Trading and Risk

In 2022 Vitol, the largest independent oil trader in the world, earned a reported net profit of about $15.1 billion, more than in any year of its history and more than many oil majors. Three years earlier, in 2019, it had earned about $2.3 billion (reported). Vitol owns almost no oil reserves. It is a private partnership owned by several hundred of its own senior employees, run from Geneva, London, Singapore and Houston, which moves about 7 million barrels a day of crude oil and refined products (company figures, reported) and trades LNG, gas, power, coal and carbon besides. Its rivals had records too: Trafigura about $7.0 billion for its year to September 2022, Mercuria about $2.98 billion and Gunvor about $2.36 billion (reported). The year had given them everything a trader needs: Russia's invasion of Ukraine on 24 February, sanctions that forced Russian crude and diesel to find new buyers in India, China and Turkey while Europe looked for new suppliers, Brent touching about $139/bbl intraday on 7 March, and European diesel margins at records (reported). Vitol said in March that it would stop new Russian business and exit by the end of the year (reported).

The same prices nearly broke Europe's utilities, and the reason was not that they had gambled. They had hedged. Generators had sold their expected output forward on exchanges a year or more ahead, as prudent hedgers do. When the Dutch TTF gas price rose above €200/MWh in March and settled at a record of about €340/MWh on 26 August, and German power for the following year traded above €1,000/MWh, those short positions lost value every day, and exchanges demanded the losses in cash the next morning. The offsetting gain on the power the companies would generate would arrive only when they delivered it, months later. Austria's Wien Energie needed a €2 billion emergency credit line from the federal government in August 2022 to meet its margin calls. Finland and Sweden set up emergency liquidity guarantee schemes for their utilities in September (reported). The European Federation of Energy Traders warned in March that margin requirements could exceed €1.5 trillion (reported; a lobbying figure, widely cited). Germany rescued and then nationalised Uniper, its largest gas importer, which had to buy replacement gas at spot for Russian volumes that did not arrive (Chapter 3). Within months, governments that had privatised their utilities were lending to them or owning them.

The traders and the utilities had faced the same prices. What separated them was the structure of their positions and the cash behind them. This chapter explains what energy traders do, why their profits follow volatility rather than prices, and why hedging, the tool that is supposed to remove risk, moves it from price to liquidity.