Surviving a Crisis With ‘Paper Barrels’
It wasn’t even lunchtime here, but the markets for heating oil and gasoline had already skyrocketed, plummeted and recovered, and the roller-coaster ride had been knotting the stomachs of Chevron Corp.’s trading coordinators for nearly six hours.
It was deceptively quiet Tuesday in the ninth-floor trading room at Chevron’s headquarters, where the coordinators manage the worldwide buying and selling of crude and other products for Chevron Corp.’s operations.
But for these coordinators--as for their counterparts in other oil companies--the market’s volatility since the Aug. 2 Iraqi invasion of Kuwait has become a familiar, though hardly welcome, fact of life.
“Usually . . . you can look at trends and . . . indicate channels of price movements, but in this market, it’s been virtually useless,” said Kevin M. Kelly, manager of futures trading for Chevron’s international oil company. “So you have to go a lot more with gut feel.”
Like other major oil companies, Chevron has a network of trading offices around the globe that buy oil for its refineries, sell surplus oil or trade it for other supplies, and occasionally buy and sell futures contracts of oil or refined products as a way to make money on the markets.
Chevron traders in Houston; Stamford, Conn.; London; Singapore, and Abidjan in the Ivory Coast buy and sell foreign oil. Coordinators in San Francisco make sure everything runs smoothly. Chevron’s domestic unit also has traders in Houston and in Walnut Creek to trade U.S. oil.
The traders also buy and sell futures contracts on the New York Mercantile Exchange and other exchanges as a “hedge” to protect the value of their cargoes of oil or refined products.
Such contracts, or “paper barrels,” are purchased at the same time as the physical cargoes, or “wet barrels,” and in effect act as an insurance policy against changes in price of the oil before actual delivery. Any gain or loss in cash markets for the oil will be offset by changes in the futures price, and the contract in effect “locks in” the purchase price of the wet barrel.
Kelly supervises such “risk management” from the San Francisco trading room.
The room is dominated by a world map, over which clocks show time in Singapore, San Francisco, Houston, New York, London and Abidjan.
On another wall, two bulletin boards record the status of current transactions: “requirements trades,” which are carried out to obtain crude supplies for Chevron’s refinery system, and “opportunity trades,” transactions undertaken simply to make money by taking advantage of daily price fluctuations in the market.
As a result of the Iraqi invasion, Chevron--like other oil companies--has drastically scaled back its “opportunity trades,” concentrating instead on ensuring adequate supplies of crude for its operations.
“In this type of environment, our trading does change,” said Herb Long, Chevron International’s general manager for planning and development. “At the moment, all of our trading is being done to take care of our system’s needs.”
The day starts early in San Francisco. Anne Jennings, who coordinates crude oil opportunity trading, is usually in her cubicle by 6 a.m., checking her messages, assessing price changes worldwide, speaking on the phone with her contacts in the field.
Kelly is there for the opening of the NYMEX at 6:45 a.m. San Francisco time.
This day, the futures price of gasoline skyrockets out of the gate. The day before, it had reached a record high, breaking the $1-per-gallon barrier for the first time since unleaded gasoline futures began trading in 1984 on fears of worldwide shortages of supply.
Within minutes of opening, the September contract for unleaded gasoline reaches a new high, above $1.06 per gallon. Kelly watches the numbers carefully. He wants to sell gasoline futures that he purchased earlier as a hedge to protect a cargo of gas oil, a refinery feedstock.
“What we attempt to do is allow the market to go up, and then when we feel it’s ‘toppish,’ we try to sell the futures,” he says. “In effect, we’re artificially selling the wet cargo that’s in inventory or in transit somewhere . . . at a higher price.”
Working with a trader in Houston, Kelly monitors prices for the right moment to sell. The minimum target: $1 a gallon.
Shortly after 7 a.m., the market reacts to news of a speech by a representative of Iraqi President Saddam Hussein that appears to be less belligerent than earlier ones.
Kelly derisively calls such market reactions “headline trading.” But the effect is nonetheless dramatic. Within minutes, the market is plunging. $1.05. $1.03. $1.02.
Kelly orders the selloff--but it’s too late. “I had the orders in when we were trading at $1.01, but we couldn’t get the orders executed because the market was just running so quickly,” he says.
By the time the sale transactions are completed, gasoline has fallen to $1. A little after 8 a.m., it has fallen as low as 95.5 cents, a loss of 8 cents.
“We had sort of mixed success, but we did all right,” Kelly says with equanimity. By 10 a.m., the market has recovered to about $1 again.
Meanwhile, Jennings is across the room setting up possible trades of crude for the following day. By morning’s end, she has lined up no opportunity trading, a further reflection of Chevron’s desire to stay out of that part of the market.
“Tomorrow, I may be buying and selling all over the place, but today, I’m setting the stage,” she said.
Trading on the NYMEX closes about lunchtime, a lull period for the San Francisco trade coordinators. But they will be on the job until 5 p.m. or 6 p.m., working with Chevron operating companies to determine future needs. They will deal with Chevron traders in Houston, even with traders in Singapore, where the market day is just beginning.
In Houston, for example, Luis Coimbra has been setting up the purchase of crude oil for Chevron’s Philadelphia refinery. He has a line on two 1-million barrel cargoes of low-sulfur, light crude oil.
But he is not ready to execute the trade today because he must first arrange shipping. But market fears will frustrate his plans eventually: by Wednesday, when he has lined up shipping, the two potential sellers are no longer willing to part with their oil.
“Since the invasion, . . . people are of course reluctant to let go of their hydrocarbons because they may need them for their own systems,” he said. “If Saudi Arabia blows up, where are people going to get their oil?”
By the time the San Franciscans are heading home, traders in Singapore are getting into full swing. And they will undoubtedly have their own crises to deal with.
“Obviously, this situation is a lot worse than others, but in the world of trading crude oil . . . it’s always topsy-turvy,” Long said. He added: “I don’t think my people are drinking any more Pepto Bismol than usual.”
