Shell Says Fuel-Refining Margins Could Add $1 Billion to Quarterly Earnings

The reversal marks a dramatic swing back from 2020 when Shell and other oil companies notched historic losses and wrote down assets in preparation for a long, painful pandemic.

However, while Shell said it is benefiting from higher energy prices, the company is also grappling with some remaining fallout from its decision to pull back from Russia in the wake of its invasion of Ukraine. Shell said its exit from a Russian natural-gas development could have a negative impact of $300 million to $350 million on its quarterly earnings, as it continues to account for the removal of natural-gas assets from its balance sheet.

Shell in May took a $3.9 billion posttax charge related to its Russia exit, only slightly denting an otherwise strong quarter bolstered by soaring commodity prices. The biggest portion of that was tied to the Sakhalin-2 integrated oil-and-gas project in the country’s Far East. Last week Russia took control of the international consortium behind Sakhalin-2, giving the Kremlin say over which foreign investors will be allowed to keep their stakes.

Shell provided the guidance Thursday ahead of second-quarter earnings scheduled for July 28. The company said that overall marketing and sales profits in the second quarter will be higher than the previous quarter but in line with the second quarter of 2021. But in Shell’s sprawling natural-gas trading business, second-quarter results are expected to be lower than the first quarter, which Shell described as exceptional.

The company said it projects higher overall refining margins in the second quarter despite an expected loss from chemicals refining in the period, reflecting price inflation that is eating into profit margins from refining those products. The increased fuel-refining margins in the quarter could add $800 million to $1.2 billion to earnings for the period, the company said.

Shell also warned that swings in commodity prices continue to hit cash flows. Commodity-price volatility resulted in about $6 billion in cash outflows as of the end of May, Shell said. The outflows reflect how big commodity-trading companies are facing huge cash demands from banks and exchanges exposed to volatility as intermediaries in financial transactions. Analysts say that in turn adds to market price swings.

Shell’s update comes after U.S. oil major

Exxon

Mobil Corp. last week forecast banner second-quarter profit boosted by the highest prices for oil, gas and refined fuels in years.

Exxon said earnings could come in as high as about $18 billion. These projections aren’t precise and exclude certain factors, including specific costs incurred by the companies. Exxon’s estimate means its second-quarter profit could be its most lucrative in at least 25 years, according to FactSet.

While soaring commodity prices have helped boost profits for oil-and-gas companies, they have fanned widespread political tensions over rising energy bills. The U.S. national average for regular gasoline topped $5 a gallon in June. In Europe, prices for natural gas crucial to consumer and industrial power supplies jumped again this week after months of historically high levels.

Europe is struggling to manage gas supplies following Russia’s February invasion of Ukraine and resulting sanctions by Western countries, heightening energy-security risks on the continent.

The U.K. government is putting finishing touches on a temporary levy on oil-and-gas producers to help soften the blow of soaring energy prices on consumers.

In the U.S., President Biden last month urged oil refiners including Shell and Exxon to expand capacity and accused the companies of profiteering as the public pays record prices at the pump.

Shell said it is producing as much as it can from its relatively small U.S. refinery footprint and is exploring other options, including accelerating efforts to lift oil production in the Gulf of Mexico. Exxon pointed to an expansion project to boost capacity at its Beaumont, Texas, refinery and said the U.S. government could enable easier fuel shipments and encourage more investment in oil by having more predictable lease sales and streamlining approvals for pipelines.

Write to Jenny Strasburg at jenny.strasburg@wsj.com