TRANSFORMING

COMMODITY
TRADING WITH
GENERATIVE AI
Generative AI Will Separate The Commodity
Trading Leaders From The Followers

James Koh
Ernest Huang
Christian Lins
Laurence Holmes
Transforming Commodity Trading With Generative AI

Commodity trading firms have come through some turbulent times.

As we pointed out in an earlier analysis, the industry is rebalancing from
severe disruption that occurred in 2022. And as the industry settles
into a new normal, we are seeing leading commodity traders embrace
generative artificial intelligence (AI) to expand their competitive edge.
Firms are finding generative AI to be an invaluable tool in tasks ranging
from data pre-processing to augmenting long-term strategic planning and
short-term portfolio optimization. In parallel, the cost and time to deploy
generative AI models has dramatically decreased since 2022, lowering
the barriers to experimentation and impact. Just as with the leap from
landlines to smartphones, generative AI has the potential to revolutionize
the commodity trading industry, potentially leaving behind firms still
tethered to more traditional processes.

© Oliver Wyman 2
Transforming Commodity Trading With Generative AI

GENERATIVE AI MOMENTUM IN COMMODITY TRADING

Generative AI is the latest chapter of a decades-long evolution in AI and machine learning
(ML) techniques used by the commodity trading industry as early as the 1990s. The practice
evolved in specialist firms and commodity trading hedge funds, and has gradually gained
traction among the large independent traders in recent years. Traders use predictive
analytics to create different scenarios in supply and demand to discover trading factors
by analyzing large market datasets. Additionally, traders can use supercomputers with
AI algorithms to predict weather patterns to determine solar and wind energy supply and
local energy demand, or to process satellite images of loading docks to understand oil
tanker logistics. Such cutting-edge market intelligence can then be monetized, putting
the trader ahead of competitors.

Several commodity trading firms are already using AI for simple efficiency and productivity
gains. From 2018 to 2023, total IT costs and investments across all organizations increased
by 47%, according to Oliver Wyman proprietary data on leading commodity traders.
These investments are primarily going into firms’ data management platforms, cloud
computing, and talent budgets — the key ingredients to build a generative AI organization.
IT headcount increased 15%, and total IT spending per full-time IT role rose 28% during
that same time frame.

Exhibit 1: IT investment levels in commodity trading organizations

47%
Increase in IT investments
28%
Increase in IT spend
15%
Increase in IT full-time
per full-time IT role employment headcount

Source: Oliver Wyman proprietary data and analysis

BARRIERS TO AI EXPERIMENTATION HAVE DECREASED

AI is more accessible to industry players than ever before. The cost of deploying AI models
has fallen by 60-fold since 2020, mainly driven by better chipsets, algorithms, and energy
efficiency. Similarly, the time from idea to deployment of AI models has decreased from
12 months to 12 weeks, largely due to the proliferation of ready-made AI development tools.

© Oliver Wyman 3
Transforming Commodity Trading With Generative AI

Exhibit 2: New commercial tools have collapsed the cost and time to deployment of
large language models

Cost to train a GPT-3 model

In US$

2020 4,600,000

2022 450,000

2024 75,000 1/60

Time to deploy a generative AI model

In months

2022 3 6 3 12

2024 0.5 1.5 0.5 2.5 1/10

Design and planning Model training development Deployment

Source: Unite.AI, ARK Invest, American Enterprise Institute, and Oliver Wyman analysis

Not all trading operations are ready for this level of AI adoption. In fact, our view is that
commodity trading firms will diverge into two camps: a camp of AI visionaries, which can put
their existing talent, capabilities, and infrastructure to work building a lasting competitive
advantage; and a camp of AI challengers, which find themselves squeezed between the
AI visionaries and a new generation of challenger firms that are native to generative AI.

AI VISIONARIES WILL CHART THE FUTURE

Firms that develop leadership capabilities, organizational structures, and human skillsets
to support incorporating AI into their operations are in the best position to harness the
potential of generative AI. They added the infrastructure and processes to collect and curate
proprietary data. For example, electricity traders use algorithm tools to spot and execute
trades, with little human intervention. Regional utilities use AI for short-range local weather
forecasting to predict gas and power demand. Some commodity traders took a page from
the logistics arms of tech giants such as Amazon and Alibaba to explore using generative AI
in pre-processing massive amounts of complex data.

© Oliver Wyman 4
Transforming Commodity Trading With Generative AI

The incredible performance of commodity trading firms in 2022 and 2023 prompted much
of this activity. As shared in Oliver Wyman’s annual commodity trading report, the industry
earned record margins in 2022 of $150 billion due to intense volatility triggered by the war in
Ukraine, then margins declined last year to $100 billion, still the second-highest year for the
industry. Hedge funds, which traditionally focus on big data and quantitative analysis, were
attracted to the sector. Energy traders subsequently took notice. While traders traditionally
rely on asset networks and existing relationships for origination, the visionaries among
them began working to enhance their own analytics, too.

