Shell flags surging Q2 trading profit as refining margins hit $20

Shell signaled a surge in second-quarter trading profit as the Iran conflict boosted oil markets, with refining margins climbing to about $20 a barrel and chemicals margins nearly doubling from the prior quarter.

"Trading & Optimisation is expected to be significantly higher than Q1'26," Shell said in its quarterly update note published Tuesday, without providing a specific dollar range.

The London-based energy giant's indicative refining margin rose to about $20 a barrel from $17 in the first quarter, while the indicative chemicals margin jumped to about $240 a tonne from $139. Integrated Gas production is expected at 610,000 to 650,000 barrels of oil equivalent per day, down from 909,000 in Q1, reflecting the impact of the Middle East conflict on Qatari volumes. LNG liquefaction volumes are forecast at 7.4 million to 7.8 million tonnes, compared with 7.9 million in Q1.

The strong trading outlook shows how Shell and its peers are benefiting from the surge in crude prices after the Strait of Hormuz closure. The energy sector's earnings are expected to more than double year-over-year, according to FactSet, helping drive the S&P 500 to a second straight quarter of earnings growth above 20 percent.

Shell's upstream production is forecast at 1.75 million to 1.85 million boe/d, largely in line with the 1.84 million in Q1. The chemicals and products division is running at near-full refinery utilization of about 100 percent, up from 99 percent in the prior quarter. Marketing adjusted earnings are expected to be in line with Q1, with sales volumes of 2.55 million to 2.65 million barrels per day.

Working capital is expected to swing to a positive $1 billion to $6 billion from a negative $11.2 billion in Q1, which Shell attributed to "unprecedented volatility in commodity prices." Tax paid is forecast at $2.6 billion to $3.4 billion, up from $2.3 billion in the first quarter. Cash flow from operations will be closely watched by investors after the Q1 working capital drain.

The last time Shell reported a comparable surge in trading profits was in Q2 2022, when the Russia-Ukraine war pushed energy earnings to record levels. The company's adjusted earnings that quarter reached $11.5 billion, more than double the prior year. Shell cautioned that given market dislocations, realized refining and chemicals margins are lower than the calculated indicative margins and have been adjusted accordingly.

The update comes as the broader market prepares for a busy earnings season. Banks kick off second-quarter reports next week, with analysts expecting the S&P 500 to post 23 percent earnings growth, according to FactSet. The energy sector is projected to be the standout performer, with earnings expected to more than double as crude prices remain elevated.

Shell's Renewables and Energy Solutions division is expected to post adjusted earnings of negative $300 million to positive $300 million, compared with $300 million in Q1, reflecting the volatile commodity environment. Corporate adjusted earnings are forecast at negative $500 million to negative $700 million, narrowing from negative $900 million in the prior quarter.

The strong performance in Shell's core oil and gas operations contrasts with the challenges facing European energy rivals. BP and TotalEnergies are also navigating the impact of the Middle East conflict on their production and trading operations, though Shell's heavy exposure to LNG and refining gives it a differentiated earnings profile in the current environment.

Shell is scheduled to publish its full second-quarter results on July 30. The company-compiled consensus, managed by Vara Research, is expected to be published on July 22.

This article is for informational purposes only and does not constitute investment advice.