Big Oil's Secret World Of Trading
Bloomberg Markets|April - May 2021
With the future of fossil fuels in doubt, some energy companies are counting on a hidden army of commodity traders to ride to the rescue
JAVIER BLAS and JACK FARCHY

It was a bleak moment for the oil industry. U.S. shale companies were failing by the dozen. Petrostates were on the brink of bankruptcy. Texas roughnecks and Kuwaiti princes alike had watched helplessly for months as the commodity that was their lifeblood tumbled to prices that had until recently seemed unthinkable. Below $50 a barrel, then below $40, then below $30.

But inside the central London headquarters of one of the world’s largest oil companies, there was an air of calm. It was January 2016. Bob Dudley had been at the helm of BP Plc for six years. He ought to have had as much reason to panic as anyone in the rest of his industry. The unflashy American had been predicting lower prices for months. He was being proved right, though that was hardly a reason to celebrate.

Unlike most of his peers, Dudley was no passive observer. At the heart of BP, far removed from the sprawling network of oil fields, refineries, and service stations that the company is known for, sits a vast trading unit, combining the logistical prowess of an air traffic control center with the master-of-the-universe swagger of a macro hedge fund. And, unknown to all but a few company insiders, BP’s traders had spotted, in the teeth of the oil price collapse, an opportunity.

Over the course of 2015, Dudley had acquired a reputation as the oil industry’s Cassandra. Oil prices had been under pressure ever since Saudi Arabia launched a price war against U.S. shale producers a year earlier. When crude prices started falling, he confidently predicted they would remain “lower for longer.” A few months later, he went further. Oil prices, he said, were due to stay “lower for even longer.”

On Jan. 20, 2016, the price of Brent crude oil plunged to $27.10 a barrel, the lowest in more than a decade. It was a nadir that would be reached again only in March 2020, when the Saudis launched another price war, this time targeting Russia, just as the coronavirus pandemic sapped global demand.

When Dudley arrived in the Swiss ski resort of Davos for the World Economic Forum on Jan. 21, 2016, the industry was braced for more doom and gloom. Wearing a dark suit and blue tie, the BP chief executive officer made his way through the snowy streets. After one meeting, he was asked—as usual—for his oil forecast by a gaggle of journalists. “Prices will remain low for longer,” he said. This time, though, his by-then-well-known mantra came with a kicker: “But not forever.”

Few understood the special significance of his comment. After months of slumping oil prices, BP’s traders had turned bullish. And, in complete secrecy, the company was putting money behind its conviction.

Shortly before flying to Davos, Dudley had authorized a daring trade: BP would place a large bet on a rebound in oil prices. Although its stock is in the FTSE 100 index and owned by almost every British pension fund, this wager, worth hundreds of millions of dollars, has remained a closely guarded secret until now.

BP was already heavily exposed to the price of oil. What the traders wanted to do was double down, to increase the exposure by buying futures contracts much as a hedge fund would. BP’s trading arm—staffed by about 3,000 people on its main trading floors in London, Chicago, Houston, and Singapore—argued that the price had fallen so far that it could only go up. And Dudley agreed.

Quietly, BP bought Brent crude futures traded in London. It was a “management position”—a trade so large it couldn’t be the responsibility of anyone trader and had to be overseen by the company’s most senior executives.

The optimistic coda Dudley attached to his catchphrase in Davos proved prescient. By early February, oil was up by a third, trading above $35 a barrel. By the end of May, it was more than $50 a barrel.

That’s when the company started to count the profits. The trade “made a lot of money,” says a former BP executive with direct knowledge of it. Another executive, who also was involved, put the payout at about $150 million to $200 million, declining to provide an exact figure. Publicly, however, BP —whose vast size means it’s not obligated to disclose even a windfall of that scale —said almost nothing.

BP’S TRADES in the midst of the 2016 slump are a demonstration of one of Big Oil’s best-kept secrets. The company and its rivals Royal Dutch Shell Plc and Total SE aren’t just major oil producers; they’re also some of the world’s largest commodity traders. Shell, the most active of the three, is the world’s largest oil trader—ahead of independent houses such as Vitol Group and Glencore Plc.