Currently, these firms are gathering the low-hanging fruit of these efforts, using the
technology to improve worker productivity by automating repetitive tasks, and creating
bespoke marketing and customer experiences. An Oliver Wyman Forum and Oliver Wyman
Quotient joint survey found significant productivity effects of AI across 14 core business
functions. More than half of employees surveyed said they use generative AI weekly
at work. Beyond cost savings and productivity, these firms are actively innovating to
translate AI capability into revenue.

OPPORTUNITIES AND CHALLENGES FOR AI VISIONARIES

There is great potential for generative AI in several emerging areas. In business

development, AI can help firms with structured origination, finding the right
opportunities given the organization’s asset network and market positions. AI can
help firms plan long-term strategy by analyzing long-range scenarios and determining
the most optimal strategy for various geographies and value chains. The technology
can analyze trades to optimize short-term risk and return, while driving toward a long-
term target portfolio. Further, AI can help penetrate opaque markets by clustering
and triangulating fragmented market data to create a bootstrapped market view.

A key to achieving the technology’s potential is a fine-tuned generative AI model with

a combination of rich proprietary internal data (such as internal weather predictions or
logistical data from internal fundamental models) and available public data. This type of
customization can unlock more of a model’s functionality while enhancing accuracy.

One major challenge is data privacy and security. Data is a key competitive advantage
for commodity traders. Any asymmetric information on commodity supply, demand, and
logistics can be monetized through trading strategies. Traders are extremely protective
of their informational advantage, even toward other traders in the same organization.
Therefore, persuading traders to trust generative AI with their data and to adopt the
technology to increase their productivity requires strong data privacy guarantees.

Ultimately, the current market conditions present many business development

opportunities for traders, but the right opportunities are few. A successful AI visionary
will use generative AI to identify and capture the right opportunities that otherwise
would have been overlooked, and do so at speed and scale.

© Oliver Wyman 5
Transforming Commodity Trading With Generative AI

NEW AI CHALLENGERS CAN LEAPFROG THE COMPETITION

This second group of commodity trading firms has developed a pool of trader talent,
deep business relationships, and extensive asset networks, so they may not have
seen advantages to adopting advanced analytics and AI. Typical AI challengers view
the technology as a corporate IT exercise that does not impact their day-to-day
work or the bottom line. These firms may deprioritize investments in AI talent and
infrastructure, and they lack, for example, a software development operations team.
Such underinvestment can result in delays for traders to experiment with AI or scale
up a model.

Evaluating the potential benefits of generative AI on their organization, versus the

implementation requirements, is key to knowing when and how to make
technology investments.

Exhibit 3: Evaluating the potential benefits versus implementation costs of

generative AI

Organizational Strategy
impact Does the use cases of AI
Is the workforce align with the overall
trained and ready to strategic goals of your
effectively utilize organization?
the AI use case?
Process relevance
Is the volume of work
high enough to realize
Data transparency significant savings?
Are the right permissions
Is the process
and safeguards for data
established enough to
privacy and security
build a use case
in place?
around it?

EFFORT BENEFIT

Impact
Does the AI use case
Data readiness generate significant
Is the required data financial benefits from
collected, cleaned, revenue generation or
and accessible? cost savings?
Does the AI use case
improve the quality of
the output or service
Cost and technical Use case maturity provided?
complexity Can the AI use case
Are the costs and be replicated and scaled
technical capability across the organization?
required within the Will the AI use case be useful
organization’s appetite? for the foreseeable future?

Source: Unite.AI, ARK Invest, American Enterprise Institute, BentoML, and Oliver Wyman analysis

© Oliver Wyman 6
Transforming Commodity Trading With Generative AI

The ultimate goal for AI challengers is to rapidly catch up with their competitors using
this opportunity presented by generative AI. The competitive edge built with AI can help
to close the gap with AI visionaries and prevent organizations from being leapfrogged by
new entrants.

ACCELERATING THE GENERATIVE AI JOURNEY FOR ALL

COMMODITY TRADERS
Access to data, talent, and key organization enablers such as leadership and digital
infrastructure will separate the pack into winners and losers, adding complexity to an
industry that is simultaneously adapting to heighted uncertainty and volatility.

AI visionaries will have the opportunity to take advantage of their lead by embracing AI.
These leading firms must move beyond the low-hanging fruit of productivity enhancements
to the competitive advantages of long-term strategy planning and portfolio optimization.

AI challengers that have yet to dip their toes into the AI waters now have a golden
opportunity to leapfrog their competition by adopting AI-ready digital infrastructure,
data governance, and investing in talent.

James Koh is a Singapore-based partner, Christian Lins is a Zurich-based partner,

Laurence Holmes is a Newcastle-based partner, and Ernest Huang is a Singapore-based
engagement manager in Oliver Wyman’s Energy and Natural Resources practice.

Alex Franke, a Zurich-based partner, Adam Perkins, a London-based partner in Oliver Wyman’s
Energy and Natural Resources practice, and Brad Kyer, a Houston-based director of Veritas,
a business of Oliver Wyman, contributed to this paper.

© Oliver Wyman 7
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