Traders on oil spot market have no time for Ping-Pong
In the back room of a top-floor office in this port city, stands a green Ping-Pong table. Six years ago the staff of Anro Company used to hold elaborate tournaments during working hours. There wasn't much else to do. But now the table is covered with cardboard boxes of stationery; paddles and balls lie unused in a carton on the floor. The staff has no time for table tennis any more.
It is much too busy taking part in a revolution in the world oil business: the mushrooming growth of the spot trading market that is helping push oil prices downward.
Only a few years ago, world spot traders like the Anro Company were an obscure group of individuals whose deals accounted for a mere 5 percent of all oil bought and sold. The major oil companies controlled the market from wellhead to gasoline pump. Oil was bought and sold on long-term contracts. But the spot market has zoomed into top gear to cover what traders and analysts such as Anro's chief, Mike Roffey, say are at least 20 to 30 percent of the world market.
Governments now control crude oil production. Big and small oil and refining companies buy on the open market as well as on contract. They find they can make money at it as well - with traders' help. Prices rose so high that global demand fell and sellers outnumbered buyers, each scrambling for a bigger slice of a diminishing market.
Every spot deal provides a reference point against which buyers measure official (contract) prices. By Feb. 23, after Nigeria's unexpectedly heavy cut in crude prices, the spot price for North Sea crude dropped to about $27.25 per barrel - about 10 percent below the new British National Oil Corporation's price of $30.50 per barrel. In other words, buyers who hoped the British and Nigerian reductions would bring official prices closer to spot prices have been disappointed. The downward tug on official prices continues to be strong.
(Saudi Arabia and five other members of OPEC said Feb. 23 they had agreed to a $4 decrease, from $34 to $30 per barrel, in Saudi light crude oil, which determines the price for other OPEC countries' oil price. On the spot market, Saudi light crude is selling for $28 per barrel, according to Oil Buyers' Guide International, a petroleum-related publication.)
In fact, at this writing, spot trading is light. Buyers, expecting even lower prices, are still watching and waiting. That in itself helps to push prices lower, day by day.
One other result of the growth of the spot market is that speculation can reap big profits.
When oil was a dollar a barrel, no one gave the spot market a second thought. Today, an individual cargo of gas oil, at 25,000 metric tons, is worth roughly $ 250 a ton, or $6.25 million in all. If a trader bids on a 200,000-ton load in an oil tanker, he has as much as $44 million on the line for a single cargo.
Profits can be huge for traders who read the markets right. One who predicted OPEC would settle nothing at its Geneva meeting Jan. 23 and 24 agreed before the meeting to sell a 20,000-ton cargo of gas oil for $280 a ton three weeks later. He did not have the cargo in hand, but planned to buy it after the OPEC meeting at a lower price. OPEC did fail, the gas oil price plummeted, and the trader bought a cargo for only $245 a ton. His profit on that one deal alone was $700, 000.
Losses can also be high. A trader was on the point of delivering a gas oil cargo at $290 a ton when his trader-buyer suddenly went bankrupt - a not-uncommon occurrence these days. As the seller wondered what to do with the cargo, the OPEC meeting in Geneva broke up in failure, the gas oil price fell, and the seller could only find a buyer at $240 a ton. He lost $50 a ton on 20, 000 tons - a cool $1 million.
One US trader is estimated to have lost between $15 million and $25 million because he guessed - wrongly - that the Geneva meeting would be successful.
The trading world is still small, comprising only about 1,000 individuals worldwide, according to London estimates. Some are fly-by-night traders with whom reputable companies like Anro will not deal. Some are traders who have to be pursued before they will pay up. There are banks so overextended that letters of credit bearing their names are increasingly suspect by good traders. And there is not much regulation - no central trading floor, no registration of traders, no formal mechanism for recording prices other than reports by commercial companies, such as the Platt Group, which makes its own telephone checks at the end of each trading day.
Traders themselves have become far more cautious. They point out that countries like Israel and South Africa want to disguise the sources of their oil purchases. Some OPEC producers go to great lengths to hide the origin of oil they trade on the spot market, rather than sell under contract.
They don't deal with people they don't know. They require bank letters of credit for almost every deal. They talk endlessly by phone. A deal is often begun with a casual inquiry about the weather, and a good deal of verbal sparring to sound out the other man's position.
Anro's Mike Roffey, considered in London to be one of the sharpest traders of them all, says cautiously that he would not object to some regulation of the market. He also points out that traders like the current informality of doing business by phone, with prices gathered by Platt's Marketscan Report or the Petroleum Argus and telexed to them daily.
An element of regulation has begun with the oil futures markets planned for New York, Chicago, and London. Trading has already begun, limited to lots of 100 tons each.
Spot-market trading is a young man's game. Most are under 40 years of age. They are extroverts, skilled at tactics and at judging the moment to turn aggressive.
Some traders, like Anro, were set up by major oil companies who needed to buy crude oil after Iran, Nigeria, and other producers took over their fields. Others, like Marc Rich are individuals with expert knowledge. Still others have a commodity background, such as Philipp Brothers, once part of the Engelhard Group, which trades minerals and chemicals, and Tradax Petroleum America Inc., another trader linked with a large grain-dealing company.
Men like Kurt Rohner, trader Hans Lubbers of Germany, and fuel oil trader Rob Day of Britain thrive on knowing their markets, making deals, and earning big money at a young age - all without ever seeing a barrel or a barge-load of oil.
A big question is whether the spot traders' cumulative, and growing, influence is good - or bad. Opinions differ.
Some top traders like Mike Roffey see other traders taking risks that major companies don't want. They are balancing supply and demand in a legitimate way, while making money as well. He agrees that the presence of traders can accentuate price movements up or down. But he argues that world recession, and the world oversupply of oil, have created a more lucrative, and volatile, market than ever before.
''Fewer traders mean sharper swings,'' he says. ''The more traders you have, the more continuous the market is, and the less prices fluctuate.''
Other experts, such as former trader Peter Lymbery and Mr. Hart, see a weakening of ethical standards and a growth of sharp practices at the edge of the trading market.
Mr. Hart sees traders more likely to walk away from a deal and leave refineries possibly short of oil. Mr. Lymbery, a respected analyst, sees ''governments subordinating contractual obligations to what they see as their own national interest.'' The impact of the spot market, he say, is to act as a kind of servomechanism, exaggerating swings and then overcompensating the other way.
One big weakness in the system is that individual traders who are not offshoots of major oil companies have few tangible assets. A string of losses can mean that unscrupulous traders simply don't pay, and go out of business.
That there is room for some tightening, at least, is suggested by the number of traders either not making good their commitments or going out of business altogether.