‘Greed and fear’: How BP and Shell’s oil profits are boosted by their own traders | Oil
British oil giants BP and Shell reported huge quarterly profits this month, reigniting calls for a windfall tax to ease the burden of bills on struggling families. Tesco chairman John Allan argued this week that there was a ‘damning case’ for a one-off levy on North Sea extractors. While the focus was on their oil production business, the two “supermajors” benefited from a boom in trading revenues.
BP and Shell don’t just produce and sell oil, they employ thousands of traders whose job it is to buy and sell oil produced by other companies. They profit from speculation on fluctuations in the price of oil, and the more turbulent the market, the higher the potential profits.
The pandemic and the war in Ukraine sent the markets on a rollercoaster ride, creating ideal conditions for those betting on price movements. Gasoline prices at the pump are at record highs, up 16% this year on top of a 50% increase in 2021. Wholesale gasoline prices are up nearly 400% since the invasion of Ukraine. The volatility has made hydrocarbons popular with institutions and day traders. More than 100 million barrels per day of oil and other petroleum products are traded.
For many years, the oil business was a small offshoot of booming multinational corporations, but now it represents a vital profit engine, the well-kept cousin of the dirty, tough world of riggers and drillers.
Oil traders in London typically earn around £102,000 a year, but can earn significant bonuses depending on their performance. Last year Vitol’s top 350 employees shared a bonus pool of £2.1 billion, the equivalent of £6 million per person.
Although the sector is dominated by commodity specialists Vitol, Trafigura and Glencore, extractors are very present.
But there is no transparency. BP and Shell don’t break down figures for their business divisions, meaning those looking for answers have to settle for estimates.
In its exceptional first-quarter results, BP trumpeted “exceptional” trading, surpassing last year. The company employs around 3,000 people in its extensive trading floors in London, Houston, Chicago and Singapore. Alliance Bernstein analysts estimate that BP made $1.3 billion in gas trading profits between the start of the year and the end of March, and $1.1 billion in liquids trading – a total of $2.3 billion, just over a third of its $6.2 billion in profits. in the first trimester.
Shell’s trading profits are more difficult to estimate, but in the division containing its trading activities, which also include exploration and mining, adjusted profit jumped to $6.3 billion in the first quarter from $3.4 billion in the same period a year earlier. Shell earns up to $4 billion a year from oil and gas trading, while BP earns $2-3 billion, Bloomberg reported last yearciting sources close to the companies.
Sinead Gorman, Shell’s Chief Financial Officer, said: “Our trading business has done very well – of course it has the advantage of being very strongly tied to our underlying assets.”
The specialists should do well this year. Glencore raked in $3.7 billion from its trading arm last year and was on course to easily top its long-term guidance range of $2.2 billion to $3.2 billion this year. It would be the third year in a row that the FTSE 100 firm has exceeded forecasts, on the kind of form that earned it the nickname “The Millionaire Factory” before its flutter that enriched an army of executives a decade ago. Vitol, the world’s largest independent oil trader, made a record net profit of just over $4 billion last year, while rivals Trafigura, Mercuria and Guvnor also boasted windfall profits.
It is a sector built around financial instruments. Oil companies can agree immediate ‘spot’ prices or ‘forward’ contracts, in which fixed prices for specified quantities of certain oils are agreed in advance. Companies will often lock themselves in cheap oil and then hedge against the price going the other way.
Traders do not necessarily need to take delivery of physical oil under a futures contract and can settle in cash if it is no longer needed. In fact, it is estimated that around 13 times the physical quantity of oil is traded through purely financial contracts. This means that the price paid at the pumps in Britain is as much related to the trading done on stock exchanges in the United States as it is to the amount of oil arriving at ports.
Another common set of instruments are “call” and “put” options, which allow traders to bet on making a profit if prices rise above or fall below a certain price.
“You can have an opinion on the price difference between Russia and non-Russian oil. Then you speculate that, if sanctions come into effect, the value of Russian oil will go down and others will go up – so you can trade the difference,” says Bill*, who ran a joint venture with one of Russia’s biggest traders. raw materials in the world.
“We are driven by greed and fear. If the price of something goes up, knowing when the right time to sell is crucial, you need to recognize that,” he adds.
But it is a job that involves significant risks. In the early 2000s, Bill was encouraged to travel from the Port of Grimsby to London to meet a group of American executives making waves in the energy market. “I walked through a huge floor of shopkeepers in sharp suits in Canary Wharf. They explained to me how they traded in the markets and, at the end of the meeting, I said to myself: ‘Either I am fat or these guys are charlatans’”, he says. The company was Enron. It would soon implode in one of the biggest accounting scandals in corporate history.
Enron’s collapse has become a cautionary tale about the dangers of arrogant management and complex accounting. It also nurtured the image of an industry with players willing to take the risky – but potentially rewarding – bets made by Wall Street investment bankers.
This was highlighted when little-known company Vega Capital reported £400m from the 2020 oil price crash. The 12 traders, dubbed ‘the Essex boys’, have since been charged in US courts manipulate markets and violate antitrust rules. laws. They decided to have the lawsuit dismissed.
In The World For Sale: Money, Power, and the Traders Who Barter the Earth’s Resources, written by two Bloomberg energy specialists, BP sources say the company made between $150 million and $200 million in one trade in 2016. A former chief executive, Bob Dudley, secretly sanctioned a decision by a management team – because the trade was too big for one individual to be held accountable – to bet that Brent would finally break down. improve after a sustained decline. This proved a watershed moment for BP traders, who took advantage of the rebound in oil.
Without a quick end to the war, 2022 could prove just as seismic for traders.
*name has been changed