Amazingly, that meant anyone selling oil had to pay someone else to take it off their hands. Then the crude market collapsed completely, falling almost $40 in 20 minutes, to close at –$38. It was the lowest price for oil in the 138-year history of the New York Mercantile Exchange—and in all likelihood the lowest price in the millennia since humans first began burning the stuff for heat and light.
Watching this spectacle unfold were traders, energy executives, and freight company employees—whose livelihoods are tied to oil’s fluctuations. Regulators with the Commodity Futures Trading Commission in Washington stared at their monitors, stunned. “The screen was just going nuts,” Tom Kloza, an analyst at the research firm OPIS Ltd., told Institutional Investor. The experience, he said, was like watching a film by surrealist director Federico Fellini: “You’re able to appreciate it, but no one really knows what’s going on.”
Within 24 hours the insanity was over, oil cost money again, and it was tempting to see what happened as a blip. But WTI futures, in which buyers and sellers agree on a price to trade at some upcoming date, sit at the heart of the $3 trillion-a-year oil and gas industry. WTI is one of the main components that determines the global price of oil—whether that oil is being sold by a Middle Eastern kingdom or a fracking conglomerate in Alberta. It affects what airlines pay for jet fuel and what manufacturers pay for petroleum-based chemicals.
Beyond the physical commodity itself, billions of dollars’ worth of financial products are also pegged to WTI in a specific and idiosyncratic way. Their value is determined by the WTI price at 2:30 p.m. four working days before the 25th of every month. That crucial “settlement” for the May WTI contract was on April 20.
The sudden price drop that day, which wiped out some investors who’d bet on an oil recovery, was explained as the result of a confluence of macroeconomic factors. The pandemic, and resulting economic shutdowns, had decimated demand for oil, and space to store it was rapidly running out. It seemed to be a simple case of “fundamental supply and demand,” said CFTC Chairman Heath Tarbert in an April 21 interview with CNBC. Terry Duffy, chief executive officer of CME Group Inc., which owns the New York exchange, known as Nymex, saw it in similar terms. “The market worked the way the market was supposed to work,” he told the network. “To perfection.”
Perhaps to industry veterans like Duffy, it all made sense, but to anyone who has ever paid to fill up a car or home oil tank, a negative price was difficult to comprehend. Moreover, there had been a torrent of selling starting two hours or so before the settlement, leading to questions about whether someone had deliberately set out to push prices down. Harold Hamm, chairman of oil producer Continental Resources Inc., published a letter demanding an investigation into what he described as “failed systems” and “possible market manipulation.”
After all, the May contract was back at $10 on April 21 and the outlook had barely changed. “Going into April there was chitchat about zero or even negative prices, but nobody was talking about –$40,” says Dave Ernsberger, global head of pricing and market insight at S&P Global Platts, which provides benchmarks for buyers and sellers. “So what’s the real story here?”
U.S. authorities and investigators from Nymex trawled through trading data for insights into who exactly was driving the action on April 20. According to people familiar with their thinking, they were shocked to discover that the firm that appeared to have had the biggest impact on prices that afternoon wasn’t a Wall Street bank or a big oil company, but a tiny outfit called Vega Capital London Ltd. A group of nine independent traders affiliated with Vega and operating out of their homes in Essex, the county just northeast of London, had made $660 million among them in just a few hours. Now the authorities must decide whether anyone at Vega breached market rules by joining forces to push down prices—or if they simply pulled offone of the greatest trades in history. A lawyer for a number of the Vega traders vehemently denies wrongdoing by his clients and says they each traded based on “blaring” market signals.
PAUL COMMINS STARTED HIS TRADING CAREER BUYING and selling oil in the rowdy pits of London’s International Petroleum Exchange, where, according to a former colleague, he was affectionately known as “Cuddles.” He had the kind of broad cockney accent that wouldn’t be out of place in a Guy Ritchie movie and struggled to pronounce his r’s. As a result, his three-digit badge, which everyone wore at the IPE, contained the letters “F-W-E”—pronounced “fwee,” the sound that would come out of his mouth when he tried to say “three.”
Opened in 1980, the IPE was riotous—400 traders and brokers in colorful jackets screaming at one another and using hand signals to strike deals that were then sealed on scraps of paper. They mostly came from working-class backgrounds, often from Essex, known for its brash culture and ostentatious displays of wealth. (The stereotypical Essex male is a soccer-loving “geezer” with a pint in his hand and an expensive “motor.”)
The pits rewarded quick thinking and a tolerance for risk, and Commins—aka Cuddles, aka FWE—thrived there. After a few years filling orders for corporate clients at Trafalgar Commodities, he became a “local”—one of the elite traders in red jackets who wagered their own funds. A former colleague describes him as among the top three in the gas and oil pit where he operated.
The pits were collegial and freewheeling, a place of ethical and regulatory gray areas. If a local overheard news about a big trade that some oil major had in the works, he might try to jump ahead of it, a prohibited but pervasive practice known as front-running. The cavernous trading floor had cameras, but there were blind spots where people went to share information. A former executive struggles to remember a single meeting of the exchange’s compliance committee.
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