The commodities trading house Trafigura and a bank are testing blockchain as a way to settle deals in the US oil market, a sign of the potential for digital technology to change how barrels of crude are bought and sold.
Blockchain is the electronic ledger originally built to underpin bitcoin markets. Promoters say it will lead to cheaper, more secure ways of settling all kinds of transactions, though it remains on the fringes of finance.
Since November, Trafigura and Natixis, the French bank, have run blockchain simulations using the trader’s existing crude oil deals along Texas pipelines, according to Arnaud Stevens, New York head of global energy and commodities at Natixis. The technology could ease the cumbersome process of exchanging contracts, letters of credit, inspection and other paperwork by email or fax when one company sells oil to another.
“By using blockchain, the goal is to streamline the workflow,” Mr Stevens said.
The use of blockchain could also lessen the working capital traders need to cover the cost of oil in transit by cutting the amount of time it takes to execute deals, Mr Stevens said.
The participants said the tests were the first test for blockchain in the US physical oil market. Another trading house, Swiss-based Mercuria, has used blockchain to sell African crude to China, Marco Dunand, chief executive, told Reuters in January.
Christophe Salmon, Trafigura’s chief financial officer, said there would need to be widespread adoption by major oil traders and refiners to make blockchain in commodity trading viable in the long term.
“We look forward to seeing the potential business benefits which could bring substantial efficiency and productivity gains to our finance operations, while increasing security,” Mr Salmon said.
The head of another leading commodity trader said banks offering trade finance would save substantially on costs by adopting distributed ledgers such as blockchain. It would also give them greater control of risk. But he questioned whether commodity traders would be able to make large savings.
IBM hosted the test for Trafigura and Natixis. In commodities trading and financing, “there’s a lot of friction and a lot of manual effort involved. It’s error prone,” said James Wallis, a vice-president at the tech company.
Mr Stevens acknowledged that a large network of traders was necessary to make blockchain work in the oil market. Natixis had begun to discuss the use of blockchain with Trafigura’s peers in the US as well as other commodity banks, he said.