Buying and selling oil is proving to be a profitable business this year, particularly for private trading companies. Soaring spot prices, up 50 percent to $50 for US crude, have captured the headlines as rapid demand growth tests the capacity of global supply.
But trading houses make their living by exploiting arbitrage openings - across geographies, between time spreads and over multiple grades of crudes and petroleum products.
The asset-light profiles of traders like Swiss-based Vitol, Glencore and Trafigura and London-based Arcadia, wholly owned by Japanese firm Mitsui, together with the expertise of their employees, often allows them to run rings around more cumbersome players in the multi-billion-dollar world oil market.
Traders familiar with the mechanics of the oil markets say trading houses are poised to set record profits for the year, helped along by extreme volatility in flat prices and in arbitrage spreads.
"Assume record profits all round," said one well-placed trading source.
Arguably the cog that keeps the global oil trading system in balance, publicity-shy traders handle tens of billions of dollars worth of physical crude and petroleum products every year.
Their low profile belies massive involvement in the market. Swiss-based Vitol, one of largest traders of physical crude, turned over $43.7 billion in 2003 from oil trading.
Unlike the oil majors, trading houses do not need to answer to their shareholders, giving them greater trading flexibility in lucrative areas like Equatorial Guinea, Congo, Chad and Nigeria - where the multinationals have drawn criticism for their involvement.
Since the privately-owned firms do not disclose their accounts, its hard to say exactly what a profit record would be, but market sources say the top two firms - Vitol and Glencore - are each likely to pocket $500 million this year on oil.
"It is volatility and arbitrage opportunities that make the difference," said one trader, who, like most market participants, preferred to remain anonymous.
"Trading companies exist to move things from where people do not need them to where they do the 'invisible' hand."
The trick of arbitrage trading is to spot an opening before anyone else does.
Traders said one independent operator made as much as $100 million this spring from a single oil product arbitrage between Europe and Asia.
"Products were interesting definitely. Refinery margins were very good and there is clearly an issue between where demand for products exists and where refineries have spare capacity, so to that extent, no complaints," said one trader.
Before 1970 there was no spot oil market to trade.
Integrated oil majors had bought up and taken control of most of the world's production, but unequal demand and supply growth meant their system of fixed prices was bound to throw up inefficiencies.
Marc Rich, the Belgian-born oil and metals trader, exploited them.
Recognising that buyers were willing to pay more than the official selling prices for crude supplies, after the 1979 Iranian revolution he bought Iranian oil at the former price and resold it at the latter - inventing modern global crude arbitrage and making a fortune at the same time.
Legend has it that in the early days of the spot market, pioneering traders could make millions of dollars on a single trade of a cargo of Nigerian oil.
The market has tightened up since then, with majors like BP, Shell, ChevronTexaco and Total stepping into the game themselves - although some, like ExxonMobil, are still notable absentees.
Majors' trading teams are also having bountiful years and arbitrage opportunities are pounced on so quickly they are often only seen after they have closed again.
"Why would anyone want to share information about arbitrage?" said one trader. "We all talk about it as if it's a game, but information is money, and it's only a game until you have to pay your mortgage."
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