Citi Bets on Commodities Boom, Expands into Energy

Citigroup, which shrank its commodities activities after a 2008 bailout, is expanding its energy business across the globe again as it bets on a commodities boom, its global head of energy said on Thursday.


Stephen Trauber, who joined the bank in 2010 from UBS, said it had recently added around 50 bankers to its energy business, while also increasing capital allocations to its commodities segment, including trading.

Citi had to cut drastically its exposure to commodities after being bailed out by the U.S. government during the 2008 economic crisis, while some of its peers such as Morgan Stanley remained very active in physical trading.

"We're growing all aspects of our energy business, on the banking side, on the commodity side, on the research side, and across all geographical regions," Trauber told Reuters Insider Television ahead of the Reuters Energy Summit next week.

"We're trying to take advantage of the activity levels that we're seeing in the global economy and in the global energy market."

Prices on some commodity markets have soared as investors bet on growth in appetite from emerging economies such as China.

"Risk and volatility increases the level of activity. It doesn't have to be all positive news. Negative news causes companies to take advantage or to take action that results in us being busy," he added.

He said Citigroup now had a strong capital position, one of the key requirements to go into capital intensive and global commodity trading business. It was boosting its power, metals, natural gas, oil and refined products teams.

"Unknown Regimes"

Trauber said he was not hugely surprised by OPEC's failure to reach an oil production deal boost at a meeting in Vienna this week as he said it had just confirmed uncertainty about where the global economy is going.

He said chances of a U.S. strategic reserves release were slim unless oil prices spiked. He expected oil to trade around current levels -- about $102 a barrel on Thursday -- with demand destruction setting in only if U.S. crude exceeds $110 a barrel.

"Put me in a better economy where more people are employed and the global economy is stronger, that level may move up but, given the fragility of the global economy and U.S. economy, that number feels like it's the right number," he added.

He said he thought the key risks for commodities markets were an economic slowdown in China, a default of a euro zone member and continued unrest in the Middle East.

"As those regimes change -- Egypt, Libya, Yemen, Syria -- we don't know the motives, objectives of new regimes. We don't know how they play against each other. That to me leaves a lot of political uncertainty around the Middle East for years if not decades to come," he said.

China Expands

Trauber said the level of merger and initial share offering activity in the energy sector was the best he has seen in his 25-year career as an energy banker.

That activity is mainly spurred by access to cheap capital, a commodities boom and severe competition between resource-hungry majors from developed countries and new players like China and India. He added he did not think oil at $100 a barrel was acting as a break on mergers and acquisitions or initial public offerings.

"More companies are getting comfortable with higher oil prices in their modelling but more important than that is the need to replace their own declining reserve base."

He said the merger landscape will be dominated by mid-sized deals rather than super-mergers.

"I have never seen IPO activity where it is today. We at Citi have in the U.S. and Europe something like 15 IPOs where we are mandated as book-runners -- not just upstream but mid-stream, downstream and services."

On the acquisition front, China will be playing an increasingly active role.

"If you have the strategic need and the lowest cost of capital you are going to be competitive in every opportunity you want to seek. That is causing majors to look elsewhere because they didn't used to have to compete with the Chinese... China was not a competitor that Exxon ever had to worry about. Today they do."