*New wave of consolidation in global oil trading

Global energy trading businesses are set for a new wave of consolidation as rising interest rates and high oil prices compress already thin profit margins, said Mercuria, one of the world’s biggest oil traders. “The overall industry is oversized,” chief executive Marco Dunand said.

“In the trading world, if you look typically over the last few years what the return on equity in trading is, it’s not so bad. But if you look at profit compared to turnover it is very small,” he said.

The industry usually operates with a net margin of below 1 per cent and during poor years closer to 0.5 per cent, which Dunand said leaves very little room for error.

“The net margin compared to turnover is probably one of the lowest you can find in markets... We believe there should be consolidation within the industry.”

Mercuria grew rapidly in recent years by buying trading books and businesses of rivals such as JP Morgan as banks exited commodities trading and some parts of struggling rival Noble Group.

“One way to grow, or at least reduce your cost base, is...consolidation,” said Dunand citing opportunity to reduce expenses such as back and legal offices: “Once you have those in place you don’t have to double in size”.

Also spurring consolidation might be higher oil prices, requiring larger working capital to fund trading operations, as well as increasing interest rates around the world, he said.

Mercuria is still looking to enter the liquefied natural gas (LNG) market, Dunand said, where its rivals such as Gunvor and Trafigura have already carved out a chunk of the increasingly liquid market.

The firm tried to gain exposure to LNG earlier this year when it was part of a failed bid by Harbour Energy to buy Australian gas producer Santos Ltd.

The Swiss-based firm reported a gross profit of $674 million in 2017, down from $716 million in 2016 while traded volumes of crude and refined products rose to 121 million tonnes from 105 million tonnes.

Volumes will go slightly up in 2018 and the trader will have more than 50 per cent of its business in gas, power, coal and metals trading and less than 50 per cent in oil and products, said Dunand.

In another development, Britain’s oil major Cuadrilla extracted its first shale gas from its site in northwest England, it said after it began fracking operations there just over two weeks ago.

Cuadrilla said the gas flows were small but coming at such an early stage of the project were evidence of the potential of the site.

“This is a good early indication of the gas potential that we have long talked about,” Cuadrilla Chief Executive Francis Egan said.

Fracking, or hydraulically fracturing, involves extracting gas from rocks by breaking them up with water and chemicals at high pressure.

ALSO SPURRING CONSOLIDATION MIGHT BE HIGHER OIL PRICES, REQUIRING LARGER WORKING CAPITAL TO FUND TRADING OPERATIONS, AS WELL AS INCREASING INTEREST RATES AROUND THE WORLD.

The practice, which started at the New Road site has been halted and restarted twice since then after small earth tremors were detected.

Britain’s regulatory system calls for any fracking to be paused if any tremor of magnitude 0.5 or above is detected.

Cuadrilla said it plans to fully test flow rates from the current two exploration wells towards the end of 2018 and into the New Year to determine whether full-scale gas extraction would be viable.

Fracking is opposed by environmentalists and green groups who say extracting more fossil fuel is at odds with Britain’s commitment to reduce greenhouse gas emissions.

But Britain’s government is supportive of the industry and is keen to reduce the country’s reliance on imports of natural gas, which is used to heat around 80 per cent of Britain’s homes.