What is the difference between a driller and a trader? Iran War exposes Big Oil’s transatlantic division: Bousso
The first-quarter profits of European oil majors were boosted by a bumper trading gain as the Iran Warupended supply chains. This highlights how sometimes the ability to move barrels around can trump the ability to pump them out of ground. BP, Shell, and TotalEnergies 'have spent years creating vast oil trading machines which now sit at their core of their business – setting them apart from their U.S. counterparts, for better or worse. BP announced a first-quarter profit of $3.2billion on Tuesday. This is more than twice the figure from last year, largely due to an exceptional performance by its oil trading. Oil trading is part of the Customers and Products division. This division has delivered a profit of $3.2 billion before interest and taxes, the best since Russia's invasion in Ukraine 2022.
According to ROI calculations, BP’s oil trading – the buying and the selling of crude and other fuels for its global retail network as well as end customers – likely contributed $1.5 billion pre-tax profits in the third quarter.
The size of BP's trading operations is both a source of upside potential and risk. The company trades 12 million barrels per day, which is equivalent to roughly 11% global demand. This is 10 times BP’s upstream production capacity and 8 times its refinery capacity. TotalEnergies reported a $5.4 billion net profit for the third quarter. This was a 29% increase year-on-year, largely due to strong trading. Total's oil-trading segment, the refining & chemicals segment, has seen its earnings more than quadruple to $1.6 billion in a year. Shell, which is estimated to trade 14 million barrels per day, has also reported a strong performance in the first quarter ahead of its results on May 7.
OPPORTUNITY RISK
The majors have a vast network of refineries and pipelines, as well as storage terminals and tanks, and a large derivatives desk that allows them to take advantage of small price fluctuations across products and regions. The opportunities and dangers multiply when those dislocations reach seismic levels, as they have in the last two months. Since the Iran War broke out on 28 February and the Strait of Hormuz has been effectively closed, over 13 million bpd of production - 13% of the global supply – have been trapped in the Gulf. This has sent shockwaves throughout crude and refined products markets. The impact has been massive. Brent crude is up more than 60% since the start of the war, to $115 per barrel. This has been accompanied by a tremendous amount of volatility on oil, fuel, and liquefied gas markets.
Arbitrage is possible when disruptions of this magnitude occur. One example is to reroute diesel and jet-fuel along unusual routes, like shipping cargoes out of Europe to Australia where prices have risen since the beginning of the conflict.
Trading at this level is capital intensive and can be unforgiving when things go wrong. Tankers that hold large amounts of cargo for long periods can cost a lot of money.
BP said that its working capital increased by $6 billion during the third quarter. This included $4.1 billion due to higher oil prices, longer routes for shipping and larger inventories. These positions will unwind in the coming months but they are still significant.
Large trading arms have been able to absorb losses during this turbulent time. BP is heavily exposed to the Gulf. Equity upstream production was around 411,000 barrels per day (bpd) in the Middle East - or about 17% of total output by 2025. TotalEnergies accounts for 15% of its production through operations in Qatar and Iraq, as well as the United Arab Emirates. Shell reported a lower output due to the outages in Qatar. BP estimates trading can typically deliver up to a 4% increase in returns on average capital used. Shell provides similar advice. This increase is likely to be higher during periods of extreme volatility.
UNRIVALED EXTRACT Exxon Mobil, Chevron and their European competitors may envy the trading profits of their European counterparts.
Both U.S. giants keep trading under tight control, and only use it internally to handle upstream and downstream volumes. Previous attempts to create more independent trading desks failed, partly because the highly centralised decision making at these firms prevented traders from acting quickly in fast-moving market conditions. This contrast is a two-way street. Exxon and Chevron's upstream operations are vastly superior to those of their European rivals.
Exxon, Chevron, and Shell will produce about 4.7 and 3.7 millions bpd, respectively. This is well above BP, Shell, and TotalEnergies, which produced?2.3 and 2.8 million bpd, respectively. The European upstream sector's weakness is partly due to the heavy investments made in renewables and lower-carbon fuels in this decade. BP and Shell have retreated from this strategy following heavy losses but still lag behind their U.S. competitors.
Exxon's and Chevron’s massive production engines will generate enormous cash if the prices remain high after the Iran War, but the trading profits of BP Shell and TotalEnergies might not be replicated if volatility decreases.
Investors find it difficult to value trading operations because they are opaque and volatile. Trading could become more important to European majors, given that they are unable to compete with U.S. competitors on production. This would increase the valuation gap between Europe and America.
Energy industry will be increasingly defined by new divisions: traders and drillers.
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(source: Reuters)
