Energy firms expanding, but cautious over risks

ENERGY CONCERNS: Citigroup sees prices at the $65-70 range as fair value under current conditions.(Getty Images)

Energy companies are planning expansions to capture a bigger slice of future growth, looking past gloomy months on hopes the worst of the economic crisis is past, industry executives said this week.

But the optimism is tempered by the view the industry still holds many risks - Japan's Idemitsu sees lower export margins this year and leading Asian trader Hin Leong says end user demand for distillates in Asia and Europe remains bad.

Those who survived the economic shake-up and demand slump, which brought oil prices hurtling down from the peak above $147 a barrel last July, are hankering after the part of the pie left behind by those who faltered.

Companies including European trader Trafigura and Singapore-listed Noble Group <NOBG.SI> told the Reuters Energy Summit they aim to boost their trading presence with investments in two main areas -- expertise and storage infrastructure.

"Some of our competitors have scaled down, but we see this as a major opportunity to grow our energy business into a global one," said Noble's Chief Operating Officer Ricardo Leiman.

Noble recently sub-leased storage in Singapore formerly used by Cargill, which suspended its Asian gasoline trade operations, and the Hong Kong-based commodity and oil firm hired five former Trafigura traders to start physical fuel oil trade.

Citigroup is looking to hire at least two to three more traders to join its Singapore team of 20 trading and marketing staff, and brokerage MF Global <MF.N> hired last year a team of middle distillates and fuel oil brokers in Singapore at a time rivals were folding teams.

"Coming in and making the investment (in people) when the market was at the lowest point was a good strategy," said Mikal Boe, MF's managing director for commodities.

Trafigura, the world's third-largest independent oil trading firm, will invest up to $400 million over the next two years to double storage capacity at a unit to 25 million barrels in East and West Africa, Malaysia, the Caribbean and Middle East.

"These investments allow us to open up new markets and expand our trading operations by improving logistics in regions where adequate infrastructure is lacking," Trafigura's Chief Financial Officer Pierre Lorinet said.

Access to storage is crucial to traders, allowing them to time their purchase and sale to make the most profit. Storage demand is particularly high in a contango market structure, where future prices are expected to be higher than prompt rates.

Hin Leong - which owns Asia's largest commercial oil facility in Singapore, the Universal Terminal - aims to expand its Singapore storage by a third, may invest in tanks in China, and said it could even consider going into refining in a bid to become an integrated oil firm.

Oil prices climbed to seven-month highs above $69 a barrel this week, after rising 30 percent in May alone.

Barclays Capital's Global Head of Commodities Benoit de Vitry said there was a forward-looking element in the price, which was anticipating a reduction in oversupply.

"If people did not expect the market to be more balanced in Q3, Q4, there would be no reason why the price would be where it is today," he said.

Others think the worst is not yet over, as mixed signals continue to show on the economic front, and some countries are trying to downplay hopes of a sustainable recovery.

Nobuo Tanaka, head of the International Energy Agency, warned that if oil prices rally too rapidly they could damage any fragile economic recovery.

"If recovery is happening, the market is getting tighter. If it does not happen, probably we will still have high inventories," he told the summit.

Echoing such caution, Hin Leong's Executive Director Evan Lim said the distillates market is still underperforming and Asian consumption is unlikely to return to its peak till the global economy picked up.

"There hasn't been any fresh and interesting demand that made us go 'Wow!'," said Lim, who also pointed to the huge volumes of diesel stored in floating storages off Europe.

Total's head of strategy and planning, Jean-Jacques Mosconi, estimates that some 100 million barrels of crude oil are also held in floating vessels worldwide.

Japan's third-largest refiner Idemitsu Kosan Co said it expected oil product exports to be steady this fiscal year as lower overseas demand hit export margins.

The country, the world's number three oil consumer, may be forced to shut more than a fifth of its refining capacity - at least 1 million barrels per day - in the next five years as oil demand falls faster than expected, said Shinji Nishio, President of top refiner Nippon Oil Corp.

Another signal of subdued bullishness came from the Asian derivatives market, where more firms have moved to clear over-the-counter (OTC) trades since last year, instead of bilateral transactions, to limit counterparty credit risks.

The proportion of swaps trades cleared has surged to 50-70 percent versus 3-5 percent before the credit crisis, MF Global's Boe estimates, a trend his brokerage is latching on to boost its market share in Asia.

Looking at crude's rally, Citigroup sees prices at the $65-70 range as fair value under current conditions.

"Ultimately, it boils down to supply and demand, and right now, with the excess capacity in the Middle East, it won't go to the $100 levels," said Ananth Doraswamy, Citi's Asia Pacific head of Commodities. "The price is about right for the near future until the economy improves."

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