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The Spokesman-Review Newspaper
Spokane, Washington  Est. May 19, 1883

Oil’s plunge hurts traders

Oil trader Justin Thomas looks at his computer screens at his one-person office in Boise on Jan. 22. (Associated Press)
Bernard Condon Associated Press

The plunge in oil has crushed the Russian ruble, erased $80 billion from Exxon Mobil’s market value and pushed Venezuela to the brink of economic collapse.

But to Justin Thomas, the real drama in oil unfolds on a smaller scale, a story told in tiny, second-by-second moves in prices on his computer screen. Lately, most of the moves have been down, taking a toll on him and other traders who believe oil should have turned up by now.

“It was quiet, then there was chaos,” said Thomas after a few losing bets earlier this month from his one-man office in Boise. “The market changes, and you lose your confidence.”

Thomas is one of thousands of oil traders who have helped turn market fundamentals – lots of oil, not enough demand – into a plunge of nearly 60 percent in the price of crude in seven months, a drop with few precedents.

He trades futures contracts, and uses them to bet on where prices are headed. His bets, and hundreds of thousands of others like them, affect what drivers pay for gasoline, airlines pay for jet fuel and truckers pay for diesel.

Futures used to be traded mostly by drillers, refiners and others in the oil business looking to lock in prices for crude that they needed to sell or buy in future months. Now, much of the trading is done by pension funds, hedge funds or day traders like Thomas who almost never touch a barrel of oil. They have no use for it, except as a way of diversifying their investments or to make a quick buck for themselves or their clients.

That futures market has ballooned in size and importance. Since futures need not involve an exchange of a single barrel, the number of these side bets can outstrip the number of actual barrels available. In a typical month traders buy and sell contracts for 15 billion barrels of just one kind of crude, West Texas Intermediate, on the New York Mercantile Exchange. That’s five times the number of barrels of all types of oil consumed globally each month.

Whether this furious trading distorts the market or helps it better reflect supply and demand is a subject of fierce debate. There is little consensus in dozens of academic papers on the issue, and little evidence their bets have a lasting impact on price.

Whatever the truth, oil traders today seem more at the mercy of the market than its masters.

It is a market that Richard Weissman won’t touch right now.

“I’m all about managing risk,” said Weissman, who writes about markets and trades commodities and currencies from his home in Port Richey, Florida. “Right now oil is high risk.”

Last summer the market didn’t seem so treacherous. It was even sleepy. The price of oil was hovering near $100 a barrel, as it had for much of the previous four years.

But in the background, supply was rising and demand falling, a combination that lowers prices. U.S. production had risen 70 percent over six years. Demand was falling as rich countries became more fuel efficient and growth in the developing world slowed.

Then the economies of Europe and Japan began to sputter, pinching demand further.

Traders began selling. Buyers became scarce. Volatility quadrupled between June and December.

As drivers watched pump prices drop and exporters like Venezuela and Russia reeled from lost revenue, traders scrambled to make money.

Trafigura Beheer, a giant trading firm based in Amsterdam, said the pickup in oil trading helped boost its profits 14 percent last year.

Dominick Chirichella, an energy investor and consultant, trades a fraction of what Trafigura does. But he also had a terrific few months as the market moved steadily lower.

He kept betting that oil would fall further, but he was careful about it. He set up secondary trades that acted like insurance policies. When he was wrong and oil turned up, those trades would pull him out of the market quickly before losses snowballed.

“Whether you make 50 cents or $1, you don’t care, you’re making money,” he said.