Utilising the right market

After extensive research into oil, gas and other energy markets, Shell has released some very solid results on the back of what many consider to be a fairly volatile industry at the moment


The global recession may have hammered oil and gas prices, but betting the right way in volatile markets helped Royal Dutch Shell Plc’s earnings in the second quarter.

Shell, the world’s second largest fully publicly traded oil company by market value, followed an industry trend of posting a drop in profit in late July due to lower crude prices, but exceeded analysts’ forecasts.

“The second quarter continued to be a strong underlying economic contribution – a volatile market is good for trading,” Shell’s Chief Financial Officer Simon Henry told reporters.

Shell’s rival BP Plc, when reporting earnings recently, said its trading performance in the second quarter was more normal after a “very strong” first three months of the year.

Crude prices slid to about $65 a barrel earlier in the year from more than $147 last year because of the recession, dragging down oil companies’ profits. But a more bearish market still brings opportunities to make money.

The crude market is in contango, a condition where today’s prices are lower than future prices. A company with access to storage can buy oil and simultaneously enter into contracts to sell it in the future, locking in a profit.

That has encouraged trading firms to store millions of barrels of oil, even on tankers at sea. Both BP and Shell have been active in storing oil on tankers in recent months.

“The contango play has continued with the second quarter, we continue to hold those positions,” Henry said. “We are still storing cargoes offshore.”

“We’ve also in the second quarter had a good contribution from our gas trading business in both North America and Europe.”

Besides trading on futures exchanges, BP and Shell are also active in the over-the-counter markets for physical oil and associated derivatives, which are estimated to be much larger in size than the futures markets.

Energy markets are coming under increased scrutiny from regulators. The US Commodity Futures Trading Commission aims to rein in speculation in energy and commodity trading. Britain’s financial watchdog said recently it and the UK Treasury met oil industry representatives in August to discuss market transparency and efficiency.