New York - The giant tankers anchored along the Scottish coast in the Firth of Forth weren’t going anywhere. They were just providing floating storage, because there was no demand for their cargo, North Sea crude oil.
But the computer screens in the world’s trading rooms told a different story. Prices through the month of April were jumping, showing someone was buying, stunning traders and leaving some with heavy losses.
The buyer on virtually all those occasions was Royal Dutch Shell, according to interviews with two dozen industry executives and data compiled by Bloomberg. Last year, Shell dominated Brent trading to such an extent that it moved the market even against the fundamentals of global supply and demand, according to the interviews with the market participants, who asked not to be named. Shell said in a statement there was no basis for competitors to criticise its behaviour.
Better known for its oilfields and refineries, Shell is also the world’s largest oil trader, handling contracts that exceed the needs of its core business and enabling it to make speculative bets in dozens of markets.
Shell trades over 12 million barrels a day of physical crude and refined products - more than a tenth of the world’s oil consumption - and “several multiples of that as derivatives”, according to a Shell presentation.
Although none of those interviewed said Shell did anything illegal, they said the company violated the unspoken rules governing the market. Executives of several trading rivals raised objections with counterparts at Shell last year, according to market participants.
Layers of contracts
The strife centres on one of the most important corners of the oil market: the complex layers of physical, forward and financial contracts for North Sea oil that make up what outsiders refer to simply as Brent. Although North Sea oil output has been declining for more than a decade, Brent is still the world’s most important industry reference.
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The benchmark is a mix of four varieties of crude: Brent itself, Forties, Oseberg and Ekofisk. Of the four, Forties is the most important, because it has the largest output. Shell built significant positions in Forties crude last year, at times accumulating most of the crude available in any given month, according to data compiled by Bloomberg.
As Shell bought the crude, rivals scrambled to cover their own positions. Despite a glut in the global oil market, the price of Brent rose in April as if there were a shortage.
The difference between the June and July contracts - the most traded at the time - exploded from minus 70c to plus 99c - a huge swing in just four weeks. As soon as the June contract expired, the market returned to normal: the shortage had been a mirage - oil was plentiful.