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By Kasper Walet, Founder and Partner AI Energizer and Maycroft
I recently read a very interesting article in the Financial Times about how commodity trading firms are still lagging behind other trading sectors in using Artificial Intelligence solutions. but that the industry is trying hard to catch up. These findings are in line with my practical experiences in our advisory services business: AI Energizer.
Particularly in today’s market situation where margins are squeezed, commodity traders are looking for tools that could help them to increase profitability. Intelligent technologies such as robotic process automation and machine learning, offer new opportunities to improve process performance and realize significant cost savings. These technologies can be implemented in short sprints, focused on a specific problem, with manageable costs.
If you click here, you can read our white paper about successful AI projects we executed for two of the leading energy commodity trading firms in Europe.
Compared to other financial and industrial sectors, commodity traders are coming from way behind. Currency, equities and interest-rates investors have already used algorithms, machine learning and artificial intelligence to turn data into successful trades for years. Now, commodity traders are seeking ways of exploiting their information to help them profit from price swings as well. It really is a combination of knowing what to look for and using the right mathematical tools for it.
Traders are looking to gather data on a large scale and run machine-learning algorithms to find patterns linking fundamentals with price movements, thus improve decision-making in trading and, as a result, the profitability. With a properly trained algorithm and a sufficiently sized historical data set, a company using machine learning to identify patterns in the trading data - even when the data has inconsistencies – will reduce redundant trades and streamline the entire process. To accommodate all this commodity trading firms are investing in people, processes and systems to centralize their data.
Despite this new enthusiasm, the road to electronification may not come easily. One issue is that some of the larger commodities traders face internal resistance in centralizing information on one platform. With each desk in a trading house in charge of its profit-and-loss account, data are closely guarded even from colleagues. The move to ‘share all our data with each other’ is a very, very big cultural shift.
Another problem is that in some trading houses, staff operate on multiple technology platforms, with different units using separate systems. Rather than focusing on analytics, some data scientists and engineers are having to focus on harmonizing the platforms before bringing on the data from different parts of the company. Even where the digital infrastructure is in place, it may take some time before AI becomes a large part of commodities trading.
Company leaders should start with the following three steps:
Step 1: Focus on value
As AI can solve targeted problems, it's up to company leaders to identify applications that offer the most potential value. Demonstrating strong returns in a short time will convert the cynics. AI projects typically happen in a series of sprints and can be completed in around 3-4 months.
Step 2: Change Management
Automation alone does not save money or improve performance: People and processes will also have to change. This is an area where there is understandable anxiety; automation stokes fears that machines will take people's jobs. But practice suggests that many of the tasks being automated are activities people tend not to want to undertake, such as spending half the day pulling and loading data. Or they are tasks for which small automation can actually improve people's performance - for instance, by introducing predictive algorithms that help them make better decisions and free up their time for more rewarding, interesting, and higher value-add activities.
This is an entirely new way of working, and company leaders will need to ensure that both they and their people have the right knowledge and skills, such as programming and data science knowledge and process improvement skills - to be successful. And they'll need to ensure that everyone's mind-set and behaviors also shift accordingly.
Step 3: Strategy is King
The backbone of this new way of working is strategy. Companies need to know their own strengths. There will be "keep the lights on" activities that can become touchless, as well as differentiating activities that should become increasingly intelligent. Moreover, companies need to take a fresh look at their organizational structure to ensure that it gives teams the freedom to develop creative solutions and experiment.
Conclusion
Concluding we can say that digitization is increasingly driving trading, and needs to be embraced, as many commodities executives believe. “It’s another tool that traders have to understand.”
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As U.S. crude oil export volumes have increased to an average of 2.8 million barrels per day (b/d) in the first seven months of 2019, the number of destinations (which includes countries, territories, autonomous regions, and other administrative regions) that receive U.S. exports has also increased. Earlier this year, the number of U.S. crude oil export destinations surpassed the number of sources of U.S. crude oil imports that EIA tracks.
