The oil-trading boom that cushioned the profits of Royal Dutch Shell Plc and BP Plc through the price slump of 2015 and early 2016 is over.
BP said it made a â€œsmallâ€ loss
trading oil in the fourth quarter, while Shell last week said trading profits â€œflattenedâ€ in late 2016. The fall off in trading contributed to worse-than-expected fourth-quarter profits at Europeâ€™s largest oil and gas producers.
Although better known for their oilfields, refineries and gas stations, Shell and BP are the worldâ€™s top
energy traders, handling about 20 percent of global oil demand between them and dwarfing independent trading houses such as Vitol Group BV, Trafigura Group and
BP â€œsimply had a weak fourth quarterâ€ in oil trading, Brian Gilvary, the companyâ€™s chief financial officer, said in an interview, adding that
BP managed to make a profit in
overall trading once natural gas was included. BP said a court ruling
late last year, which cost the trading division about $70 million, further hurt earnings.
Oil traders thrived in 2015 and 2016 by taking advantage of an oversupply that led to an unusually strong contango market structure â€” where contracts for future delivery trade higher than spot prices. The contango allows traders to buy
oil cheap, store it and profit later
by locking in their profit through derivatives in so-called â€œcash-and-carryâ€ deals.
As onshore depots filled up over the last two years, oil traders relied on supertankers for â€œfloating storageâ€ deals, at times anchoring ships for months in natural ports or near trading centers like Singapore.
The contango has narrowed sharply since the Organization of Petroleum Exporting Countries and Russia cut production. The price difference between Brent crude for immediate delivery and the one-year forward dropped to a contango of $0.52 a barrel on Friday, the narrowest since September 2014 and well below the 2015 peak of $12 a barrel.
Oil traders predict the market could flip later this year into the opposite condition, backwardation, where prices for immediate delivery trade at a premium to forward contracts. The oil curve is â€œflat as a pancake,â€ Gilvary said, using an expression from his days as head of trading at BP. While contango opportunities no longer exist in crude trading, some remain for gasoline, he said.
Oliver Wyman, a consultancy
that publishes a benchmark annual review of the commodities trading industry, said the trading arms of BP and Shell enjoyed in 2015 their best year ever thanks to â€œlow, volatile spot prices that created cash-and-carry opportunities.â€
Total, the other major oil company with significant trading operations, reports quarterly earnings Thursday. In contrast to their European rivals, Exxon Mobil Corp. and Chevron Corp. have smaller trading operations.
Independent commodity trading houses have also seen profits from
energy trading decline. Vitol, the largest independent oil trader, posted a 42 percent drop in first-half 2016 profit, according to people familiar with the matter.
Trafigura, the third-largest independent oil trader behind Vitol
and Glencore, said in December that full-year gross profit from crude
and petroleum product trading fell 13 percent.