The legendary derivatives trading team at Vitol Group, the world’s largest oil trader, has reportedly lost hundreds of millions of U.S. dollars on oil bets that went very wrong as the war in the Middle East roiled global markets and trapped physical supply at the Strait of Hormuz.
Vitol’s star trader Yaoyao Liu found himself on the wrong side of bets on crude and fuel prices at the start of the U.S.-Israel war with Iran, as prices soared in the worst disruption of global oil supply in history, the Wall Street Journal reports, quoting sources with knowledge of the matter.
Liu’s trades are reportedly a closely-guarded secret not only on the market but also within Vitol itself.
The oil trading giant’s derivatives trading team won a lot of money earlier this decade, especially with the previous period of soaring oil prices in 2022, when the Russian invasion of Ukraine sent oil prices above $100 per barrel.
Turnover and crude trades at the privately-held trading firm have held high ever since 2022, and prospects for additional profits looked even brighter at the beginning of this year. Following the U.S. seizure of Venezuela’s oil, Vitol and another major trader, Trafigura, were picked by the White House to provide logistical and marketing services to facilitate the sale of Venezuelan oil.
About that time, the tensions between the U.S. and Iran started to simmer again, and U.S. President Donald Trump began sending more aircraft carriers and troops to the region.
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But even Vitol’s star trader was wrong-footed. Sources and other traders who spoke to the Journal suspect that the oil bets were that diesel prices would trade at a premium to jet fuel and that the price of Dubai crude would slump compared to Brent Crude prices.
These could have been winning bets if the war had been avoided.
Instead, the U.S.-Israeli strikes on Iran and the subsequent de facto closure of the Strait of Hormuz sent jet fuel and Dubai crude prices soaring to astronomical highs.
And Vitol’s oil bets went awfully wrong, with losses estimated in the hundreds of millions of U.S. dollars, according to the Journal’s sources.
Last month, Dubai crude prices soared to an all-time high of $169.75 per barrel. So violent were the market whiplashes in recent weeks that Asian refiners have started pricing their orders for U.S. crude oil against the ICE Brent benchmark instead of the typical pricing on Dubai crude.
The other oil market bet that reportedly wrong-footed Vitol’s trading team was that diesel prices would rise against jet fuel prices.
The war that cut off about 10 million barrels per day of crude oil supply from the Middle East reduced supply to Asian refiners, who had to curb output. Some Asian countries banned fuel exports to preserve domestic supply.
Of all crude and product markets, nowhere has the stress been more severe than in jet fuel cracks and prices. The specifics of producing and storing jet fuel compared to other fuels made the kerosene market the most vulnerable to the major shifts in physical supply seen over the past weeks, analysts say.
Jet fuel has very specialized tank storage requirements, and there isn’t much of it stored globally, unlike many other products such as diesel and gasoline.
Airlines in Asia are already grounding flights, while European carriers start to fret about a true jet fuel scarcity going into May and beyond.
“We don’t expect any disruption until early May, but if the war continues, we do run the risk of supply disruptions in Europe in May and June, and we hope the war will finish sooner than that and the risk to supply will be eliminated,” Ryanair CEO Michael O’Leary told Sky News earlier this month.
The jet fuel situation will worsen in the coming weeks, with shortages in Europe arriving within weeks. Even if the Strait of Hormuz were to re-open unconditionally to all traffic today, it would take months for oil and fuel markets to return to some semblance of normality.
By Charles Kennedy for Oilprice.com
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