Over the past three years, giant trading houses and trading desks of Big Oil companies have taken advantage of the extreme volatility in oil and energy prices to make a killing in the markets.
Beginning 2021, dozens of oil and commodity traders including Vitol, Trafigura Group, Glencore Plc (OTCPK:GLCNF), Gunvor Group and Mercuria saw their profits explode thanks to their ability to leverage their storage facilities, global network of terminals and shipping fleets to cash in on supply disruptions and soaring energy prices.
Thereafter, volatility in energy markets remained at elevated levels after Russia’s invasion of Ukraine in 2022 sent Europe scrambling to secure new Oil & Gas supplies. Vitol–the world’s largest independent oil trader–posted profits of $15.1B in 2022 and $13.2B in 2023, both figures more than three times higher than the firm’s income in 2020. Last year, Vitol paid a record $6.5 billion in dividends to its ~450 trader shareholders. Overall, over the past two years, Vitol, Trafigura Group, Mercuria Energy Group Ltd. and Gunvor Group posted more than $50 billion in combined profits, a seven-fold increase compared to $6.8 billion they recorded in 2018-2019.
Meanwhile, European oil majors led by BP Plc. (NYSE: BP) have been reporting exceptional oil trading performance over the past few years.
Unfortunately, the oil trading boom appears to have run its course. Last month, Singapore-based oil and commodities trading powerhouse Trafigura Group posted the smallest profit since 2020 after oil price volatility dropped to multi-year lows. Trafigura reported a net profit of $1.47 billion in the six months through March, good for a huge 73%Y/Y decline from a record $5.5 billion the firm posted in H1 2023 while the company’s revenue fell 5.4% to $124.2 billion. Trafigura’s energy division saw operating profit before depreciation and amortization drop by half, to $3.35 billion while. In sharp contrast, its metals division recorded an 11% Y/Y increase after the company took a large impairment charge for an alleged nickel fraud. Trafigura now has to contend with huge share buyback commitments it made during boom time, Bloomberg has reported.
Europe’s oil majors are feeling the heat, too, with both BP and Shell Plc (NYSE:SHEL) warning of impending profit declines due to the poor performance of their respective trading desks.
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Luckily for U.S. oil majors, oil and gas trading is not their forté, meaning they are likely to be less impacted by the ongoing low volatility in energy markets. To wit, Exxon Mobil (NYSE: XOM) abandoned efforts to build an energy trading business to compete with those of BP and Shell after low oil prices during the 2020 oil price crisis forced the company to heavily cut the unit’s funding amid broader spending cuts. The deep cuts left Exxon traders without sufficient capital to take full advantage of the volatile oil market.
Exxon Mobil and Chevron (NYSE:CVX) are scheduled to announce Q2 earnings results on August 2nd, before the market opens. The consensus on Wall Street is for Exxon to post Q2 2024 EPS of $2.01 (+3.6% Y/Y), and revenue of $89.68B (+8.2% Y/Y). Over the past two years, XOM has managed to beat EPS estimates 63% of the time and has exceeded revenue estimates 50% of the time. Over the past 3 months, XOM has seen 1 upward revision on earnings and 15 downward. The latest downgrade was by Mizuho who lowered Exxon’s adjusted EPS estimate for Q2 2024 by ~31% to $2.01/share, citing weaker-than-expected refining margins, higher DD&A related to purchase price adjustments from acquiring Pioneer Natural Resources, and one-time costs related to the deal. However, XOM remains TD Cowen’s top pick, although the analysts have warned the company could see weakness as downstream prices fall.
Meanwhile, Chevron is expected to report a lower profit, with the consensus Q2 2024 EPS estimate at $3.00 (-2.6% Y/Y) and the consensus revenue estimate at $50.73B (+3.7% Y/Y). Over the past two years, CVX has exceeded both EPS and revenue estimates 50% of the time. On a brighter note, Chevron’s production is expected to remain robust despite the mixed report, supporting its growth potential.
That said, there’s little clarity as to whether Chevron will finally succeed in its bid to acquire Hess Corp. (NYSE:HES), with Exxon Mobil’s attempt to stop Chevron’s proposed acquisition currently resting on whether the transaction would involve a change of control of Hess’ Guyana subsidiary. Exxon claims Hess should have first given it the opportunity to purchase its stake in the prized Guyana asset, and that Chevron structured the deal in a way to bypass Exxon’s right of first refusal if it’s triggered by a change of control in Guyana.