Traders’ take on oil prices
Screaming about higher gas prices? Jeff Grossman does it every day.
He is one of the dozens of traders in brightly colored jackets who pack the floor of the New York Mercantile Exchange, one of the world’s premier hubs for energy trading. The 130-year-old venue is one of the last in Manhattan where people can still shout out orders instead of them silently being processed by computers.
That’s given traders such as Grossman a rather unique perspective on the rising price of fuel -- especially since prices at the pump typically follow moves on the trading floor by just a few days.
“You might as well gas up today because Friday they’re going to raise your price,” Grossman, an independent energy options trader, told his wife on Long Island one day last month after the price of crude oil surged in the trading pits.
There have been plenty of times when it would have been wise to fill up the tank in recent months. As is common in springtime, gas prices have steadily risen as refineries gear up to make the cleaner burning, more expensive fuel needed in summer.
American consumers are struggling as a barrel of benchmark U.S. crude oil surged above $100 early in the year and a gallon of regular gasoline reached more than $4 at the pump in many parts of the country.
The reasons for the elevated prices have become a subject of national debate. Members of Congress have blamed it on speculators, presidential candidates have blamed it on one another, and policy wonks have talked about the Middle East and refinery capacity.
For insights into what is actually moving the energy markets, there are few better places to go for answers than the exchange floor.
The Nymex is by no means the only place where oil prices are determined. Different types of crude oil are traded on exchanges around the world, and many of them do all their trading electronically.
When the Nymex was purchased by the Chicago Mercantile Exchange in 2006, much of the trading here was put onto electronic exchanges that can be accessed from anywhere. But the Chicago company kept open the trading pits that sit in a building in downtown Manhattan next to the Hudson River.
As has been the custom for decades, brokers who are trading on behalf of their customers stand on the top stair of one of the pits in distinctive jackets. A few steps down, in the center of the pit, are the more formally dressed traders, often buying and selling for their own profit. Communication is done through an elaborate language of gestures -- with one hand motion for each month, and another for the different types of contracts.
Market watchers have been predicting for years that the pits would totally die out, given the speed of electronic trading. But physical trading has proved to offer advantages for complicated energy contracts, especially when prices remain volatile.
“In a market that is really whipping around, if you want to get a big trade done, most of the people come to the floor,” said Tom Riley, an options trader for SCS Commodities Corp.
The pit for energy options was thrown into a frenzy recently after reports that President Obama and British Prime Minister David Cameron discussed opening petroleum reserves to help ease the pressure on gasoline prices. The cost of a barrel of oil plunged $2.50 in a matter of minutes. Once traders realized that the release of the reserves was not likely to happen, the price bounced up again.
Politicians have taken some of the blame in public for the rising price of oil. But aside from the petroleum reserves discussed by Cameron, traders say politicians have almost no ability to change the price of gas other than through long-term energy policy. The more important factors, traders say, are those of basic supply and demand.
Traders say they’ve been intently watching several global stories that have a big influence on which way the markets will move. The supply of oil from the Middle East has been threatened in recent months as tension between Israel and Iran has mounted, and Iran has threatened to close the sea route through which much of the region’s crude oil passes.
Grossman said he thinks the Iranian crisis has added $5 to $10 to the price of a barrel of oil, an increase that could disappear if tensions are resolved.
In the past, the price of oil has been determined largely by the value of the dollar and the euro -- forcing oil traders to become currency experts. But in recent months, that relationship has become less important. Riley of SCS Commodities said that lately the health of the U.S. economy has been one of the most important factors, with oil prices rising when the stock market has gone up.
“People think the American economy is strong -- and that will drive demand for oil,” Riley said.
The traders themselves have taken some of the blame for volatility on the markets.
More than 50 members of Congress wrote a letter complaining about the effect that oil speculators, including those on the floor, are having on gas prices.
The floor traders acknowledge that they are always trying to get ahead of the price of gas, but they bristle at the suggestion that they individually or as a group could decide to drive up prices.
“The idea that people can keep that price up there artificially -- it’s not happening,” said Ray Carbone, a trader for Paramount Options. “You’d get run over.”
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