Oil and products house of the year: BOCI

Throughout the past 18 months, oil market participants have faced intense price volatility and market uncertainty, making financial risk management critical for business success. In the first half of 2022, oil prices climbed steeply on the back of the war in Ukraine, but this was followed by a steady decline. From mid-June 2022 to March 2023, the price of West Texas Intermediate futures slid 43% from over $120/bbl to $67/bbl as markets grappled with economic uncertainty and fears of a global recession. As prices plummeted, the number of firms able to take on the rising risk and provide effective risk management dwindled.

During this time, BOC International (BOCI), the investment banking arm of the Bank of China, stepped up its offering, implementing a more robust risk management process, developing new hedging strategies, enhancing its tailored financial products and improving its customised market analysis. This led to solid demand for its repo business, with 134% growth in transaction volumes in fuel oil, alongside 17% growth in the profit margins of its fuel oil trading business year-on-year, the company says.

Raymond Lau, BOCI

“In the past year we’ve enhanced our ability to identify and manage potential risks in the market by increasing the automation and sophistication of our middle office,” says Raymond Lau, chief operating officer of BOCI’s commodities business. “This has given us better, real-time insight into our positions, more accurate margin prediction and enhanced our stress-testing and daily analysis.” A key part of this has been an increased focus on scenario analysis with the team building more and varied scenarios including ones for extreme market conditions, Lau adds. 

The team has also developed new hedging strategies, including a foreign exchange component to allow clients to manage their risk exposures more effectively. “It can be difficult for clients to take advantage of international arbitrage opportunities between US-denominated crude futures and the Shanghai International Energy Exchange [INE] crude futures that trade on the Shanghai Futures Exchange, which is denominated in renminbi,” Lau added. 

As a result, BOCI now offers over-the-counter dollar-denominated INE swaps where the bank effectively manages the FX risk for the client. In 2023 so far, BOCI has traded 32 million barrels in the product. 

Setting out to bridge the gap between China and the global commodities markets, BOCI was the first Chinese financial institution in commodities to have clearing membership of global major futures exchanges and the first offshore institution participating in Chinese onshore futures. It was also the first Chinese financial institution to independently publish global benchmark commodity indexes. With a strong presence in Hong Kong, London, Singapore and Shanghai, BOCI’s services span hedging, risk management, market strategy, financing and physical solutions in a range of energy products, including crude oil, refined products, natural gas and petrochemicals. The firm’s dedicated energy trading team was established in 2011. 

Over the past year, BOCI has grown its oil repo business after partnering in 2021 with commercial banks to maximise its offering. Under this arrangement, BOCI holds title to the physical structures of the trade and carries out risk management and hedging, while the commercial bank is responsible for the receivables – providing the financing and taking on the credit risk. This financing structure has allowed BOCI to increase the scale and reduce the cost of financing.  

“Our repo business is a really good example of an investment bank working with a commercial bank to offer a comprehensive service to our clients,” comments Lau. “Repo transactions carry strategic importance to our customers and this enhances our relationship with them.”

BOCI has also invested time and effort in recent months in enhancing its proprietary analytical tools. One of its most important models uses machine learning to forecast price changes, and identify potential spreads and arbitrage opportunities for clients across six key commodity trading hubs worldwide.  

“Over the past year we proactively marketed and increased our offering in various value‑added services to our long-term clients such as refineries, which need hedging solutions and commodity financing,” says Lau. “This fortified our long‑term relationship with these clients and brought BOCI even more business opportunities from both new and existing clients as we demonstrated being a truly entrusted partner in this challenging environment.”

Sponsored content