Shell’s Trading Machine
Shell wants investors to place greater value on its trading and supply business, but outsiders still cannot see clearly how much it earns, how risks are controlled or how durable its advantage really is.
🎧 Prefer to listen?
At Shell’s Capital Markets Day in March 2025, chief executive Wael Sawan described the Trading & Supply business as an “underappreciated and undervalued aspect of Shell” that was fundamental to the integrated nature of the company. Shell said the capability had added around two percentage points to return on average capital employed (ROACE) over the previous decade and expected it to contribute between two and four points over the medium term. Sawan was asking investors to recognise Trading & Supply not merely as a function supporting the rest of Shell, but as an important source of returns in its own right.
That statement needs to be understood in the context of a wider change in Shell’s business. Since the acquisition of BG Group, Shell’s proved reserves have fallen by around 40% and production by almost 25%. Over the same period, LNG sales increased by 28%, even though its own liquefaction volumes declined by 8%. Shell has therefore expanded the commercial reach of its LNG business while the physical production and resource base beneath the wider company have become smaller.
Shell is relying less on growth in its physical resource base and more on its ability to source, move, trade and optimise molecules across a global commercial system. Third-party supply, long-term purchase agreements, shipping capacity, regasification access and customer contracts allow it to meet commitments from different sources, redirect cargoes as regional prices change and reshape exposures through derivatives. Returns come not only from producing gas cheaply or operating liquefaction plants efficiently, but from using the scale and flexibility of the wider system to extract more from Shell’s molecules, contracts and market positions.
That system would be extraordinarily difficult for a new entrant to reproduce. In 2024, Shell sold 66 million tonnes of LNG across 30 countries, controlled around 10% of the global LNG fleet and physically traded more than 8 million barrels of crude oil each day. Sawan presented that scale as the foundation for the additional returns Trading & Supply is expected to generate.
The financial significance may be much larger than the two-to-four-point language suggests. At Capital Markets Day, Morgan Stanley analyst Martin Russell calculated that the claimed uplift could mean Trading & Supply contributes more than a quarter of Shell’s ongoing earnings, making it one of the company’s largest economic activities. Shell does not report it separately, and Sawan emphasised that trading is a capability applied across the group rather than a standalone division. Even if Russell’s estimate is only directionally correct, capitalising a contribution of that scale at Shell’s overall market multiple would imply tens of billions of pounds of equity value. This is a major part of the investment case, not a useful function at its margins.
I think of the model as leverage: using assets, contracts and financial instruments to magnify returns. A comparatively limited owned production and liquefaction base supports commercial decisions across a much larger portfolio, allowing Shell to earn returns on volumes without owning every field, plant, ship or terminal involved. Gross trading volumes do not reveal the economic exposure on their own, but the principle is clear.
That leverage is central to the attraction of the strategy. If Shell uses its scale, information and flexibility more effectively than competitors, Trading & Supply could be one of the group’s most capital-efficient sources of returns. The same characteristics also make the risks harder for investors to judge. Shell has not disclosed a large or uncontrolled speculative exposure, and nothing in its published reporting demonstrates that one exists. The issue is whether its risk management is keeping pace as commercial volumes grow relative to owned supply and Trading & Supply becomes more important to group returns.
Commercial leverage
Oil and gas companies have always traded commodities. Production rarely matches customer demand precisely by grade, volume, location or timing. Refineries require crude oil that differs from the output of the group’s upstream assets, while marketing businesses need dependable product supply across multiple regions. Companies therefore buy, sell, transport, store and exchange commodities to keep their physical systems working, and derivatives have long been used to manage some of the exposures created along the way.
Shell’s strategy is not wholly new in kind, but it is different in scale and importance. Trading is no longer presented only as a way to sell production, supply refineries or hedge risks arising elsewhere. The commercial organisation is expected to add materially to group returns, while LNG sales increasingly depend on molecules sourced beyond Shell’s own liquefaction portfolio. Trading & Supply has been unified under one organisation, its president Andrew Smith joined the Executive Committee in 2025, and the capability is intended to operate more deeply across LNG, crude oil, products, power and low-carbon fuels.
Physical assets still anchor the opportunity. A liquefaction plant provides supply, a ship provides flexibility, a regasification terminal provides market access and a customer contract provides demand. Traders create additional returns by understanding how those positions interact and using alternatives elsewhere in the portfolio as conditions change. The physical system provides options and information unavailable to a purely financial participant.
The economic exposure cannot be identified from gross volumes alone. Buying ten cargoes from third parties and selling them under closely matched contracts may create relatively little outright price risk. Buying and selling the same volumes across different indices, delivery periods and locations may create substantial exposure even when the headline quantities balance. Optionality can reduce risk by giving Shell more ways to respond, but it can also make the portfolio harder to understand because the final economics depend on decisions that have not yet been taken.
The relevant investor question is therefore not merely how many third-party cargoes Shell buys, but how much economic exposure the wider portfolio can create relative to the physical assets, capital and liquidity available to support it. Commercial leverage may be a genuine competitive advantage. Owning every molecule would consume enormous amounts of capital, reduce flexibility and leave Shell more exposed to the long development cycles of upstream and LNG projects. The same structure means that an adverse commercial outcome is no longer confined to the output of assets Shell owns.
Basis risk is inherent in this model because the financial hedge will rarely match the physical LNG exposure exactly. The two may reference different benchmarks, delivery periods or locations, while freight, terminal access and contractual flexibility can alter the final economics. A hedge can therefore be entirely sensible and still lose money if the cargo, customer contract and derivative move differently.
