The cream of the crop

The employment market for oil and energy traders has been from one extreme to the other in a short space of time – especially in oil. Andy Webb looks at where the recruitment market is headed next

The past five years have seen the oil trading business swing from one extreme to another and then back again. Prior to December 2001 it was in strong growth mode, with many US banks in particular ramping up their operations. Then came Enron.

Almost overnight, oil and other energy markets went into massive retrenchment. Trading operations were shut down or radically scaled back, with the European regional operations of US banks being hit particularly hard.

There were some exceptions to this exodus, and long-established players such as Morgan Stanley and Goldman Sachs even benefited. However, in general the recruitment market for energy traders collapsed into a state of torpor.

A handful of players saw this as a buying opportunity. For example, Enron’s demise also spelt the demise of the one-year non-compete clauses in its traders’ employment contracts, whereby employees agree not to work for competitor companies or form a new competitor company within a certain time period after termination of employment.

Banks seize the moment
Barclays Capital for one was quick to seize this moment by building a European power and gas business around ex-Enron managers Joseph Gold and Richard Lewis in 2002. 2003 saw some interbank poaching, but it was not until early 2004 that the market really burst into life – led by ABN Amro and Merrill Lynch, followed by (among others) JP Morgan, CSFB and Lehman Brothers.

Once again, energy trading is certainly booming; however, with the shadow of Enron still present there is a feeling that this time the markets are a little more mature.

The post-Enron period saw recruitment and training in commodities slashed, so the 2004 renaissance has placed experienced energy traders at a major premium. The past year has seen this squeeze intensify, with an increasing number of participants chasing a restricted pool of trading talent, especially in oil.

Prior to Enron, the bulk of energy trading employment was distributed between ‘commercials’ (such as users and producers) and banks. Slightly different skill sets differentiate the two. Commercials such as utilities are looking for strong understanding of the markets’ physical fundamentals, while banks are generally more focused on trading financially settled commodities. Interest in the past year has focused on the crossover between the two.

While both these employer segments are again buoyant, a third group has now joined them – hedge funds. “This has appreciably shifted the dynamic in the employment market, with hedge funds recruiting heavily from banks’ oil trading operations,” says Philip Muir, specialist consultant in FX and commodities at WoodHamill Executive Search.

“There have been a few signs of a reverse flow here, as some ex-bankers find the hedge-fund environment not to their liking, but that aside the traffic has been almost exclusively one way,” he adds.

To redress this, banks have looked increasingly to recruit replacements from utility companies. In some cases this has been successful and there are many high-profile bank traders that have followed this career path. However, the increased demands on this talent pool are starting to highlight the technical and cultural differences between utilities and banks quite starkly.

As a result, many banks have taken an alternative approach. The general strategy revolves around having a handful of high-calibre (and expensive) personnel at the top of their energy trading operations. However, rather than hiring staff further down the tree, they are recruiting internally among more junior personnel who already have strong derivatives, risk management and trading skills. They are then trained up (usually within a year) for oil or any other commodity asset class.

“I think there are two factors at play here,” says Muir. “On the one hand, the banks probably feel that it is less expensive to do this than hire traders from outside. On the other, they also end up with traders who in the long term will be a naturally better cultural fit in the banking environment.”

Money
The oil market is a very tight-knit community, where most top traders will be known among their peers. For a commodity market it is also astonishingly non-commoditised with regard to employment. This combination makes generalisations about salary and benefit levels extremely general, since no firm benchmarks really exist. “There’s no such thing as a generic oil trader,” says Muir. “Particularly as regards the top bracket in the banking and hedge-fund segments, you are into specifics and individual personalities almost immediately.”

Factoring in the supply and demand imbalance between the number of available traders and the number of trading operations searching for traders, means that it is probably safe to say that packages for the elite are now comfortably into seven figures per year.

At the other end of the spectrum, an internally trained mid-level bank oil trader might be starting at around £500K including bonus. “You will also see considerable variation depending on the exact role,” says Muir. “Banks are being forced to look very closely across the commodity trading business at remuneration levels, to ensure high performance is adequately rewarded, given the difficulty in replacing this talent.”

The picture in the commercial segment is a little different. While traders at the more advanced utilities are generally lower paid than at the banks, their salaries are nonetheless significantly higher than most other employees of the utility, including the chief executive.

Where these utilities are still state-owned, this is seen as politically unacceptable. Even where they are listed companies, it raises questions of identity in the minds of shareholders and other interest groups. Is the utility there to provide a public service and generate reliable cashflows, or is it just a trading shop with all the P&L swings that entails? The net effect is that remuneration in the utilities segment has had to become rather less flamboyant, with the very top traders probably on six rather than seven figures.

“Overall, the top packages are generally being offered by the US investment banks re-entering the market” says Muir. “This is really a premium to compensate traders for the risk of moving from an established energy trading business to a business that has only recently entered or re-entered the commodity trading environment.”

European banks, including those domiciled in the UK, tend to be rather more conservative – but even here, intense competitive pressure is seeing very substantial sums paid for the top traders, says Muir. The Asian market for commodity derivatives is far less mature, so demand for traders at this point is less acute.

Other commodity markets
Other markets with inputs and outputs related to energy have also started to feel the pressure of finding suitably qualified personnel. While oil still leads the pack, markets such as coal, freight, electricity and gas have all seen salaries rising. Apart from the correlation between the various underlying commodities, many of these markets are also part of the same commodity or energy business within banks as oil.

The incentive to expand these businesses is also growing. Just as in oil, huge flows from hedge funds and other sources of proprietary capital are driving volatility and volume. The bulk of the participants behind these flows are not interested in taking physical delivery of the underlying commodity. This is further skewing employment requirements for these markets (as well as oil) in favour of the financially skilled traders typically found in banks and hedge funds.

By contrast, other commodity markets such as base metals are less liquid and less easy to get into. While these markets have seen significant hedge-fund participation over the past year or so, neither has experienced anything like the influx of liquidity and corresponding shortage of skilled traders as oil and other energy markets. Prices paid for experienced base and precious metals traders have consequently lagged energy markets.

Future prospects
A dramatic collapse in oil prices or another Enron apart, it seems unlikely that the current employment scenarios in oil and other energy markets will change radically in the near future.

Though various pockets of skill shortages are gradually being addressed, demand for suitably skilled traders remains strong. Financial flows into commodities have risen sharply and continue to do so, as an increasing number of investors enter these markets.

That said, many of the banks currently investing in building oil-trading businesses have no long-term pedigree. Some of them also have a track record for frequently dipping in and out of the market and so find themselves having to pay a substantial risk premium to employees.

While commodities generally has been enjoying a bull market for the past couple of years, should the trading environment deteriorate, the market will look to these new entrants with interest in order to gauge their long-term commitment this time round.
Andy Webb is a freelance writer in derivatives, technology and trading methodologies
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