European oil majors thrive on cheap crude

Europe's largest oil companies are gaining support from an unlikely source as they confront the industry's worst slump since the financial crisis: lower crude prices.

Although better known for their oilfields, refineries and petrol stations, BP, Royal Dutch Shell and Total are also the world's biggest oil traders, handling enough crude and refined products every day to meet the consumption of Japan, India, Germany, France, Italy, Spain and the Netherlands.

The three companies' sway in commodities trading, largely unknown outside the industry, is set to pay off this year as the bear market allows traders to generate higher returns by storing cheap oil today to sell at higher prices later and using lower prices to make more bets with the same capital.

"Volatility has increased dramatically over the past three or four months," said Mike Conway, the head of Shell's trading and supply business. "Parts of your business that are volatility-driven are probably doing pretty well."

While companies are shy about revealing the financial results from their trading business, a look at the last major bear market provides clues to the opportunity they have today. In the first quarter of 2009, BP said it made US$500 million above its normal level of profits from trading. That means trading accounted for, at the very least, 20 per cent of the firm's adjusted income for that quarter of US$2.38 billion.

From dealing floors that resemble the operations of Wall Street banks in cities including Geneva and London, oil trading could provide BP, Shell and Total with an edge over US rivals Exxon Mobil and Chevron, which sell their own production, but largely eschew pure trading as a means of generating profits.