paying close attention. When commodity trading major Trafigura bought a 10-percent stake in Rosneft’s Vostok Oil project, oil prices were trading below $50 per barrel. There were also forecasts that oil demand may never recover to pre-pandemic levels and that oil, in general, was on its way out.

Now, Trafigura’s peer Vitol has joined the company in its bet on eastern Siberian crude. Vitol, in a consortium with Mercantile & Maritime, sealed a deal with Rosneft last week for the acquisition of a 5-percent interest in the megaproject. Reuters has compared the project with the oil development of western Siberia in the 1970s and the U.S. Bakken play more recently.

Vostok Oil fully deserves its megaproject title. With reserves estimated at 2.6 billion tons of crude, equal to some 19 billion barrels, the group of fields that the Vostok Project spans could produce up to 100 million tons of crude annually once it reaches full capacity. Rosneft itself estimates the reserves of the fields at up to 44 billion barrels. 

The cost of developing the vast project is only fitting, at some $140 billion (10 trillion rubles) throughout its lifetime. Even with such a price tag, the project is expected to be profitable at an oil price of $35-40 per barrel.

Some medium- to long-term oil price forecasts see oil at these levels because of the energy transition. However, not all agree, especially now that we are all witnessing how fast oil demand is rebounding in key consuming markets. Brent crude is trading at more than $72 per barrel, and even West Texas Intermediate this week crossed the $70 threshold. There is already talk about $100 oil. Forecasts may need to be revised.

“The world consumes oil, but is not ready to invest in it,” Rosneft’s chief executive Igor Sechin said earlier this month in his keynote speech. In the same speech, Sehin warned that Big Oil’s low-carbon plan to reduce oil and gas exploration and production would lead to a deficit of supply.

“This trend [of low upstream investment] may become a ‘new norm’ for global majors and result in resource base depletion. The world runs the risk of facing an acute deficit of oil and gas,” Sechin said.

Of course, the head of the company leading the development of all those billions of barrels in eastern Siberian oil reserves has a vested interest in forecasting a deficit that would ensure the sustainability of the megaproject. The thing is, Sechin is far from the only one predicting a deficit of oil and gas due to low investments in new production.

The International Energy Agency last month shocked the energy world by calling for an end to new oil and gas exploration investment by the end of this year or 2022 at the latest. This would be required, the IEA said, if the world hopes to reach its 2050 net-zero goals. Yet in its latest monthly oil report, the same agency called on OPEC+ to boost production to avoid a further spike in oil prices. It also revised up its demand outlook for this year and next.

What this means is that even short-term forecasts about oil demand are a challenge. If they are a challenge, then it would be reasonable to suggest that long-term demand forecasts would be even more challenging. And what Trafigura and Vitol are doing is a rare example of commodity traders planning for long-term oil demand.

Reuters noted in a report on the Vitol news that it is not common practice among commodity traders to invest directly in upstream oil and gas projects. However, Vostok Oil is obviously an exception because it offers them access to long-term stable supply for the world’s key demand growth market: Asia.

The energy transition is underway in Europe and, with a lag, in the United States. But in Asia, for all the wind and solar generation capacity of China, crude oil will continue to play a pivotal role. And Russia’s eastern Siberian fields are a comfortably short distance away via the Northern Sea Route, which will keep the oil competitive.

Trafigura paid some $$8.83 billion (7.3 billion euro) for its 10 percent in Vostok Oil. Most of the money came from a loan from a Russian bank, but the commodity trader did wager $1.82 billion (1.5 billion euro) of its own cash on the Russian project. Details about the Vitol deal have not been disclosed, but the Trafigura stake price tag is some indication about the second deal’s value.

When a commodity trader makes a rare direct investment in an oil and gas production project, it is worth noting. When the commodity trader does it at a time when the odds—at least the political odds—seem to be stacked against oil, the news of such an investment becomes even more important. It means that politics is one thing and actual energy demand reality is another.