Vitol’s David Fransen Discusses Oil Prices and the State of Global Commodity Trading

In an interview with Le Temps, David Fransen, managing director of Vitol SA, discussed the volatility of recent oil markets. He explained that supply and demand fundamentals determine the price of crude and that high prices adversely affect Vitol’s working capital.

In a candid interview, Fransen provided his thoughts and set the scene for the global oil market. “We are not producers looking to sell our oil at the highest price. What we sell, we have bought. A high oil price affects us because we need more working capital to finance the same trading operations. So when the price of a barrel was at $147 we had three times as much tied up in working capital, when compared to prices today.

Focusing on the economic crisis and the potential risk for traders Fransen added, “Naturally, it’s a risk, and no one can be sure some banks won't have liquidity problems. Fortunately, this collapse in banking activity has come at a time when the price of oil is low, so it has less of an effect on our activity because we need less financing and, most importantly, we enjoy excellent relationships with our banks, who value our business.”

Talking about the quantities of oil on tankers anchored at sea and whether the oil is used for speculative purposes Fransen said, “In a contango market, buyers are willing to pay more for oil delivered in a few months time than today, ” and notes, “if the market structure changes, then this oil may come to the prompt market.”

Fransen says OPEC has reduced their supplies by more than 3 million barrels per day and this has tightened the market, causing traders to release stored oil, reinforcing the point that market demand and producers supply are the real drivers of the price of oil.

Discussing the rumor that a large investment fund could be involved in the lower price of the U.S. market compared to the European market Fransen said, “No, until recently the U.S. crude market was at a discount to Europe because there was just too much oil in the U.S. The storage centre at Cushing, Oklahoma was full so the market created no incentive to import European barrels.

http://www.vitol.com/