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Reuters: ANALYSIS-Risk no longer a dirty word for Shell oil traders

Tue Oct 9, 2007 11:30am BST
By Jonathan Leff

SINGAPORE, Oct 9 (Reuters) – Royal Dutch Shell’s (RDSa.L: Quote, Profile, Research) high-profile buying spree of Asia’s benchmark crudes last month is the clearest signal yet that the major has rediscovered its appetite for trading risk after a five-year hiatus.

Shell hoovered up over 10 million barrels of Dubai and Oman crude, the main benchmarks for Asian refiners, in what appeared to be the market’s biggest leveraged trading play in years, drawing flak from Asian refiners still haunted by past squeezes.

While many traders are still baffled as to how Shell made money out of the strategy, they say its willingness to embark on such a high-profile venture spoke volumes.

“Risk is no longer a bad word in Shell,” said one senior crude oil trader with a Western trading company. “We see them being more active outside Asia as well.”

The spree was the latest sign of a shift in the balance of trading power among the world’s biggest oil firms, with BP (BP.L: Quote, Profile, Research) pulling in its horns amid bad U.S. publicity, while Shell shakes off its past mishaps and pays more to retain top traders.

By the company’s own measure it was taking slightly more oil trade risk than Total (TOTF.PA: Quote, Profile, Research) but not quite half as much as industry leader BP last year, with an average daily Value at Risk (VaR) of $12.5 million. [ID:nSP338121]

Shell was once a regular in the market limelight employing strategies akin to BP and other companies. But traders say its profile shrank somewhat after 2002 amid a corporate scandal over its booking of oil reserves and a $30 million fine against its U.S. gas and power trading arm by U.S. regulators.

The readiness to test its limits have become more apparent since Mike Conway took charge of Shell’s global trading operations 12 months ago, traders at other companies say.

A Shell spokesman said the company does not comment on specific transactions, market positions or trading strategies.


The risks of a high-profile binge run beyond the financial.

During September, Shell bought 418 “partial” cargoes of November-loading Dubai and Oman crude of 25,000 barrels each, during the half-hour trading window that assessor Platts uses to determine its benchmark prices, the biggest physical volume of Middle East crude ever purchased through the window mechanism.

Shell can point to fundamentals to support its heightened appetite: maintenance at offshore oilfields will remove some 18 million barrels of Abu Dhabi crude from the market next month, a factor well reported for months.

That argument does not win over many refiners, who point to a near $1.50 a barrel spike in the premium for Dubai crude plus the shrinking discount to higher-grade Oman as a sign that Shell’s buying drove prices higher than they would have been, potentially crimping profits at firms Shell trades with regularly.

“We were very surprised they carried this through to the extreme they did,” said a trader at an investment bank. “It seems like a very short-term strategy — in Asia, it’s all about the refiners.”

On top of the maintenance there are other mitigating factors.

Although Shell effectively bought about four times more crude than is physically produced by Dubai, it only acquired about a third of the underlying benchmark, which was broadened to allow delivery of Oman (2001) and Upper Zakum (2006) instead, measures imposed to make it more difficult to corner the market.

That’s a far cry from past squeezes, in which traders would absorb an entire slate of benchmark crude, a strategy that sometimes provoked a harsh response from refiners.

In November 2000, Indian refiner Reliance Industries Ltd (RELI.BO: Quote, Profile, Research) suspended trade with oil major Caltex and Dutch trader Vitol, blaming them for a $3 surge in the premium for Dubai crude, a Reliance source told Reuters at the time.

In the same year Unipec, trading arm of China’s top refiner Sinopec (0386.HK: Quote, Profile, Research)(600028.SS: Quote, Profile, Research), said it had suspended trade with London-based Arcadia and Swiss giant Glencore after a trading play in European marker Dated Brent.

U.S. refiner Tosco ultimately sued the two firms for driving up prices. The case was settled out of court.

Unlike that play, and others like it, Shell appears to be delivering the crude windfall to its own refineries, which will also be buying Saudi crude on the Dubai benchmark. This would dilute any trading profit made from driving prices higher.

While refinery sources contacted by Reuters reiterated their displeasure, none suggested a return to past punitive measures.

“It’s just normal business,” said one trader with a Chinese company active in the market. “Sometimes we do it too.”

Leveraged trading plays, in which companies buy large volumes of physical oil at a loss in order to profit from an offsetting derivatives position, are legal strategies in most of the world’s unregulated over-the-counter oil markets.

But they are less common now than five years ago, as U.S. regulators try to expand their oversight to physical energy markets and pricing agency Platts revises its system, making a return to past form unlikely for the oil giant.

Rob Routs, the head of Shell’s global downstream operations, told Reuters earlier this year that trading had become “very important” for the company, but also reiterated that it had tough controls in place to limit any rogue behaviour.

“If you don’t watch them… it runs away from you.”

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