Energy Trades Ease Oil Firms' Pain

NEW YORK (THE WALL STREET JOURNAL via Dow Jones Newswires), Apr. 30, 2009

Western oil majors have taken a hit from the slump in crude prices, but that's been partially offset by the big profits they've earned from energy trading.

BP PLC and Royal Dutch Shell PLC both reported first-quarter earnings this week that comfortably beat analysts' forecasts. One factor was the success of their oil trading operations.

Shell said Wednesday its trading profits were higher in the first quarter than in the preceding three months, though it declined to quantify them. "It is about trading our volumes and using our storage," Peter Voser, Shell's chief financial officer, told analysts. "We have used some working capital actually to drive trading during Q1, and to a certain extent in Q2."

A day earlier, his counterpart at BP, Byron Grote, said the first quarter had seen "some very strong overall contributions" from supply and trading operations. It was, he said, "about $500 million higher than what we would consider the normal range of quarterly volatility."

Oil companies' profits have been hammered by the tumbling price of crude, which has fallen by nearly $100 a barrel since reaching a high of $145 last summer.

Shell said Wednesday its adjusted net profit totaled $2.96 billion in the first quarter, down 62% year-on-year.

But the oil companies have been able to partly compensate for the low oil price by taking advantage of a crude market that since October has been in what's called contango, a price structure where near-term contracts are cheaper than contracts for delivery in the future.

Contango usually occurs when there is the expectation that prices will rise -- the slow economy and the historically high amounts of crude in storage drive down current prices, while expectations for economic growth and tighter oil supplies push up future contracts.

Oil companies are ideally placed to profit from this trade because they have plenty of storage capacity in the form of tanks and pipelines to stockpile the oil while waiting for prices to rise. Other, smaller traders would have to pay high rates for storage.

In a typical contango play, a company that bought oil on the spot market at $49.92 a barrel as of Tuesday's close, and at the same time sold a futures contract for September delivery at $53.19 was able to lock in a profit of $3.27 a barrel. In mid-January, the difference widened to $15.21. Contango has narrowed in recent months, but the trade still pays off handsomely, even factoring in storage and financing costs.

"It's almost like printing money," says Torbjorn Kjus, oil market analyst at DnB NOR Markets in Norway.

BP has been a particularly active player, exploiting the enormous storage capacity it has around Cushing, Okla., a huge pipeline and trading hub and the price settlement point for the U.S. benchmark, West Texas Intermediate.

"Contango at Cushing is one of the lowest risk trades out there," says Andy Lipow, a Houston consultant and principal of Lipow Oil Associates LLC. "Your biggest risk is if your oil is hit by lightning."

Shell, on the other hand, has been leasing supertankers to store oil in places like the North Sea. Most companies only book very large crude carriers to transport oil directly from the field to the refinery, whereas Shell is booking them for several months at a time, at huge cost, to float at sea. But the contango is currently so steep that it pays off.

U.S. oil companies are also in on the act. New York-based Hess Corp. said Wednesday it had lost money on its refining and oil-production operations, but recorded a $19 million gain on trading. ConocoPhillips said last week that the lion's share of the $1 billion it recently borrowed was spent on building up inventories for the contango trade. "The storage economics in the first quarter . . . were favorable and we took advantage of that to some extent," John Carrig, Conoco's president and chief operating officer, told analysts.

Some think the bonanza could continue: Mr. Lipow says he expects contango to last through the end of 2009, when the economic recovery kicks in. But others are more skeptical. Trading may have contributed mightily to BP's bottom line in the first few months of 2009, but "we don't anticipate that this level of contribution is likely to persist in subsequent quarters," Mr. Grote told analysts.

(Carolyn Cui contributed to this article.)  

Copyright (c) 2009 Dow Jones & Company, Inc.


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