The Squeeze: Oil, Money and Greed in the 21st Century. Tom Bower

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СКАЧАТЬ oil, an important fuel in America, and crude oil futures, dubbing the price spread ‘the crack’. The reference for prices was the future delivery of West Texas Intermediate (WTI, America’s light sweet crude oil) to Cushing, a small town of 8,500 people including prison inmates in the Oklahoma prairies. Several oil companies were building nine square miles of pipelines and steel container tanks in Cushing as a junction linked to ports and refineries in the Gulf of Mexico, New York and Chicago. Prices quoted on Nymex, based on those at the Cushing crossroads, rivalled those at London’s International Petroleum Exchange, trading futures in Brent and natural gas delivered in Europe. Instantly, the last vestiges Saudi Arabia’s stranglehold over world prices were removed. With the formalisation of a futures market, OPEC’s attempt to micro-manage fixed prices was replaced by market forces. The fragmented market became more efficient, but also murkier. Dictators producing oil were unwilling to succumb to regulators in New York, Washington and London. Instead of sanitising oil trading, Nymex lured reputable institutions to join a freebooting paradise trading oil across frontiers without rules. ‘I wish we were regulated,’ one trader lamented. ‘Why?’ he was asked by Peter Gignoux. ‘So I could bend the rules.’

      In 1982, Phibro had faced an unusual problem. The profitable commodities business was handicapped by a lack of finance. Its solution was to buy Salomon Brothers, the Wall Street bank, and begin issuing oil warranties. Manhattan was shocked at a commodities trader owning an investment bank. Overnight, Hall and O’Malley were established as super-league players among oil traders, yet Hall was upset. ‘Traders and asset managers don’t mix,’ he announced. ‘I don’t want to be part of a bank.’ Phibro moved to Greenwich, Connecticut, to be as far from Salomon as possible, operating as a hedge fund before hedge funds became widespread.

      Across Manhattan, Neal Shear, a pugnacious gold trader at Morgan Stanley, had watched Hall’s success with interest. Recruited in 1982 from J. Aron & Co., a commodities trader owned by Goldman Sachs, to start a metal-trading business to compete with his former employer, Shear envied the easy profits Hall and Rich were making. Compared to gold, he realised, oil trading was much more sophisticated and profitable. Without transaction costs or retail customers, and blessed by general ignorance about differing prices in Cushing and elsewhere in America, traders could pocket huge profits. In economists’ jargon, oil trading was ‘an inefficient market’. Shear’s business plan was original: ‘Our concept is not to be long or short but flat, to profit from transport, location, timing and quality specifications.’ Initially he wanted Morgan Stanley to copy and compete with Hall and Rich, but Louis Bernard, one of the bank’s senior partners, understood that the rapid changes in oil prices guaranteed better profits than speculating in foreign exchange. On Morgan Stanley’s model, the volatility of oil prices could be 30 per cent, while in the same period foreign exchange could move just 8 per cent. Investment bankers who had traditionally offered their clients the chance to manage risk in foreign currencies could make much more by offering them the chance to manage, protect and hedge crude prices against the risk of price changes. In 1984 Bernard hired John Shapiro, a trader at Conoco, and Nancy Kropp, a trader employed by Sun Oil, to trade crude. To ensure a constant stream of information about the market’s movements ahead of its rivals, the bank leased a few oil storage containers from Arco in Cushing. Hour by hour the traders in New York would be aware of whether there was a surplus or a shortage of WTI in Oklahoma, which determined prices on Nymex. Shapiro invented oil options, explaining the new idea to the oil industry at its annual conference in London in 1985. ‘We’re not taking speculative positions,’ he explained. ‘This is defensive, as a hedge, leaving Morgan Stanley to manage the residual risk. We’ve no desire to do an Andy Hall.’ Andy Hall had also ‘invented’ oil options, offering to the public the chance to invest in the oil trade. In the same year, by a different route, Goldman Sachs established another group of oil traders.