In 2009, the United States imported crude oil from as many as of 37 sources per month. In the first seven months of 2019, the largest number of sources in any month fell to 27. As the number of sources fell, the number of destinations for U.S. crude oil exports rose. In the first seven months of 2019, the United States exported crude oil to as many as 31 destinations per month.
This rise in U.S. export destinations coincides with the late 2015 lifting of restrictions on exporting domestic crude oil. Before the restrictions were lifted, U.S. crude oil exports almost exclusively went to Canada. Between January 2016 (the first full month of unrestricted U.S. crude oil exports) and July 2019, U.S. crude oil production increased by 2.6 million b/d, and export volumes increased by 2.2 million b/d.
Source: U.S. Energy Information Administration, Petroleum Supply Monthly
The United States has also been importing crude oil from fewer of these sources largely because of the increase in domestic crude oil production. Most of this increase has been relatively light-sweet crude oil, but most U.S. refineries are configured to process medium- to heavy-sour crude oil. U.S. refineries have accommodated this increase in production by displacing imports of light and medium crude oils from countries other than Canada and by increasing refinery utilization rates.
Conversely, the United States has exported crude oil to more destinations because of growing demand for light-sweet crude oil abroad. Several infrastructure changes have allowed the United States to export this crude oil. New, expanded, or reversed pipelines have been delivering crude oil from production centers to export terminals. Export terminals have been expanded to accommodate greater crude oil tanker traffic, larger crude oil tankers, and larger cargo sizes.
More stringent national and international regulations limiting the sulfur content of transportation fuels are also affecting demand for light-sweet crude oil. Many of the less complex refineries outside of the United States cannot process and remove sulfur from heavy-sour crude oils and are better suited to process light-sweet crude oil into transportation fuels with lower sulfur content.
The U.S. Energy Information Administration’s monthly export data for crude oil and petroleum products come from the U.S. Census Bureau. For export values, Census trade data records the destinations of trade volumes, which may not be the ultimate destinations of the shipments.
The state investment firm Temasek Holdings has made an offer to purchase control of Singaporean conglomerate Keppel Corp for S$4.1 billion. News of this has reverberated around the island, sparking speculation about what the new ownership structure could bring – particularly in the Singaporean rig-building sector.
Temasek already owns 20.5% of Keppel Corp. Its offer to increase its stake to 51% for S$4.1 billion would see it gain majority shareholding, allowing a huge amount of strategic flexibility. The deal would be through Temasek’s wholly-owned subsidiary Kyanite Investment Holdings, offering S$7.35 per share of Keppel Corp, a 26% premium of the traded price at that point. The financial analyst community have remarked that the bid is ‘fair’ and ‘reasonable’, and there appears to be no political headwinds against the deal being carried out with the exception of foreign and domestic regulatory approval.
The implications of the deal are far-ranging. Keppel Corp’s business ranges from property to infrastructure to telecommunications, including Keppel Land and a partial stake in major Singapore telco M1. Temasek has already said that it does not intend to delist and privatise Keppel Corp, and has a long-standing history of not interfering or getting involved in the operations or decisions of its portfolio companies.
This might be different. Speculation is that this move, if successful could lead to a restructuring of the Singapore offshore and marine industry. Since 2015, Singapore’s rig-building industry has been in the doldrums as global oil prices tumbled. Although prices have recovered, cost-cutting and investment reticence have provided a slower recovery for the industry. In Singapore, this has affected the two major rigbuilders – Keppel O&M and its rival Sembcorp Marine. In 2018, Keppel O&M reported a loss of over SS$100 million (although much improved from its previous loss of over SS$800 million); Sembcorp Marine, too, faces a challenging market, with a net loss of nearly 50 million. Temasek itself is already a majority shareholder in Sembcorp Marine.