Massive trading floors that mirror those of Wall Street’s biggest banks are becoming increasingly important to the oil companies, which are driven by fears that global oil demand could start to drop in the next few years as climate change concerns reshape society’s—and investors’— attitudes toward fossil fuel producers. No longer looked down upon as handmaids to the engineers who built Big Oil, the traders are now seen as their companies’ saviors. The brightest stars can make more than $10 million a year, outstripping their bosses.

Like BP’s 2016 trade, much about the oil majors’ trading exploits has never been reported. Bloomberg Markets pieced together the story of these lucrative but secretive operations through interviews with more than two dozen current and former traders and executives, some of which were conducted for The World for Sale, our new book on the history of commodity trading.

The oil majors trade in physical energy markets, buying tankers of crude, gasoline, and diesel. And they do the same in natural gas and power markets via pipelines and electricity grids. But they do more than that: They also speculate in financial markets, buying and selling futures, options, and other financial derivatives in energy markets and beyond— from corn to metals—and closing deals with hedge funds, private equity firms, and investment banks.

As little known as their trading is to the outside world, BP, Shell, and Total see it as the heart of their business. In a conference call with industry analysts last year, Ben van Beurden, CEO of Shell, described the company’s trading in almost mystical terms: “It actually makes the magic.”

And the wizardry pays off: In an average year, Shell makes as much as $4 billion in pretax profit from trading oil and gas; BP typically records from $2 billion to $3 billion annually; the French major Total not much less, according to people familiar with the three companies. In the case of BP, for instance, profits can equal roughly half of what the company’s upstream business of producing oil and gas makes in a normal year, such as 2019. In years of low prices, like 2016 or 2020, trading profits can far exceed those of the production business. Last year, both BP and Shell made about $1 billion above their typical profit target in oil and gas trading.

Continue reading your story on the app

Continue reading your story in the magazine

MORE STORIES FROM BLOOMBERG MARKETSView All

Jonathan Kellner Has Big Money Backing His U.S. Stock Trading Startup

When he was handed a debit card with $70 million in the bank, Jonathan Kellner realized his startup was different. ¶ Members Exchange, known as MEMX, started as a protest by banks and market makers against the rising data and connectivity fees charged by U.S. stock exchanges. In the two years since Kellner, 52, signed on as chief executive officer, MEMX Holdings LLC has locked in more than $135 million in funding from 18 stock trading and investing heavyweights, including BlackRock, Citadel Securities, and Morgan Stanley. ¶ Since it went fully live in October, MEMX has clinched 1% of the U.S. market share. Kellner, previously the CEO of Nomura Holdings Inc.’s Instinet, spoke with Bloomberg Markets in February about launching during a pandemic and the surge in meme stocks.

5 mins read
Bloomberg Markets
April - May 2021

BINANCE'S CHANGPENG ZHAO: “I'm not using crypto to buy fiat, I'm not using crypto to buy houses. I just want to keep crypto ”

Changpeng Zhao, 44, has spent his life trying to overcome borders. As a child growing up in China, he waited for years until his family could win permission to see his father in Canada, then pursued a career (including a few years at Bloomberg LP) that took him around the world.

10+ mins read
Bloomberg Markets
April - May 2021

Big Oil's Secret World Of Trading

With the future of fossil fuels in doubt, some energy companies are counting on a hidden army of commodity traders to ride to the rescue

10+ mins read
Bloomberg Markets
April - May 2021

Who Should Set The Rules?

TWO OF THE MOST powerful women in finance are at odds over how to use their power.

6 mins read
Bloomberg Markets
April - May 2021

If You Want to Know What Stock Is Set To Skyrocket, There Are Options

WHAT DO NIKE INC., Raven Industries, and Fortinet Inc. have in common? They exemplify the predictive capacities the options market offers: Recent stock price spikes were preceded by certain telltale signs in the options market, according to data compiled by Bloomberg. Use the terminal to generate ideas for enhancing your portfolio and profit from ever-changing option trading trends.