      As the gold market deteriorated in 1981, J. Aron & Co., a conservatively managed precious metals dealer, had been sold to Goldman Sachs for $30 million, although the rumoured price was $100 million. Goldman Sachs’s partners had only agreed to buy what one called a ‘risk-averse pig-in-a-poke’ because they assumed that Phibro’s purchase of Salomon’s must be clever, and Aron would give them additional international experience to earn a slice of the commodities trade. Three years later, 30 Aron metal traders were ordered to start trading oil. Under the leadership of Steve Hendel, Charlie Tuke and Steve Semlitz, they were to rival Morgan Stanley. Among their new ventures was speculating in heating oil contracts. By offsetting any order to buy or sell heating oil for future delivery, the bank earned its profit on the arbitrage regardless of future prices. ‘Arbing on the difference in price’ depended on whether the speculator took a bearish or bullish view, but the risk was taken by the customer. The bank’s books were nearly always balanced. Whenever an order to buy was booked, the bank’s traders made sure that the order for the future was fulfilled by finding a supplier. In those early days, neither Goldman Sachs nor Morgan Stanley were proprietary traders betting on the price, and they were blessed that British banks were either too sleepy or too small to compete.

      In 1985, to profit from the ‘cash and carry possibilities’ of heating oil and crude, Goldman Sachs’s traders also acquired storage containers in Cushing and New York. The two American investment banks had become players in physical and paper oil. Oil prices, they realised, were determined not only by demand, but also by supply and international events. In that jigsaw, they traded only if they had the edge. Recognising that accurate prediction of prices was impossible, the traders did not bet on prices going in a particular direction, but traded on the volatility itself as Brent fell from $30 a barrel in December 1985 to $9 in August 1986. Fast and furious, dealers traded huge volumes even to earn just half a cent on a barrel. The watershed in their trading – before computer models had eradicated the club atmosphere – was the formal introduction of derivatives (‘Contracts for Difference’), allowing traders to own huge ‘paper’ positions to influence the market. Bankers, oil traders, the oil companies and the OPEC producers were plotting against each other to master and manipulate the market. The trade in futures, or ‘paper barrels’, was as much a banking business as an oil trader’s speciality.

      1986 was the beginning of oil’s Goldilocks years. Survivors of the crash were destined to earn fortunes because of the volatility of prices. Regardless of whether these went up or down, the traders could profit. During the boom in the 1970s, oil prices had soared fivefold, and pundits had predicted $100 a barrel. In the mid-1980s, Sheikh Ahmed Zaki Yamani, the Saudi oil minister, became worried that high prices would encourage the West to search for alternative sources of energy. In that event, he anticipated, the floor for oil prices would be $18. Others including Matt Simmons, a Houston banker, predicted a crash. ‘Stay alive till ’85’ became the mantra of groups characterised by Simmons as ‘insular and unreliable’ for failing to understand the effect of the growing excess capacity. Contrary to their expectation, oil prices had fallen despite the Iran-Iraq war. Falling prices appealed to President Reagan. According to rumours, in 1985 he urged King Fahd of Saudi Arabia to flood the world with oil in order to destroy the Soviet economy; at the same time, Margaret Thatcher ended BNOC’s monopoly in the North Sea, deregulating prices of Brent oil. During December 1985, Simmons’s pessimistic forecast began to materialise. Prices were falling from $36 as Saudi Arabia flooded the world with oil, and they fell further as unexpected surpluses of oil from Alaska, the North Sea and Nigeria were dumped on the market. Traders in the speculative Brent market played for huge profits as prices seesawed. The value of 44 to 50 tankers carrying 600,000 barrels of crude oil every month from the North Sea terminals to refineries assumed global importance among the 50 players – oil companies, banks and traders. All crude oil in the world beyond America was priced in relation to Dated Brent, the benchmark of oil prices. Two traders fixing a future price for oil produced in Nigeria would base their contract on the price of Brent on the material day in the future. By squeezing the price of Dated Brent, traders could directly influence the price of crude sold by Nigeria, or Russia, or Algeria. Fortunes could also be made by manipulating the market prices of other oils across the globe based on Brent.

      In that hectic atmosphere, a group of traders regularly met at the Maharajah curry house off Shaftesbury Avenue in central London to agree joint ventures to reduce risk and СКАЧАТЬ