Barclays expects rise in European oil supply deals
Barclays anticipates an increase in demand for oil supply deals in Europe, as refineries look for ways to reduce volatility risks.
John Eleoterio, Barclays’ head of commodities structured origination, tells GTR: “Given the need for more working capital management solutions for refiners as well as their desire to reduce the commodity volatility associated with maintaining large blocks of commodity inventory, we’ve seen an increase in demand globally for a product like this.”
The bank has signed its first major crude supply deal with the UK subsidiary of Indian oil firm Essar Energy, under which Barclays holds the company’s inventories at Stanlow – the UK’s second largest refinery acquired by Essar in July 2011 – and supplies crude oil to the firm in line with its requirements.
“This solution reduces [Essar’s] working capital cycle significantly as well as their capital outlay, credit exposure to the market and risks of commodity volatility around the inventory.
“This isn’t a high-frequency type of product given its complexity. It’s more common in the States [where the bank has been doing such deals for the past three to four years], and we anticipate an increase in demand in Europe,” Eleoterio adds.
The Barclays deal will enable Essar Oil UK to repay its existing working capital revolving credit facility, provided by 13 banks, by reducing its costs and improving its operational flexibility.
Barclays’ head of commodities explains: “As opposed to having a long working capital cycle for their crude procurement, posting and risks management for holding such inventory, Barclays is now doing all of that. They’ve outsourced their crude procurement to us, we procure it, we hold it, we manage commodity risk around it and sell them crude on a daily basis.”
The arrangements also include a factoring deal with Barclays Corp for certain receivables.
Volker Schultz, chief executive officer of Essar Oil UK, says: “This transaction (...) is fully in line with our strategy to maximise efficiency, to substantially improve margins and to ensure that the refinery can thrive in all market conditions.”
Stanlow lost US$30.2mn in the first eight months after Essar purchased it from Shell. The company says the results were primarily impacted by a reduced Northern European refining margin index that affected the region as a whole.
Market sources suggest that the going into administration of Dutch oil firm Petroplus – the largest European refiner – could have reduced appetite for single asset refining exposure, participating in the need for alternative ways of sourcing capital in the oil industry.