Days of Frenzy in the Energy Pits


On the trading floor of the New York Mercantile Exchange, a veteran commodities dealer finds that oil price volatility is the new order

It had been a rather uneventful workday for Ray Carbone, a 47-year-old oil and gas trader who owns Paramount Options, a small energy commodities trading firm in New York. Perched on the outer edge of the options pit at the New York Mercantile Exchange—one of six arenas on the floor where traders bellow and gesture wildly to move their wares—Carbone was biding his time. There had been a sharp decline in oil prices the previous day, refusing to break $60 a barrel for the third straight session. Other traders had started taking short positions, but Carbone remained stubbornly long on it for himself and his clients.

But suddenly, at about 2 p.m. on Feb. 8, the lull gave way to a price explosion as the market rallied. In the half-hour preceding the closing bell, crude prices surged by $2 a barrel, as energy traders piled back into the market. The news was good for Carbone, who learned later that the impetus for the 3% burst was news of a fire at an Occidental Petroleum (OXY) field in California, which would affect supplies.

"Good result today," says Carbone. "I'm a believer in crude because I'm a believer in Asian demand and demand in this country. When we were down [earlier this year] I started to doubt my instincts, but we're back."

Up and Down

These days, energy prices are exhibiting extraordinary volatility. Prices are jostled by big-picture factors like ongoing geopolitical tensions threatening to disrupt supply, the booming Chinese and Indian economies boosting demand, and OPEC's mysterious machinations as well as shorter-term blips like unusually warm winter weather patterns and short-term production hiccups. Add to these factors the rapid movements of new energy market players—speculators like banks and an estimated $1.5 trillion hedge fund industry intrigued by commodities—which tend to exaggerate price movements. With nearly 180 funds focused on energy commodities, the entry of these new forces has helped make energy prices even more sensitive.

The results of each day's session ripple rapidly throughout the world economy. No sector is untouched by energy prices: oil producers and refiners who invest billions to explore, airlines nervous about jet-fuel prices, auto companies who must adjust models rapidly to survive, and retailers like Wal-Mart Stores (WMT) keen to know how deeply its shoppers will be dunned at the gas pump.

The clearinghouse for much of this buying and selling is the trading pit at the New York Mercantile Exchange, the largest physical commodities exchange in the world. Oil contracts are also traded through the international Intercontinental Exchange (ICE) in London, as well as electronically 24 hours a day. Traders like Carbone sit at the front lines of these movements in the global oil market, battling price gyrations to turn a profit for clients and their firms. Here in the pit, the dull moments are many, but they never last long.

Feb. 7: A Long, Cold Day

Wednesday, Feb. 7 begins at 16 degrees in Manhattan, and an icy northwest gale makes it feel subzero. The bitter cold isn't just chilling the traders barreling into the New York Merc before the 9 a.m. bell, it also influences prices. Two weeks of freezing temperatures in the northeastern U.S. have helped oil prices rally from a lull in January, an unusually balmy month.

Carbone has been inside since 8:30 a.m. Later this morning, the weekly data on U.S. oil inventories will be released, promising an exciting day on the floor. Wearing a simple blue-and-green jacket with "Paramount" lettering on the back, he'll be shoulder-to-shoulder in the options pit, working for eight of his clients, including banks, oil companies, and funds. Carbone trades primarily in natural gas and the crude benchmark product, West Texas Intermediate (WTI) oil.

The previous few days hadn't been so eventful. After a warm winter curbed demand and kept oil prices sliding for much of January—down $11 during the first three weeks of the year—it then rebounded with the cold snap, hovering just below $59 a barrel this week. Carbone, who considers himself a "conservative" trader, has been long on crude, expecting prices to rise. If today's numbers show low inventories, he could be in luck. After the bell sounds, the opening price of $58.88 edges down slightly, and from his perch on the outer ring of the options pit, Carbone uses the exchange's brisk sign language to conduct a few transactions, including the sale of several thousand options priced at $55, based on his clients' expectation that the price will climb higher. With the constant din of male voices, punctuated by the occasional roar, it sounds like a football game. Billboards full of numbers surround the pits, each dedicated to a different commodity or type of bid.

'Ugly' Finish

At 10:30 a.m., the inventory number is out. Prices initially move higher after the Energy Dept. announcement that crude inventories fell by 400,000 barrels last week to 324.5 million barrels, a larger draw than analysts had expected. Front-month West Texas Intermediate crude hits $59.85 after the report's release, but the rise doesn't last, and soon starts to fall, which it does the rest of the afternoon. By the closing bell the price is off $1.12 to $57.76 per barrel. Carbone emerges from the pit, looking tired. "Today was a failure—ugly day," he said. "We needed bullish inventory numbers and we didn't get them." Although he'd traded 10,000 lots—individual options or futures—he had kept his long positions.

Carbone, who started his career at the Nymex at age 25, agrees that volatility on the floor has increased in recent years as more speculators have entered the market, increasing the fluidity and frequency of price gyrations (see BusinessWeek.com, 1/29/07, "Barrels of Confusion"). While this jerky intraday terrain can produce more profit, its price can be a trader's health. Since every minute counts, many traders skip lunch and fuel up on trail mix, energy bars, and coffee, if they catch a break at all. And on the floor, the pushing, shouting, and stress can be constant. The lifestyle takes a toll; Carbone and a half-dozen colleagues on the floor have suffered hernias in recent years. "It's definitely more stressful [than before]—at times relentlessly stressful," says Carbone, who had his hernia fixed a year ago, missing 10 days from the pits.

Feb. 8: A Brief Rally

Thursday, Feb. 8 is natural gas inventories day. The buzz is that bullish numbers on natural gas inventories could lift natural gas to the magic level of $8 per 1,000 cubic feet, and potentially send oil higher, too. Natural gas has failed to break through $8 in the past few months, frustrating traders who recall the glory days of February, 2003, when the price nearly doubled, to almost $12, within a week. While that counts as a high point in Carbone's career, he's now bearish on natural gas. He takes his usual spot, along with his fellow traders whose various colored jackets identify their firm affiliation. There's light activity until the inventory number is out at 10:30 a.m.—numbers that are bullish but expected. Crude ticks slightly up, lacking conviction.

"It was a non-event," Carbone says of the gas figures. As the session continues, a variety of sentiments hold the floor. Traders and a cluster of reporters, weary of all the chilly weather chatter, are starting to ponder spring. Another trader, Eric Bolling, mentions that a warm front is lurking behind the cold, which could again send prices down.

Despite all the focus and talk of big-picture issues such as inventories, winter weather demand, Nigeria and Iran, the year's biggest rally to date takes all of 15 minutes on this Thursday afternoon. In seconds, Carbone's hope of crossing $60 looks as if it might become reality. But despite a $2-per-barrel surge, March crude settles at $59.71, matching its high point on the year. The roar erupts from the trading floor, and Carbone is pleased. But he's not overly excited. "Big deals don't last long around here," he says.

Feb. 9: There's Always Next Week

Sure enough, Friday offers few big deals. Overnight electronic trading had broken through $60, but by the 9 a.m. opening bell, the price has retreated. The bulls had hoped increased U.S. tensions with Iran and dim chances for a break in the cold would help the contract breach $60. In the last five minutes of trading, the electronic board reads $59.99, and traders in the futures pit jump and scream. But at the 2:30 p.m. close, it's not to be. Oil finishes the week at $59.89.

"All that work for an unchanged day," Carbone says afterward, smiling. Still, he's pleased with the session, and week, which saw a nearly 2% gain. Come Monday, $60 a barrel will still be waiting.


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