Oil trading profits soar for energy majors who made storage bets
In March and April, as oil prices plunged to their lowest in
a generation, Norwegian energy giant Equinor ASA was busy doing the opposite of
what oil companies usually do: pumping as much crude as possible underground
into giant caverns on the nation's North Sea coast.
Equinor also filled oil tankers with crude, turning them
into floating storage facilities, and put even more barrels into onshore tanks
elsewhere. Its traders were trying to soften the blow of rock-bottom prices by
buying cheap crude, storing it, and simultaneously selling it on the forward
market at higher prices.
The trade, known in industry jargon as a contango play,
combined with other oil trading activity delivered a record of about $1 billion
in pre-tax adjusted earnings in a single quarter. And the Norwegian oil company
wasn't alone: it's a pattern likely to be repeated throughout the industry from
oil majors such as Royal Dutch Shell Plc to independent commodity trading houses
like Glencore Plc.
The price difference between a Brent contract for immediate
delivery and the six-month forward contract - a key measure of the contango -
plunged to a record of nearly -$14 a barrel in early April, surpassing the
contango witnessed during the 2008-09 financial crisis.
Equinor on Friday said that its midstream business line,
which includes trading, made adjusted profit before taxes of $1.16 billion in
the second quarter, an increase of $951 million from a year earlier. "The
increase was mainly due to contango market during the quarter and good results
from liquids trading," the company said.
The key to the contango play is access to a place to park
millions of barrels of crude, perhaps for as long as a year. And Equinor had
plenty. "We have storage at Mongstad," Eldar Saetre, the company's
boss, said in an interview, referring to the underground caverns able to hold
almost 9.5 million barrels of crude under the country's west coast.
"And we have storage capacity that we rent in Korea, we've
done that for many years, and some other storages here and there," he
said. As onshore storage ran out, oil companies turned to tankers. "We
have a lot of floating storage for this purpose," Saetre added. "We
have increased capacity for this purpose, increasing our shipping capacity for
storage use."
Most oil majors in same game
Others in the oil industry were doing the same. Although
better known for their oil fields, refineries and filling stations, Shell, BP
Plc and Total SA also run huge in-house oil trading businesses that dwarf
independent commodity trading houses.
The three companies are expected to deliver strong oil
trading results when they report their quarterly earnings over the next two
weeks, according to people familiar with their business. Some of their
so-called trading books made significantly more money in the first half of 2020
than they did in the entirety of 2019, the same people said, asking not to be
named because the information isn't public.
Shell in particular made huge amounts of money on its
jet-fuel book, one person familiar with the matter said.
The trading units of Shell, BP and Total handle more than 25
million barrels a day of crude and refined products - equal to a quarter of
global consumption. The trio don't disclose their trading results separately,
and many investors consider the operations essentially black boxes. But in the
past they have said that contango plays are extremely profitable, able to give
a $500 million boost in a single quarter to their trading businesses.
The three oil companies declined to comment.
Few other publicly-listed oil companies trade at the scale
of the European oil majors and Equinor, although Eni SpA and Lukoil PJSC also
have trading desks. While the extra profits from trading are unlikely to offset
much larger losses of revenue from lower oil prices, they could help the three
majors to weather the crisis and, perhaps more importantly, beat analysts'
estimates.
Bumper period for traders
The independent traders also enjoyed a bumper period.
Glencore, which earlier this year hired the world's largest oil tanker to play
the contango, made nearly $1 billion in earnings before interest and taxes in
oil trading in the first six months of 2020, similar to what the company made
in the whole of 2019, according to people familiar with the matter.
Glencore, which declined to comment, reports results in
early August.
Other independent oil traders, including Trafigura Group,
Mercuria Energy Group Ltd and Gunvor Group, have already announced bumper
trading results. Mercuria, one of the top-5 independent oil traders, told
bankers it enjoyed record profits for the first six months.
Likewise, Gunvor told employees it made bumper profits
thanks to its tankers, whose value surged as companies rushed to hire the
vessels for storage.
"Given our sizeable fleet of ships under management,
this allowed for substantial earnings for the quarter," said billionaire
Torbjorn Tornqvist, the co-founder and head of Gunvor.
Comments
Post a Comment