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Alex Kimani

Alex Kimani

Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. 

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How One Oil Major Excelled As Prices Crashed

When oil prices plunged to historic lows in April, the majority of oil producers, including OPEC+ nations, responded by drastically cutting production to get rid of the huge supply overhang. However, one oil company responded by doing just the opposite: Ramping up production and storing the excess oil in anticipation of a market rebound. Norwegian oil and gas giant Equinor ASA (NYSE: EQNR) is one of a handful of oil companies that have managed to turn a profit in this tumultuous market after its oil storage bet paid off big time. Equinor has reported a surprise adjusted net income of $646M for the second quarter, trouncing Wall Street’s expectations for a loss of $250M thanks to huge trading profits despite a huge 53 percent plunge in revenue to $8.04B.

Equinor’s marketing division delivered record-high results, with Q2 adjusted earnings for the company’s marketing, midstream, and processing division clocking in at $696M vs. just $74M a year ago.

Interestingly, Equinor also set itself apart from its European peers by maintaining its long-term crude oil price forecasts, thus avoiding a potentially huge impairment. The state-controlled oil company maintained its earlier forecast of $80 crude oil in 2030.

Contango Play

Source: Statista

Equinor’s impressive quarter can be squarely chalked up to the perfect execution of the so-called contango oil plays.

When oil prices tanked in April, the price difference between a Brent contract for six-month forward contract and one for immediate delivery - a key measure of the degree of contango - plunged to a record of nearly -$14 a barrel, surpassing the last major contango witnessed during the 2008-09 financial crisis. 

Related: Oil Prices In Limbo As Fears Of A Second COVID Wave Grow

Equinor pounced on the opportunity and started storing millions of barrels of the commodity, filling its oil tankers with crude, turning them into floating storage facilities, and renting onshore storage elsewhere. The company did this in anticipation that it would be able to flip its oil inventory at a profit when prices later recovered in the famous contango play.

And recover they did.

After averaging a multi-year low of $18.38/barrel in April, Brent prices have staged a significant recovery, averaging $29.38 in May and later crossing and holding above the $40/barrel mark in late June. Equinor took advantage of the oil price bounce to sell its inventories, which, combined with other oil trading activity, helped deliver a record of about $1.16 billion in pre-tax adjusted earnings in just a single quarter. 

The increase was mainly due to the contango market during the quarter and good results from liquids trading,” the company said during its latest earnings report.

Equinor was hardly a lone player in the contango game.

Savvy oil companies such as Royal Dutch Shell (NYSE: RDS.A) as well as trading houses such as Glencore, Vitol, and Trafigura made a killing during the oil price crash. Meanwhile, Reuters reported in June that Goldman Sachs commodities trading unit booked more than $1B in trading revenues after it correctly predicted the collapse and positioned its desks accordingly. BP Plc (NYSE: BP), Total SA (NYSE: TOT) Eni SpA, and Lukoil PJSC also have large trading desks whose profits might help offset losses from low oil prices.

Obviously, a key component of a successful contango play is access to ample storage. Luckily, Equinor was well endowed in that department, with its Mongstad, Eldar Saetre underground caverns capable of holding nearly 9.5 million barrels. The company also said it had rented storage capacity in Korea for years and also used floating storage extensively.

Unfortunately, lack of storage space is the key reason why prices dipped into negative territory in April - and the reason why many other traders were locked out of the juicy contango profits.

By Alex Kimani for Oilprice.com

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