Timing, counterparty and liquidity risks can compound the problem. Shell may face collateral demands before the offsetting physical cash flow arrives, lose contracted supply when replacement prices are highest, or find that a market assumed to be liquid cannot absorb a position during disruption. Exposures that appear diversified in ordinary conditions may also move together when regional gas prices, freight and physical availability are affected by the same shock.
Speculative risk is different. It emerges when a position originally created to hedge or optimise the physical portfolio becomes increasingly dependent on a view of future prices or spreads. The transition need not involve misconduct. A mismatch may be carried for longer, an exposure retained after the original customer requirement has changed, or a limit widened following several profitable years. Each decision can appear defensible while the portfolio gradually becomes more directional.
A modest open position against Shell’s own production may be manageable; the same proportion applied across a commercial portfolio several times larger can create a substantial group exposure. The risk is not confined to a trader breaching a formal limit. It also lies in a successful organisation becoming progressively more comfortable with exposure because repeated profits have made the underlying assumptions harder to challenge.
What financial institutions learned about leverage
Financial institutions are relevant not because Shell should be treated as a bank, but because banks and securities firms have long used contracts and derivatives to create exposures much larger than the capital immediately committed. Their experience shows how strong profits and apparently reassuring risk measures can coexist with leverage, liquidity dependence and correlations that are not fully understood.
The central lesson is institutional. Successful trading businesses can acquire authority faster than risk functions and boards develop the ability to challenge them. Profits validate the traders, models and strategy, while limits begin to look unnecessarily restrictive. By the time the vulnerability is recognised, the exposure may be difficult to reduce without crystallising a loss.
Shell does not need a bank capital ratio and its physical assets provide options unavailable to a purely financial institution. The relevant questions are simpler: how much exposure the commercial system creates, what liquidity is available if assumed offsets fail, and how the portfolio would behave under severe market stress.
The limits of VaR
Shell uses value at risk, or VaR, to measure commodity-market exposure. For actively traded positions, it applies a one-day holding period and a 95% confidence level. VaR is useful for comparing portfolios and monitoring authorised limits, but its apparent precision can be misleading.
The calculation says little about losses beyond the selected confidence level and depends on assumptions about volatility, liquidity and correlations. A portfolio may appear well balanced until positions expected to offset one another move together or cannot be altered within the assumed holding period.
VaR is therefore a risk-management tool, not evidence that potential losses are fully understood. Assurance must come from the system around it: severe stress testing, liquidity analysis, independent challenge and the authority to reduce exposure without the agreement of Trading & Supply.
Controls and independent challenge
Shell’s disclosures show that the risks are recognised. An independent department monitors market exposure, Trading Compliance operates separately from traders, and the Audit and Risk Committee receives reporting from management, internal audit and the external auditor. Commodity-trading finance is one of the committee’s priorities for 2026, while EY has identified Trading & Supply complexity and the risk of unauthorised trading or management override as areas requiring particular attention. None of this suggests a known failure, but it confirms that the business requires specialist scrutiny.
Shell has also told investors that its aggregated Trading & Supply activities did not record a quarterly earnings loss over the previous decade. That record supports management’s claim that the organisation is highly capable, but it does not remove the need for scrutiny.
Shell’s chief executive, Wael Sawan, and chief financial officer, Sinead Gorman, understand how a traditional integrated oil major operates and how its upstream, LNG, shipping, customer and financial activities fit together. Gorman also brings experience in Trading and Shipping, gas and power, treasury and senior finance. Andrew Smith, President of Trading and Supply, has led the organisation since 2017. That gives the executive team substantial knowledge of the business, although public disclosures cannot establish how completely any one individual understands its physical positions, third-party contracts and derivatives portfolio. In any case, knowledge within the executive team and profit centre is not a substitute for independent challenge.
Trading & Supply must manage the portfolio, while independent risk, Treasury, the CFO, internal audit and the board must be able to test its assumptions and limits. Shell’s directors bring substantial financial experience, but the combination of physical commodities, derivatives, basis risk, collateral and market models may be too specialised to expect from any one person. External expertise may therefore be necessary where the board lacks sufficient depth. Shell does not need to reproduce the trading floor in the boardroom, but it must be capable of challenging the business without relying entirely on the executives responsible for its profits.
What investors need
Shell cannot disclose enough information for investors to calculate the leverage or net economic exposure of its commercial portfolio. Gross LNG sales, derivative notionals and balance-sheet fair values do not provide the answer. Positions offset one another, physical assets create options, and the economics depend on confidential contractual details.
Investors in banks are not expected to reconstruct their trading books position by position. Instead, they take reassurance from the fact that banks are heavily regulated, with detailed capital, liquidity, stress-testing and disclosure requirements designed to address risks that outsiders cannot see. Shell’s Trading & Supply business has no equivalent standalone framework. It may contribute more than a quarter of ongoing earnings and support tens of billions of pounds of equity value, yet investors cannot observe it through a separate income statement, balance sheet or capital measure, or determine how much of the return comes from structural advantages and how much depends on volatility, unusually wide spreads or greater exposure.
Shell is therefore asking investors to assign substantial value to earnings they cannot observe separately, generated by exposures they cannot measure and without the external regulatory assurance available in financial services. Trading & Supply may be one of the company’s largest sources of value, but much of that proposition still has to be taken on trust.
Shell needs to find a better way to close that assurance gap without disclosing commercially sensitive positions. It must show that the organisation, controls, liquidity arrangements and independent challenge surrounding Trading & Supply are developing in step with its growing importance. Management has made the case that the business deserves greater recognition. It now has to explain why shareholders should be confident that Shell can protect the value it says Trading & Supply creates.