3 mins read
Bloomberg Markets
February - March 2021

How Are You Doing? AID Provides the Answers

“HOW’M I DOING?” That’s a question asset managers, sales professionals, and all of us, for that matter, ask daily.

2 mins read
Bloomberg Markets
February - March 2021

Volatile Markets Reveal Interesting Credit Opportunities in Energy

OIL ROSE ALMOST 50% from the end of October 2020 through mid-January.

4 mins read
Bloomberg Markets
February - March 2021

Colonies of Retail-Investor ‘Ants' March On Korea's Stock Market

IN LATE JULY, 70-year-old Kim Kyung-rok began frantically sifting through his long-dormant stock brokerage account.

6 mins read
Bloomberg Markets
February - March 2021

Examine How Market Upheaval Is Affecting Company Results

The coronavirus pandemic sent huge waves of volatility through markets in 2020. How did that affect the financial results of companies that interest you?

3 mins read
Bloomberg Markets
February - March 2021

Get the Insider Scoop at Newly Public Health-Care Companies

Last year was a good year for at least one thing: initial public offerings in the U.S. With the frenzy of listings of special purpose acquisition companies, or SPACs, IPOs raised a total of $154 billion in 2020. That total was by far the largest of the past 10 years, and more than double the total from 2019, according to data compiled by Bloomberg.

2 mins read
Bloomberg Markets
February - March 2021
RELATED STORIES

UNDER WATCH

The police "spy plane" experiment is over, but the growing surveillance of Baltimore continues.

10+ mins read
Baltimore magazine
March 2021

The Electric Truck That Couldn't

In the past six months, Nikola has faced an SEC probe, lost partners, and seen its shares tank

5 mins read
Bloomberg Businessweek
January 18, 2021

ADI OZ-ARI DISPERSAL

PHYSICAL, EMOTIONAL AND METAPHORICAL

6 mins read
Art Market
Issue #54 December 2020

TOO TALL BANDIT RIDING HIGH!

Making short work of FBI since 2009

1 min read
Globe
December 28, 2020

SWEET LOVE

Drizzle it over biscuits, use it to sweeten a cup of tea, or just sneak a spoonful out of the jar every now and then—there’s nothing like Oklahoma honey.

9 mins read
Oklahoma Today
January/February 2021

The Healthy Prostate

A man’s risk of BPH increases with age. These science-backed supplements help prevent and treat the most common symptoms.

4 mins read
Better Nutrition
December 2020

Boston Dynamics' Spot Robodog Finds Work on a BP Oil Rig

Boston Dynamics’ four-legged canine-inspired Spot is by no means an old dog, but that doesn’t mean it can’t learn new tricks. The 55-pound robot, unveiled in 2016, has boarded BP’s Mad Dog oil rig in the Gulf of Mexico, where it will master tasks including reading gauges, finding corrosion, mapping the facility, and sniffing out methane, according to Reuters.

1 min read
PC Magazine
December 2020

Clam beds in jeopardy?

40 to 50 jobs could be at stake

3 mins read
Island Ad-Vantages
11/26/2020

DJI COLLABORATES WITH SHELL OIL

DJI has announced a Solution Development Partnership with Shell Oil Company to create, test, and deploy DJI drone technology at its Deer Park Manufacturing Complex to improve efficiency and worker safety during industrial inspections and emergency incident response.

1 min read
RotorDrone
December/ January 2021

House Celebrates Broadside Lotus

After founding the Detroit-based Broadside Press in 1965, Dudley Randall wrote: “We (Africans in the United States) are a nation of twenty-two million souls, larger than Athens in the age of Pericles or England in the age of Elizabeth. There is no reason why we should not create and support a literature which will be to our own nation what those literatures were to theirs.”

3 mins read
Poets & Writers Magazine
November - December 2020