Risky trades, sleepless nights
In the second of a six-part series, our trader keeps his eye on the weather
This article is the second of a six-part series, "A day in the life… of an oil trader"
YOU SPEND a helluva lot of time trying to figure out the “job of the market”. Inevitably, in the physical and financial oil markets, situations come up that aren’t economically sustainable. Since so much influences the price – from fundamentals to positioning or things that are not predictable, like geopolitics or weather – you have to be constantly focused. In the summer, people are paying attention to day-to-day gasoline demand or preparing for hurricane season. Some are also looking at the upcoming winter season.
A while back many were content with total US distillate inventories being higher than the previous year by the end of summer. We saw this as a concern, especially given the predictions of a cold winter and a heavy refinery maintenance turnaround in full effect.
An early start to the winter, with colder-than-normal weather, resulted in a drawdown of well over 10m barrels. This had heating oil spreads bid along with the physical markets getting stronger. With that strength came imports and the market seemed to think that relief was going to get us through the winter – we did not think the imports were enough. I had to position the book and the business to be able to capitalise and reduce the risk of not only a physical squeeze but also a futures squeeze. I grew up in Connecticut – so I knew the cold weather could last well into March. I told the team to begin accumulating inventory and buying intermonth spreads. All this was done within the necessary risk limits – I knew that our customers depended on us to have the supply for them. And I knew we were going to have it.
The team was aligned, from scheduling to trading to risk control to marketing, and everyone was on the same page as to what was going to be executed. While everyone that contributes to the success is executing and I myself have conviction that we’re doing the right thing for the right reason, I’m also troubled by doubts. I’m constantly thinking: what can go wrong?
Imports to the northeast US via pipeline, rail, or from the sea don’t have the capacity but what if it does get warmer, much warmer and in a short time period. Am I the one that’s going to get squeezed here? Am I buying into something when many are selling? It didn’t seem like we were getting filled and having storage constraints – but what if I’m wrong? It kind of gnaws at you and you struggle to focus on anything else – nights, weekends, dinners, it doesn’t matter. The stress builds.
Thankfully, this time, we weren’t wrong.
Nymex experienced record backwardation in its futures strip and heating-based fuels dried up everywhere. We positioned the futures correctly, all the while having physical supply to sell into a strong market and keep customers supplied. I didn’t sell as much as I should have – I didn’t want to run out of product like everyone else. That put us at an economic disadvantage: I didn’t time the exit perfectly, but it was for a small amount of volume in comparison to what we moved in the matter of six weeks. We’d made the right call, and the trade worked.
I didn’t sell as much as I should have - I didn’t want to run out of product like everyone else. That put us at an economic disadvantage
We all find ourselves getting into trades with great conviction. And while you can manage and execute the trade well, it’s difficult to know everything that’s going on in the market. It’s that knowledge that keeps us up many nights through the trading process, watching and wondering if there was something we missed. The sleepless nights? They’re many – and they’re just part of what we do each and every day.