Once Keppel Corp is under Temasek’s control, this could lead to consolidation in the industry. There are many pros to this, mainly the merging of rig-building operations and shipyards will put Singapore is a stronger position against giant shipyards of China and South Korea, which have been on an asset buying spree. With the overhang of the Sete Brasil scandal over as both Keppel O&M and Sembcorp Marine have settled corruption allegations over drillship and rig contracts, a merger is now increasingly likely. It would sort of backtrack from Temasek’s recent direction in steering away from fossil fuel investments (it had decided to not participate in the upcoming Saudi Aramco IPO for environmental concerns) but strengthening the Singaporeans O&M industry has national interest implications. As a representative of Temasek said of its portfolio – ‘(we are trying to) re-purpose some businesses to try and grasp the demands of tomorrow.’ So, if there is to be a tomorrow, then Singapore’s two largest offshore players need to start preparing for that now in the face of tremendous competition. And once again it will fall on the Singaporean government, through Temasek, to facilitate an arranged marriage for the greater good.
Keppel and Sembcorp O&M at a glance:
Keppel Offshore & Marine, 2018
Sembcorp Marine, 2018
Energy used in the buildings sector—which includes residential and commercial structures—accounted for 20% of global delivered energy consumption in 2018. In its International Energy Outlook 2019 (IEO2019) Reference case, the U.S. Energy Information Administration (EIA) projects that global energy consumption in buildings will grow by 1.3% per year on average from 2018 to 2050. In countries that are not part of the Organization for Economic Cooperation and Development (non-OECD countries), EIA projects that energy consumed in buildings will grow by more than 2% per year, or about five times the rate of OECD countries.
Source: U.S. Energy Information Administration, International Energy Outlook 2019 Reference case
Electricity—the main energy source for lighting, space cooling, appliances, and equipment—is the fastest-growing energy source in residential and commercial buildings. EIA expects that rising population and standards of living in non-OECD countries will lead to an increase in the demand for electricity-consuming appliances and personal equipment.
EIA expects that in the early 2020s, total electricity use in buildings in non-OECD countries will surpass electricity use in OECD countries. By 2050, buildings in non-OECD countries will collectively use about twice as much electricity as buildings in OECD countries.
Source: U.S. Energy Information Administration, International Energy Outlook 2019 Reference case
Note: OECD is the Organization for Economic Cooperation and Development.
In the IEO2019 Reference case, electricity use by buildings in China is projected to increase more than any other country in absolute terms, but India will experience the fastest growth rate in buildings electricity use from 2018 to 2050. EIA expects that use of electricity by buildings in China will surpass that of the United States by 2030. By 2050, EIA expects China’s buildings will account for more than one-fifth of the electricity consumption in buildings worldwide.
As the quality of life in emerging economies improves with urbanization, rising income, and access to electricity, EIA projects that electricity’s share of the total use of energy in buildings will nearly double in non-OECD countries, from 21% in 2018 to 38% in 2050. By contrast, electricity’s share of delivered energy consumption in OECD countries’ buildings will decrease from 24% to 21%.
Source: U.S. Energy Information Administration, International Energy Outlook 2019 Reference case
Note: OECD is the Organization for Economic Cooperation and Development.
The per capita use of electricity in buildings in OECD countries will increase 0.6% per year between 2018 and 2050. The relatively slow growth is affected by improvements in building codes and improvements in the efficiency of appliances and equipment. Despite a slower rate of growth than non-OECD countries, OECD per capita electricity use in buildings will remain higher than in non-OECD countries because of more demand for energy-intensive services such as space cooling.
In non-OECD countries, the IEO2019 Reference case projects that per capita electricity use in buildings will grow by 2.5% per year, as access to energy expands and living standards rise, leading to increased use of electric-intensive appliances and equipment. This trend is particularly evident in India and China, where EIA projects that per capita electricity use in buildings will increase by 5.3% per year in India and 3.6% per year in China from 2018 to 2050.