The man who cornered an oil market
Kenneth R. Sheets
The man who cornered an oil market
As one of the world’s most widely traded oils, North Sea Brent crude is a reliable barometer of the petroleum market. Or so it seemed in December when signs suggested that prices soon would slump: OPEC had just tried in vain to make members quit cheating on production quotas. And a mild winter in Europe–people in the Alps were golfing instead of skiing–continued to erode the demand for oil. But suddenly, as the new year began, Brent prices mysteriously shot up by $1 a barrel.
What happened was an oil-world whodunit: One trader, a secretive Dutchman named John Deuss, had “cornered” the market. With an array of futures contracts, his Transworld Oil bought all but one of the 42 cargoes produced in January from the Brent field in the British sector of the North Sea–some 25 million barrels worth $425 million.
Brent is a high-quality crude that yields a high percentage of gasoline, a kind of oil in great demand by refineries. If January had been a month of tight supplies, Deuss’s purchases could have created a panic and sent prices soaring. Luckily, the world was–and still is– awash in surplus crude and gasoline. Shell, Exxon, British Petroleum and other major oil companies, all fearing tighter regulation by the British government, quickly made enough oil available to keep the market working smoothly. “Transworld gambled that the market would be stronger, and it is only mediocre,” says Dennis Eklof, an analyst at Massachusetts’ Cambridge Energy Research Associates.
Risks and rewards
Whether Deuss’s raid will turn out better than speculators’ past attempts to corner commodity markets is still unclear. In the late 1970s, Dallas’s oil-rich Hunt family tried to corner the world silver market and lost an estimated $1 billion when prices took a nose dive. Deuss was not as ambitious–he cornered only the Brent supply, not the world supply. He reportedly paid an average of $17 a barrel and has sold about half of what he bought. Analysts say he charged a premium of at least $1.25 a barrel over the market price to irate companies that needed it for their refineries. The rest of Deuss’s purchase is probably destined for his storage tanks in the Caribbean and his Atlantic Refining & Marketing Corporation, which operates a 125,000-barrel-per-day refinery in Philadelphia and nearly 1,000 Atlantic and A-Plus service stations on the East Coast. If prices plunge this spring, as many experts anticipate, he could lose a bundle on the oil he hasn’t sold.
Personally, Deuss is something of a mystery man. According to one industry observer, the Dutchman made millions trading oil in recent years and almost cornered the Brent market last April. He conducts most of his business in the Netherlands, Philadelphia and in Bermuda, where Transworld is headquartered. In an interview with the Royal Gazette in Bermuda, Deuss said Transworld routinely trades about 2.5 million barrels of oil a day on world markets. Cornering the Brent market, he said, was not all that remarkable.
Although Deuss’s one-month monopoly failed to create the havoc that many experts initially feared, it did demonstrate the growing influence that aggressive traders exert over the price of the world’s most valuable commodity. Until the 1980s, oil trading was done mostly by major oil companies that bought “wet cargoes”–or actual oil–on the spot market for their refineries. But as more surplus oil began sloshing around in global markets, speculators began buying and selling “paper” cargoes on futures markets.
The paper shuffle
Today, an estimated 40 percent of all oil produced in the non-Communist countries is traded on futures markets. On average, each barrel of oil changes hands four times before being consumed. The New York Mercantile Exchange, which has become the largest oil market in the world since it began trading crude in 1983, handles transactions on about 116 million barrels of oil and oil products each day. Actual consumption is roughly 46 million barrels a day.
Oil-futures markets are supposed to forecast trends in the petroleum business, just as the stock market does for the overall economy. “Spot prices quickly reflect whatever knowledge exists on supply and demand,” says Adam Sieminski of Washington Analysis, an economic-consulting firm in Washington, D.C. “Spot prices reflect what’s out there.”
The ability of speculators to influence prices has yet to rival the power of even a weakened OPEC. But they could create minichoke points in the global oil pipeline and cause wild fluctuations in price and supply, making it harder for oil companies to plan for seasonal ups and downs in the demand for gasoline and heating oil. If traders abuse their power, they could kill the goose that laid the golden egg. Says Philip Verleger, Jr., an economist at Washington, D.C.’s Institute for International Economics: “If one buyer keeps buying up the market and artificially driving up prices, the market will simply cease to work.”
Photo: Oil-company action held prices in line even after trader John Deuss bought January’s supply of Brent crude
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