“It’s Like a Burning Theater, and Everyone Is Trying to Get To the Door”: Oil Traders on the Day Prices Went Negative
On April 20, oil prices dropped below zero for the first time in trading history, leaving industry insiders shell-shocked and scrambling. “Not only have we been consistently wrong,” says one, “we have been wrong on an order of magnitude more than anyone could conceive.”
On April 20, oil prices dropped below zero for the first time in trading history. Globally, the U.S. is the biggest producer of oil, followed by Saudi Arabia and Russia, which, as members of OPEC+, often negotiate between themselves to set prices by managing supply. The root cause of the plummet was the novel coronavirus, which brought travel to a screeching halt, causing a global drop in oil demand. As excess barrels piled up, storage started to run low. Investors who trade in oil futures, but who don’t have the capacity to store oil themselves, found themselves in the position of selling or getting screwed.....MUCH MORE
Once contracts expire, buyers must physically take possession of the oil. And so the price of the futures contract for the U.S. oil benchmark West Texas Intermediate (WTI) dropped below zero the day before it expired, leading a worldwide dip. Vanity Fair spoke to oil traders about how they experienced the unprecedented drop, which one called “a beautiful, perfect storm…of Wall Street arrogance.”
Charlie Bowden (day trader in Surrey, England): Late last year, oil was making a nice trend; it was buying from like $52 up to about $65. I mean, everyone was just buying—it was one of those things where every week, you just buy the dip. And it was pretty easy money.
Tracy* (hedge fund manager in New York): In February people were like, “Oh, I can’t believe you’re going to International Petroleum Week [in London]. Have you heard about this thing called the coronavirus?” And then I’m in London, and my friends are like, “How are you getting back to New York? If your flight’s canceled, I’ll give you a ride back on my private jet.” And I was like, “Please, my flight’s not going to be canceled.”
Kevin* (trader in New York for oil asset management and logistics company): Early February, I had a conversation with a good friend of mine who’s also a broker. And we were actually talking about China. This was when things were looking bad in China, but it really hadn’t come over to the U.S. yet. And I remember one of my brokers saying, “Dude, crude could go $30, you could go $20, it could go to $10 because what if the world shuts down?” And, you know, we kind of laughed about it.
Jack* (trader in Houston for an energy company): As a major oil producer, we do a lot of selling of oil across the globe. And our Singapore office was having a really hard time clearing barrels from our global portfolio in the far East, which we just call, like, China, Korea, basically all of the big refining Asian countries.
Ben Luckock (cohead of oil trading in Geneva for international commodity trading and logistics company Trafigura): It’s a movement industry, right? Unless you’re driving or flying or whatever, you’re not using the products that we sell.
Jack: So whenever the COVID-19 stuff started hitting Asia, we started positioning ourselves into a short position, meaning selling barrels before you had them or selling them before they were priced in.
Tracy: Every piece of incremental data just kept getting more and more bearish. So fast-forward to the OPEC meeting in March, and they’re saying we’ve got to do something. Demand is really bad. And because I’m a skeptic of OPEC in general, I’m like, What can they possibly want to do? Keep oil prices at $60? I mean, what are they going to do, cut a million barrels a day, every day?
Bowden: Everyone’s expecting them to cut, because they kind of have to, right?
Tracy: The Russians had been really clear: We’re not going to cut. You know, part of our job is to read the tea leaves. And so I was like, Well, I don’t think they’re going to cut. Sure enough, we go into the meeting, they don’t cut. Then oil prices dropped.
Jack: There’s a lot of costs associated with shutting in wells. There’s a lot of issues with getting them back up—same thing with refineries. You just do not want to turn off these big machines if you don’t have to. So there’s a kind of brinksmanship mentality in our industry, like whatever it takes to keep going, whatever it takes to limp along, as long as we’re not losing too much money. They’ll lose a little bit of money just to get to the end, just to avoid shutting down.
Kevin: When Russia walked away from the table at that OPEC meeting, we literally opened down, like, $14 on that Sunday night. It was an insane move from that Friday OPEC meeting. That’s when my broker and I, we literally called each other up. and I was like, “If I had put on those $30 puts, I would have made like $50 million. Like, we would be buying matching Aston Martins for everybody we’ve ever met.”...
