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The following is an English translation of an article authored in French by Gunvor’s director of research and analysis published in the Swiss financial outlet L’Agefi:

Challenges & Opportunities in a Changing Market
By David Fyfe, Director of Research & Analysis

Major physical energy trading houses have in the last decade transformed from a role as merchants to being increasingly embedded all along the supply chainSupply chain refers to the network of interconnected businesses involved in the ultimate provision of product and service packages required by end customers. In the context of energy commodities, the....

Physical traders are inherently resilient, with a historical track record of rapid innovation and effective risk managementRisk Management in the context of energy commodities trading refers to the identification, assessment, and prioritization of uncertainties followed by coordinated and economical application of resources to minimize, monitor, and.... They are built to confront changing business environments by making adjustments in location, structure, funding, operating regime and strategy. Size matters, up to a point, but so too does the ability to remain nimble as new investment and trading opportunities arise. This is why, over the last decade, major physical traders have evolved from being just merchants to being increasingly embedded all along the energy supply chain.

Today, most major physical traders have developed a greater presence in concrete, industrial assets compared to any historic profile the industry has had. These include refineries, pipelines, storage, terminals, and upstreamUpstream refers to the exploration and production segment of the oil and gas industry. The upstream sector includes all activities related to searching for potential underground or underwater crude oil.... Although it is unlikely major trading houses will become fully vertically integrated as the “international majors” have traditionally been, successful companies have found ways to diversify in beneficial ways.

There have been several forces driving this transformation, including:

• A need by physical traders to respond to diminished pure trading margins, caused by sharply lower price volatility**Volatility** In the context of energy commodities trading, volatility refers to the degree of variation in the price of a commodity over a certain period of time. It is a... post-2009;
• A desire to diversify their portfolio of products and geographies to spread risks;
• Opportunities arising from international oil companies, independent companies and investment banks divesting physical assets on a geographical or sector-specific basis;
• A need for increased optionalityOptionality refers to the feature embedded in certain financial contracts that gives the holder the right, but not the obligation, to execute a transaction at a predetermined price, within a... for trading operations (access to “flow”) with corresponding logistical, arbitrageArbitrage refers to the practice of taking advantage of price differences between two or more markets or exchanges in order to generate profits. It involves buying an asset at a... and operating efficiencies.

This change in emphasis among physical traders has had significant implications for the way the companies operate, for their corporate structure, and for how they are financed. It has opened them to greater public scrutiny than in the past, and has seen them subject to increased oversight by national and international regulators—with now more than 70 regulatory authorities worldwide covering health and safety, insurance, emission and environmental control, product, cargo and counter-party due diligence, international trade and sanctions legislation, and banking, exchange and derivatives market rules.

To navigate this new environment, each trader has taken its own path.

Gunvor, for one, has been investing in downstreamDownstream refers to all activities and processes involved in the oil and gas industry that occur after the production phase. This segment of the industry includes the refining, processing, transporting,..., midstream and upstream assets that strategically complement its daily trading activity, and now possesses more than USD 2 billion worth of (investments in) industrial assets spread through the world, including in Europe, North and South America, Africa and Asia. Each asset enables Gunvor to better manage its trading platform by offering an enhanced understanding of sourcing and distribution components, to diversify its income streams and to strengthen its competitive position amidst rapidly changing markets.

A good example is the Ust Luga Oil Products**Oil Products** Oil products, also known as petroleum products, are the end products derived from the processing of crude oil in oil refineries. Crude oil is a fossil fuel that... Terminal on the Baltic Sea, constructed from greenfield and wholly-owned by Gunvor. It is considered to be the largest rail-ocean transshipment terminal in the world, with a projected capacity of more than 30 million metric tons per annum, 960,000 cubic metres of storage, and an ability to handle 300,000 dwt vessels. The terminal significantly enhances Gunvor’s logistics capabilities for refined petroleum products transportation, and also provides a material, stable earnings stream.

Such investments are a part of Gunvor’s long-standing strategy to enable continued growth in turnover and profitability, while retaining the unique business attributes for which traders are renowned. The company’s structure, geographical and sector presence, and strategy have effectively adapted to meet changing market conditions. Gunvor, along with its competitors, will continue to react dynamically to changing market conditions, while its core business remains the safe, efficient movement of physical energy commodities from where they are sourced and stored to where they are needed most.