Oil & products house of the year: Macquarie Group

Energy Risk Awards 2020: Physical and financial market capabilities enable bank to tackle major market events

Ozzie Pagan
Ozzie Pagan, Macquarie Group

Over the past year, Macquarie has strengthened its foothold in the physical oil space following the integration of Cargill’s oil business, purchased in 2018. Additionally, its ability to combine physical supply and offtake with financial risk management and hedging capabilities has facilitated some innovative deal structures.     

“We can manage a lot of the operational and physical risk for our clients – whether it’s vetting and chartering our own vessels or managing physical volumes on a pipeline or in a tank,” says Ozzie Pagan, head of commodity financing Americas at Macquarie Group. “It reduces our clients’ working capital requirements because we take full ownership and control all aspects of managing and hedging the product. So there’s real risk transfer that we are well positioned to manage.”

A good example of this is the bank’s June 2019 deal with a refining client in the UK. The trade complements an existing portfolio of refinery supply and offtake agreements in which Macquarie uses a “just in time” delivery mechanism to reduce the borrowing needs and risk exposure.

“We [are] able to step in front of the refineries and provide an intermediation facility, purchasing crude on the client’s behalf using Macquarie’s strong balance sheet and credit profile to secure better payment terms from suppliers [than a refinery may receive on its own],” says Daniel Vizel, head of global oil trading at Macquarie Group.

This means the client does not need to use a letter of credit or pay upfront to secure oil supply and is able to refine the crude and sell the product before paying for the oil, reducing its working capital needs. Macquarie delivers the oil to the refinery tanks and owns it until supply is needed, delivering it to the refinery as needed. The bank also offtakes some or all of the refinery output.

The just-in-time element also aims to reduce the client’s market risk exposure. “Funding requirements and hedging price risk is part of that risk transfer,” Pagan continues. “If the refinery was buying crude, it would have a 45- to 60-day voyage, depending on origin, and could then sit in a tank for an additional 15 to 30 days before being refined. The refiner would have to manage the market risk during that time.” Instead, Pagan says, Macquarie’s ability to supply crude as it is needed reduces the client’s market risk exposure to five days or less, depending on how the deal is structured. The bank can also provide hedges for any residual market risk, including risks outside of the commodity markets.

We can manage a lot of the operational and physical risk for our clients – whether it’s vetting and chartering our own vessels or managing physical volumes on a pipeline or in a tank
Ozzie Pagan, Macquarie Group

When offsetting the market risk from such transactions against its wider portfolio, the bank generally tries to remain neutral, according to Vizel, but it can make market calls to optimise hedging and portfolio management. And, while recent volatility has been a real concern for anyone exposed to oil markets, he says the size and depth of Macquarie’s oil and products portfolio has helped it to weather the storm.

It is also an opportunity to strengthen relationships with clients that need risk management services more than ever at this time. “Being there through volatile cycles across the supply chain is challenging, but it’s essential in fostering trust and partnerships with clients,” says the head of Macquarie’s commodities and global markets group, Nick O’Kane.

Another area of focus for Macquarie has been helping clients manage the risk around the International Maritime Organisation’s rules (IMO 2020), which came into force in January, lowering the amount of sulphur permitted in emissions from ships.

Hedging the new low-sulphur fuel was very difficult as there was no stated specification for it. Refineries could produce compliant products with a range of different blends of products and ships could fit scrubbers that extract emissions and allow them to continue using high-sulphur fuel oil. 

Amid this confusion, Macquarie created a low-sulphur fuel oil index at the end of 2018 designed to mimic expected price movements in the new grade to enable clients to hedge post-IMO 2020 fuel purchases. 

“We were able to offer liquidity to our clients using our view on the relative value between the 0.5% fuel, 1% gasoil and 3% fuels,” says Vizel. In February 2019, Ice launched the first 0.5% sulphur fuel contract and volumes began to pick up. “The paper contract has [since] become more liquid, but we were trading it before broader liquidity developed in the swaps market,” Vizel adds.

Again, the combination of Macquarie’s deep physical and financial market presence enabled it to provide a valuable market-making service in these illiquid markets, says Vizel. “We had physical positions from supporting our clients’ need to blend very low-sulphur fuel oil and were able to create markets for other fuels due to become off-spec because of the regulation.”

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