London crude trading’s ‘Good Old Days’: Into the nineties
Colin Bryce continues his oil markets story, as a new decade ushers in further changes to the trading landscape
The financialisation of oil trading proceeded at pace as the 1980s gave way to the 1990s, as did the transformation of work practices in terms of intensity and technology, the advent of the risk management marketers, originators and structurers and the growth of benchmark pricing of physical oil.
If there was a shake-out, it was the smaller independent traders and the Japanese sogo shoshas—so active in the 1980s—that retreated to the sidelines as the decade came to a close.
Industrials, transport companies and manufacturers were encouraging to adjust their business models and manage their price risk at the market interface by buying products from, initially, the finance houses and, in due course, the majors too. Hedging instruments to fix prices—popularised in the agricultural markets and enabling the temporal separation of price from supply and distribution—became common.
Benchmark pricing referencing Brent or WTI became the pricing tool of choice as the traditional oil industry surrendered any pretence of control over price to the market—by now deep, liquid and increasingly transparent due to the plethora of prices accessible from exchange market feeds.
Early in the decade, the promise of business in Russia post the collapse of the Soviet Union filled the Monday morning flight to Sheremetyevo with oil traders.
Relative value trading replaced outguessing Opec (and the weather), underpinned by the exchanges and OTC derivatives markets. BP’s Louise Murray championed the creation of the refinery margin hedge.
Airlines—seeking to market seats and travel free of fuel surcharges—were serviced by all, with Lufthansa a prominent early adopter. Shipping companies and cruise firms started hedging bunker price risk. The road transport sector and other industrials and manufacturers made similar moves, relentlessly pursued by a new breed of ‘marketers’ selling new and complex financial products.
Most products were predicated on a combination of futures, swaps and options with an increasing element of non-linearity, providing a role for so-called ‘quants’. This was a world away from the lunching culture of the early-to-mid 1980s and required an entirely different skillset.
Early in the decade, the promise of business in Russia post the collapse of the Soviet Union filled the Monday morning flight to Sheremetyevo with oil traders. To reach further afield in Siberia or Tatarstan required a journey across Moscow to Domodedovo airport and a wander onto the tarmac asking any of the smokers, mechanics or general Russian travelling public milling around the many aircraft which one was going to one’s preferred destination, getting onboard, and hoping arrival was at the desired location.
The week’s experiences and encounters were shared over beers in the BA Club Class gantry on the Friday night flight home. But, over the long-term, the promise of Russia as an oil business partner or opportunity has remained largely unfulfilled.
Whether the western trading community took fright after one too many stories of second attempts to land at Tyumen airport—this time with the undercarriage down—or whether business practices were just too idiosyncratic, the opportunity to do business in Russia proved, and still proves to be, disappointing.
As the century came to a close, the internet economy was taking off and those trading in crude oil paid attention. As a counter to the soon-to-launch Enron Online platform—where the buccaneering US energy trader would control all liquidity and reap a majority of the returns—Morgan Stanley and J Aron set about founding the Intercontinental Exchange (Ice). They wanted to try to protect the value of their liquidity and that of the other major market participants who they persuaded to become founder members.
The proposition was equity in return for guaranteed liquidity, and the story of the inception of Ice is well-documented in Kevin Morrison's excellent 2008 book, Living in a Material World. It was to be the trade of the era for the founders.
For an outlay of almost nothing, returns of over $1bn accrued to the initial partners when they sold their equity stakes. As Ice has evolved, it has become ever clearer that its charismatic leader Jeff Sprecher will be noted as one of the most ingenious and successful entrepreneurs of the oil trading age.
Colin Bryce is a founder of consultancy Energex Partners and has 42 years of experience in oil trading. The sixth and final part of Colin’s London crude trading’s ‘Good Old Days’ series will be published on Monday 3 August.
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