Oil & Products House of the Year: BNP Paribas

BNP Paribas is holding the course in oil and refined products, as other banks abandon the commodities market

During the past 18 months, many banks once regarded as top oil dealers have pulled back from commodities, including Barclays, Deutsche Bank and JP Morgan, pressured by regulatory changes and unfavourable markets. Against that backdrop, BNP Paribas stands out for its consistency, winning praise from clients for making markets and developing innovative solutions in difficult conditions.

"The impression they leave is that they are in the business to stay," says a senior oil trader with an Italian energy company. "This is important in a market where so many players are disappearing."

Spyros Gkinis, London-based global head of energy at BNP Paribas, attributes the bank's staying power to its strength in commodity finance, as well as a client-focused business model that was never deeply reliant on proprietary trading. As a result, BNP Paribas actually gained ground in 2013, according to Gkinis. "We have seen a pick-up in activity from clients who used to rely on other banks," he says.

Moreover, BNP Paribas has continued to demonstrate creativity in areas such as oil indexation. In one example, a utility in northwest Europe used the bank to restructure its hedges in the second half of 2013. The utility had traditionally purchased natural gas via long-term, oil-indexed supply contracts that had become uneconomic in recent years as the price of gas fell relative to the price of crude. After renegotiating its supply contracts, the utility found itself with a mismatch between its legacy long-term oil hedges and its actual exposure, now tied to prices at a European gas hub. Complicating the picture, the utility still had the right to take sizeable volumes of ‘make-up gas' – gas it had paid for under its old, oil-indexed supply contracts, but had not accepted for delivery in past years – which made it a challenging task for the utility to manage its price and volumetric risk.

In response, BNP Paribas stepped in with a tailor-made solution to restructure the utility's hedges and off-take its surplus gas. "The co-ordination between our oil desk and our gas desk was fantastic," says Gkinis.

We have seen a pick-up in activity from clients who used to rely on other banks

In 2013, BNP Paribas's oil team also executed a number of innovative structured deals for mid-sized commodity trading firms. Such firms often enter into deals with a degree of physical optionality – for instance, they may sign a contract in which they can deliver a cargo on one of two months, or to one of multiple delivery locations. BNP Paribas has tailored bespoke hedges for such clients, in which the bank pays the client a cash premium upfront in exchange for an options structure that precisely maps onto the client's physical exposure.

Getting that cash upfront is appealing to trading firms, which are often capital-constrained. "We can make derivatives to reflect the inherent optionality that you have in the physical cargo," says Mads Hultgreen, BNP Paribas's London-based head of oil and energy sales for Europe, the Middle East and Africa (Emea).

Meanwhile, BNP Paribas has been well positioned to provide hedges for European refiners struggling with tight refining margins. The bank's relationships with hedge funds willing to take the opposite side of the trade allowed it to be an aggressive market-maker in crack spreads, which reflect the difference between the price of crude and refined products. "It's a two-way flow between oil refiners and hedge funds," says Gkinis. "Thanks to the two-way flow, our books were very well balanced."

To boost its presence outside the Emea region, BNP Paribas made some notable hires in 2013. Gunnar Hoest, Deutsche Bank's former head of commodities for Asia, joined BNP Paribas as the bank's new Singapore-based head of commodity derivatives for the Asia-Pacific region, while JP Morgan veteran Catherine Flax became BNP Paribas's New York-based head of commodity derivatives for the Americas. "Our senior hires have been in Asia and the US because we see opportunities for growth there," explains Gkinis. "Our position in Europe has always been strong."

BNP Paribas expresses determination to keep trading oil even as other banks give up. "More and more, clients ask if we are really committed to commodities," says Hultgreen. "What we tell them is that we're one of the biggest lenders to the commodity industry and commodity derivatives are an important part of that picture."