BP Makes Small Oil Trading Loss as Permian Bottlenecks Bite

(Bloomberg) -- BP Plc reported a small and unusual loss from oil trading after being caught on the wrong side of Permian basin pipeline bottlenecks that prompted wild gyrations in U.S. crude prices this year.

“A lot of people got a little bit caught up in the bottlenecks in the Permian, we had some of that," BP Chief Executive Bob Dudley told Bloomberg TV in an interview, adding that the trading loss was "very, very small".

Booming oil production in the Permian region has overwhelmed pipeline capacity to get barrels to consumers, distorting markets. Producers and traders selling from the region had to swallow discounts of as much as $13 a barrel in the second quarter relative to benchmark prices almost 500 miles away in the main hub of Cushing, Oklahoma. The spread, as little as 40 cents in January, ballooned above $16 this month.

BP has lost money in oil trading in three of the last 20 quarters.

BP Makes Small Oil Trading Loss as Permian Bottlenecks Bite

While BP lost money in oil trading in the second quarter, it made an overall profit from trading thanks to a better performance in natural gas, Dudley said.

Although better known for their oil fields, refineries and gas stations, Royal Dutch Shell Plc, BP and Total SA are the world’s top energy traders, handling more than 20 percent of global oil demand between them and dwarfing independent trading houses such as Vitol Group BV and Glencore Plc.

Oil traders including BP thrived in 2015 and 2016 by taking advantage of an oversupply that led to an unusually strong contango market where contracts for future delivery trade higher than spot prices. The structure allows traders to buy oil cheaply, store it, and profit later by locking in forward prices through derivatives in so-called cash-and-carry deals.

With the contango largely gone in the second quarter, traders battled a more difficult market. On top of the Midland-Cushing price difference, other U.S. crude spreads also spiraled. The gap between WTI crude in Cushing and Houston jumped to an all-time high of $9 per barrel, up from roughly $2 during the first quarter, as trading houses fought to secure cargoes for export. The spread between WTI and Brent also moved sharply in the quarter, with the U.S. benchmark sinking in June to a discount of $11.57 a barrel, its widest in four years.

"There were some specific positions around some particularly difficult market calls and we got the call wrong," said Brian Gilvary, the company’s current chief financial officer and former head of trading. "It was around one specific position in one book."

BP Makes Small Oil Trading Loss as Permian Bottlenecks Bite

In a sign of how challenging the U.S. market has become, BP is relocating its head of crude, Dan Wise, to Chicago from London this summer, according to people familiar with the matter, who asked not to be named discussing private information. Wise took on the top job for oil after Donald Porteous, once known as the "King of Cushing" and one of the world’s most powerful traders, retired in 2016.

BP last reported a loss in trading in the fourth quarter of 2016, reversing the strong profits it made in 2015, when the unit, known as BP Integrated Supply and Trading, helped the parent to weather an oil price crash. BP made about $350 million more than a “normal” quarter in the first three months of 2015.

The company hasn’t disclosed the profit of its overall trading unit for more than a decade. It said in 2005 that it made $2.97 billion, or about 10 percent of the firm’s total earnings. The oil book has traditionally contributed about half of overall trading.

©2018 Bloomberg L.P.