According to three industry sources, Shell’s liquefied natural gas (LNG) trading division suffered a loss of nearly $1 billion in the third quarter of the year after traders were caught off guard by a sharp increase in gas prices in Europe after Russia cut off supplies.

The top LNG trader in the world, Shell, last week reported its second-largest quarterly profit of $9.45 billion, but claimed that weaker gas trading results had an impact.

Shell doesn’t release its trading results, and when describing market conditions, it frequently uses sweeping terms.

The pre-tax loss in its LNG trading of about $900 million provides unique insight into its trading operations and has the potential to significantly increase the group’s earnings.

According to the three sources, the loss was caused by a bad wager on the variation in benchmark gas prices between Asia and Europe during the summer.

Shell opted not to respond.

In contrast to rivals BP and TotalEnergies, who both reported strong earnings from their trading divisions in the quarter without providing details, Shell’s LNG trading performance stands out.

Almost $90 per million British thermal units (mmBtu) was the all-time high for European gas prices on August 22 as the region rushed to secure gas supplies after Russian pipeline gas deliveries were stopped.

The spread between the two benchmarks collapsed as a result of the rally in European prices outpacing Asian prices by a wide margin.

In order to attract supplies during the summer so that nations like Japan and China can restock their storage facilities prior to winter, Asia has historically set the highest LNG prices.

Paper derivatives are also used by traders as a hedge against price changes in physical cargo trades.

However, the paper wagers had a disastrous third quarter.

Sinead Gorman, the chief financial officer of Shell, stated last week that “seasonality and supply constraints, combined with substantial differences between paper and physical realisation in a volatile and dislocated market, are impacting LNG trading.”

“Our trading and optimization organization manages risk through hedging our physical volumes,” Gorman told analysts on Oct. 27.

“Due to a breakdown in correlations, some hedges were less effective. LNG trading and optimization were also impacted by a combination of seasonality and supply constraints where the business is geared towards supplying the Northern Hemisphere during the winter.”

Gorman added that the results of LNG trading were better for the first three quarters of 2022 compared to the same period last year.

Chinese demand has been subdued since the beginning of the year as a result of constrained and slow economic growth, which has lowered Asian prices.

Since many years, European LNG prices have been compared to TTF Dutch gas prices, and now that supplies from the Russian pipeline have decreased, the EU is looking into alternative comparisons.

(Adapted from StreetInsider.com)