Exxon Mobil Corp.’s ambitious plan. to attack the world of energy trading got a skeptical reaction from seasoned market observers who said that the oil giant could be a powerful opponent – but only if it takes risks, and is not yet willing to suffer. .
Exxon’s physical assets and large balance sheet give it an edge over the world’s top trading houses, which have posted record profits since the pandemic. But the plan is all too familiar to traders who have seen it in and out of trading over the past five years, according to more than a dozen industry professionals.
How much risk Exxon takes, how much loss tolerates, and how many cannons out for top talent – considerations rarely associated with conservative oil giants – will be key to success, he said.
Exxon has “the potential to be great, but realizing that potential is not easy,” said Craig Pirrong, a finance professor at the University of Houston. “It remains an open question how committed. BP, Shell and Glencore and others have been stuck with ups and downs. Exxon has not done that.
Established trading houses are rarely threatened by upstarts. Glencore Plc, Trafigura Group and Vitol Group, as well as BP Plc and Shell Plc, have decades of experience navigating market volatility, and creating internal systems and analytics that are hard to replicate. The high volatility of the market and the wide range of actively traded derivative contracts mean that there is plenty of profit available even if new entrants are successful.
But the global extent of Exxon’s operations and access to market information – key for any trader – unparalleled. Exxon is also flush with capital to return to its big trading position after posting a record $59 billion in profits last year.
It’s a “big shift in strategy for Exxon,” said Rebecca Babin, senior energy trader at CIBC Private Wealth Management. “It should be a natural extension of the existing business, but the competition is fierce.”
An Exxon spokesman had no comment beyond yesterday’s announcement.
Trading is not a new business for Exxon. It made a start, limited to 2018, when it hired consultants and took personnel, including some famous traders, from established stores while setting up trading floors near Houston and in Leatherhead, a commuter town outside London.
But those efforts failed in the pandemic, with Exxon posting losses while rivals made significant gains.
Exxon’s latest expansion is gathering steam. The company has made several external employees in 2023, and last year marked the best trading performance on record. Exxon has also looked to centralize traders in London this year to attract and retain talent.
In an email to employees on Thursday, the company said it is focused on “ultimately delivering industry-leading trading results.” It doesn’t mention hiring targets, how much capital it plans to raise or strategic goals for the business.
Compensation will be key as the commodity trading talent market is tight, with hedge funds in particular increasing their presence. The merchant’s payment is weighted towards the annual bonus, which often gives at least 10% of the money made to the company. Exxon does not pay annual cash bonuses to most employees, but offers a high base salary and generous pension.
But Chief Executive Officer Darren Woods has shown he is willing to break with tradition. Last year, he nearly tripled the number of employees eligible for restricted stock and gave U.S. workers wages that exceeded inflation, on top of a one-time, mid-year raise.
Exxon’s approach to risk may be more important. Oil giants are managed by engineers who have focused on building or buying the cheapest assets and operating them efficiently, rather than betting on commodity prices. That creates a culture averse to risk taking and with a low tolerance for failure.
Still, the scale of Exxon’s global operations gives it unique visibility into almost every corner of the energy market, from pipelines in North America, to shipping movements in the Middle East and demand for refined products in Asia.
Knowing immediately how prices will be affected by changes in physical flow, such as a refinery outage, can mean millions of dollars in revenue. One trader joked that Exxon’s market intelligence was so vast that its counterparty bets would be guesswork by comparison.
“You can’t beat the market unless you have some edge,” Pirrong said. “Exxon has great potential because of its global footprint. The challenge is to provide that information to traders in a way that they can trade profitably.
–With assistance from Sheela Tobben
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