Oil trading bonanza saves quarter for Shell and Total

The secretive oil-trading businesses of Royal Dutch Shell Plc and Total SE saved both European majors from posting losses in the second quarter, bringing a torrent of cash that countered the impact of the coronavirus crisis.

Investors had already been warned that the pandemic hammered almost all parts of the energy giants’ businesses — from forecourts, to oil and gas production, to the long-term value of assets. But that was offset by gains from speculating on energy markets, the companies said Thursday.

In keeping with tradition, Shell and Total didn’t disclose exactly how much money their trading operations made, but acknowledged they were able to exploit extreme price volatility during April’s record supply glut.

The quarter was “the best on record” for Shell’s trading unit, chief financial officer Jessica Uhl said on a call with reporters. “It was a really outstanding performance.”

When asked by investors on a separate call about how much money the traders made, Total CEO Patrick Pouyanne responded: “The oil trading is a secret.” He would only say it made about $500 million more than usual, but refused to disclose what’s the normal baseline.

Shell took advantage of its sprawling infrastructure that allowed it to capitalize on the market’s volatility — from storing oil cheaply to adapting its refineries to meet changes in demand. Shell benefited from “all sorts of arbitrages that opened up in unusual parts of the world,” chief executive Ben van Beurden said in a Bloomberg Television interview.

U.S. DIFFERENCE

With trading floors that resemble the operations of Wall Street banks in cities from London to Singapore, the European majors have an edge over their main American rivals, which market their own energy production but largely eschew pure trading as a means of generating profits. That means that Exxon Mobil Corp. and Chevron Corp., which publish results on Friday, are unlikely to report a similar boost in the second quarter.

Shell’s adjusted net income was US$638 million in the second quarter, down 82 per cent from the same period a year earlier but far better than the average analyst estimate of a US$664-million loss. Total posted a surprise profit of US$126 million, compared with expectations for a loss of US$443 million.

Those figures exclude tens of billions of dollars of writedowns on the value of the companies’ assets resulting from the slump in oil and gas prices, which had already been disclosed to investors.

Shell’s B shares fell 5.7 per cent to 1,113.8 pence as of 4:55 p.m. in London. Total fell 1.6 per cent to 31.93 euros in Paris.

CONTANGO TRADE

When oil prices plunged last quarter, traders were able to buy crude on the cheap, store it and lock in a profit from the future sale by selling forward in the derivatives market. The profit was possible because spot prices were much lower than forward prices, a situation known as contango.

With its vast access to data from its shipping network, its refining positions and high flow of trades, Shell was able to capitalize on the market structure more extensively than the average trader, finding contango plays in more obscure non-benchmark crudes.

“We do contango on steroids,” van Beurden told analysts in a call.

It’s unlikely that profits from trading will remain at the same level during the rest of the year, since the contango has since diminished significantly and market volatility has eased.

Shell’s “very strong trading and optimization performance that we saw in the second quarter is not necessarily an indication for the third quarter,” CFO Uhl said.

Shell’s entire refining and trading business delivered adjusted net income of US$1.5 billion in the period, more than 20 times larger than a year earlier.