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REUTERS SUMMIT-Oil traders play shale boom's knock-on effects

Ron Bousso and Simon Falush
Wednesday, 6 Nov 2013 | 12:31 PM ET

LONDON, Nov 6 (Reuters) - The U.S. shale boom is causing a cascading series of changes in global energy markets that are altering the landscape for oil trading houses and opening up new ways for them to profit, a leading Swiss trader said.

"In the energy complex specifically, the shale gas boom and plentiful supply of gas have created a series of very interesting and complex knock-on effects," Daniel Jaeggi, co-founder of Swiss trading house Mercuria, told the Reuters Global Commodities Summit.

The production of shale gas and oil using fracking technology has turned the United States from an energy importer to a major exporter of oil products and coal in recent years. Next year, the United States is set to overtake Russia as the world's top oil producer, the International Energy Agency (IEA) said last month.

This shift has hit the global coal market as U.S. industries and power plants have switched to the abundant supplies of cheaper, less polluting gas.

"If the U.S. burns more gas, what happens to the coal, and coal needs to find a way out of the U.S.?" Jaeggi said.

"In reality the gas arbitrage is actually happening in the coal world, and LPG (liquefied petroleum gas) as well," Mercuria Chief Executive and co-founder Marco Dunand told the summit in a joint interview.

Another example is gas arbitrage in the petrochemical world.

"At the end, it's probably easier to move certain types of petrochemicals out of the U.S. than it is to move gas out of the U.S.," Dunand said.

REINVENTING YOURSELF

The resurgence of the U.S. oil and gas production has drawn a large number of producers and traders from all over the world.

"When you are interacting with the market, the efficiency is spotted by more than one player, and so the efficiency disappears and you have to find the next play," Dunand said.

"It's a constant model of trying to reinvent yourself."

Shortly after the shale boom started, Mercuria invested in Bakken crude oil production and some storage capacity at the oil hub in Cushing, Oklahoma. It sold out of Bakken last year and has also reduced its position at Cushing, Dunand said.

"It's about positioning yourself early in a dislocation, and when the market becomes more efficient to reduce your exposure," he said.

Mercuria, which started as a small oil trader in 2004, has posted one of the steepest growth rates in the business over the past decade. Its turnover soared to $98 billion in 2012 from $75 billion in 2011 and $47 billion in 2010.

OIL PRICE RANGE

Both Dunand and Jaeggi said the oil market had found its price equilibrium point, which was likely to persist.

"There is a broad consensus in the market that we're in a $90 to $100 range, and I don't see any compelling argument why in the foreseeable future we'd step out considerably from that range without some form of unforeseen turmoil," Jaeggi said.

Dunand said that, despite downward pressure on prices from new sources of supply, he couldn't see oil prices going much below $90 per barrel for a prolonged period of time.

"You still need to replace around 5 million barrels per day of production every year, and you would not be able to do that if the market were to be consistently below $90 a barrel for Brent," he said.

Mercuria may continue to seek opportunities in oil production, but mostly to help its trading strategies rather than to become big in industrial activities.

"We've invested a little bit into Canada and West Africa in a couple of places. We're doing it, but this is not a major focus for us."

REGULATIONS

Dunand said trading houses were engaging with regulators across the world to make sure traders understand the new rules in commodities markets.

"The biggest problem we can see in the regulatory world is that the rules in the U.S., Europe and Asia are not completely aligned," he said.

Dunand said he believed there was a fair amount of transparency in oil markets, at least for the benchmarks.

"A lot of information is on record, but there's not necessarily a great understanding of how those benchmarks work for people who are outside the industry," he added.

"I think people are naturally suspicious of the commodities markets because they've seen prices increasing in the last 10 years, and some people may relate those price increases to market abuse."

(Additional reporting by Peg Mackey, Alex Lawler, Dmitry Zhdannikov, Lin Nouiehed, Christopher Johnson; editing by Richard Mably and Jane Baird)