Crude’s Wild Quarter Puts Big Oil Trading Desks in Spotlight

Big oil companies are forecast to post their lowest quarterly profits in four years after geopolitics whipsawed prices and left some of their traders on the wrong side of the volatility.

Crude rallied 31% over a seven-week stretch in May and June, then plunged to end the quarter 10% lower than where it began as President Donald Trump’s trade war and Opec+’s supply increases outweighed the surge from Israeli and US attacks on Iran. 

The wild swings caused diverging performance at Shell Plc and BP Plc, which have larger trading divisions than their US rivals.

Shell warned earlier this month of “significantly lower” trading earnings while BP guided to “strong” profits from its oil traders, providing a much-needed boost for Chief Executive Officer Murray Auchincloss.

 Overall, the combined second-quarter earnings for Exxon Mobil Corp, Chevron Corp, Shell, TotalEnergies and BP are forecast to fall 12% from the prior period to $19.88bn, according to analysts’ estimates compiled by Bloomberg.

“Volatility usually is good because it means more trading profits, but because it was led by geopolitical risk it was more difficult to grab,” Michele Della Vigna, Goldman Sachs Group’s head of natural resources research in Europe, Middle East and Africa, said in an interview. “Not disastrous — but definitely a tougher quarter.”

Big Oil earnings kick off Thursday when Total releases results. Shell reports July 31, followed by Exxon and Chevron on August 1, and BP on August 5.

Norwegian major Equinor ASA on Wednesday reported a 19% quarterly drop in profit due to weaker oil prices and a prolonged outage at a liquefied natural gas facility.

Higher supplies from the Organisation of the Petroleum Exporting Countries and its partners along with concerns that Trump’s tariffs will dampen global demand kept average crude prices below $70 a barrel in the quarter, making it harder for the world’s largest energy companies to fund the shareholders returns that have become a focal point for investors. 

The five supermajors are expected to increase their combined net debt this quarter to meet the payouts, even after several trimmed buybacks or spending earlier in the year.

“This isn’t 2023 anymore,” HSBC analyst Kim Fustier said in a research note. “After two years of over-distributing, room to fund buybacks through debt has shrunk.” Average debt metrics are now “slightly above long-term historical levels.”

The weakness in oil and gas prices is likely to be partially offset by improvements in refining margins in both the US and Europe as summer driving season spurs additional demand. Exxon, BP and Shell all noted better refining earnings, though the size of the gains pales in comparison to the size of their larger production divisions.

Trading will be of particular interest this quarter. European oil stocks fell earlier this month after Shell disclosed a weaker-than-expected performance from its trading division, usually one of its most reliable profit centres.

 Even so, Shell has been the standout performer among the five largest energy majors this year, with its stock rising about 10%, despite the 8% decline in Brent crude.

Shell’s outperformance compared with BP prompted speculation that it will bid for its London-based rival, which has lagged after its pivot toward low-carbon energy failed to pay off. 

The Anglo-Dutch major said it has no intention of making an offer in late June, a move that bars a bid for at least six months under UK securities laws. But the episode is likely to prompt analysts to pepper CEO Wael Sawan with questions about his long-term strategy.

With a looming Shell takeover bid off the table, BP’s push to refocus on its oil and gas roots is crucial to reverse years of poor performance. 

The struggling British major, which is under pressure from activist investor Elliott Investment Management, appointed former CRH Plc CEO Albert Manifold as its new chairman Monday, replacing Helge Lund.

BP expects to report rising production, and “slightly” lower net debt. Lower borrowing would be welcome news given the company had previously said its already-large debt pile would rise through the first half of the year, Della Vigna said.

Chevron reduced spending on buybacks in the second quarter, though kept within its annual guidance, as it adjusted to lower oil prices. CEO Mike Wirth will be keen to show progress on plans to generate $10bn in additional free cash flow at $70 Brent from new projects in Kazakhstan and the US Gulf and lower capital spending in the Permian Basin.

Wirth is also apt to tout his company’s recent acquisition of Hess Corp that came after prevailing in an arbitration fight with Exxon. The victory gives Chevron a stake in a booming oil field that Exxon operates in Guyana.

For Exxon, the focus will be a list of key project start-ups. In contrast to rivals, the Texas oil giant increased its capital spending this year as it seeks to drive low-cost production growth later this decade and beyond. 

Yellowtail and Bacalhau, offshore oil developments in Guyana and Brazil respectively, are scheduled for the second half of this year. Golden Pass, a liquefied natural gas export plant in Texas, is set to begin by the end of 2025.

But the growth comes at a cost. Analysts expect Exxon’s net debt to increase 18% to $24.28bn as it funds the expansion on top of its dividend and $20bn in annual buybacks.

Affordability of shareholder returns, ramped up after the industry posted record profits in 2022, will be a common theme.

For the third consecutive quarter, the five supermajors’ combined free cash flow won’t be enough to meet the amount they plan to pay out in dividends and buybacks, according to analysts’ estimates compiled by Bloomberg. 

Chevron and BP have already reduced buyback spending, raising the prospect that others will follow, especially with earnings expected to be 66% lower than the 2022 record.