How to Steal a Trillion!

How to Steal a Trillion

There’s a new Global Commodity Game that puts mere high-risk jewel thievery, as in the hit Peter O’ Toole and Audrey Hepburn starrer: “How to steal a Million” (1966); firmly in the shade. It is called “Trading in Oil Futures and Options”, and everyone with money to spare, including those oil–rich Sovereign Funds from UAE, Kuwait and Saudi Arabia, seem to be playing it.

Our Finance Minister P Chidambaram named quite a few other names in Jeddah. He said: "Surely, demand and supply dynamics cannot explain what has happened over the last 12 months. How is it that oil prices were USD 70 a barrel in August 2007 and how is it that they have doubled when there has been no dramatic change in demand?" He cited ample evidence that large financial institutions, pension funds and hedge funds have chanellised billions of dollars into commodity investments and derivatives. "It is common knowledge that these financial transactions are unregulated and highly opaque. The demand for oil generated by these funds is purely speculative," he said, and urged producers and consumers to wrest control of oil trading from the hands of speculators.

Ah, but the profits it yields, this rank speculation, what of that? And all you need to access these profits is nerve, a head for numbers, a large amount of ready-cash, and a gambler/robber baron’s instinct to keep playing it for double or quits.

The best part is that it takes less money in Commodity Futures Trading, including Oil, to put down a deposit, called “margin money” in the trade. In Equity Futures, or shares, by way of contrast, one needs to pay 15 or 20 per cent as margin in order to buy a “Futures Contract”. But in Commodities, including Oil, all it takes is five per cent. This is because, traditionally, there has been low volatility in commodities. But significantly, this margin requirement has not been raised, even though, crude futures fluctuate at least USD five per barrel daily of late, excelling itself by climbing USD 11 on a single day recently. It helps to stay unregulated, and oil-profits-tax-free, when the US President and Vice President are both ex-oil-men and the Treasury Secretary is an ex-head of Goldman Sachs!

But, keeping this nugget aside as an incurable fact, if you had a million dollars to invest, you could, notionally speaking, buy oil futures worth USD 20 million. Of course, you’d need to have the 20 million stashed away to cover your bet, or the part of it gone bad, if the chips don’t fall your way on “settlement” day. So, if you really had that million, you’d probably put down about USD 50,000/- worth, to take a contract worth USD 1 million. That way, you’d be well placed to cough up the million, if, God forbid, the gamble goes against you. Because, if you can’t cover your bets, life can suddenly become very dangerous!

At NYMEX, (New York Mercantile Exchange), the Oil Commodities Futures Mecca, this is how it works. You need to buy a minimum Futures Contract for a 1,000 U.S. Barrels (42,000 gallons), or about USD 139,000 worth at, say, USD 139 a barrel. But, on the other hand, you’d only have to fork out USD 6,950/- up-front, before they hand you an “Option” for: “One NYMEX Division light, sweet crude oil futures contract”.

An Indian oil speculator has it 10 times better. He can get in on the action by purchasing a minimum lot of only 100 barrels of crude oil, through a Broker like Religare; which consolidates 10 like-minded punters to buy one contract on NYMEX. To purchase a Futures Option like this, valued at Rupees six lakhs at the self-same USD 139 per barrel, you’d need to pony-up a mere Rs. 30,000/- up front!

Next, you’d learn that the Crude Oil Futures Market is traded for 30 consecutive months before going long for 36, 48, 60, 72 or even 84 months ahead. So, not only can you bet on oil prices going forward seven years ahead, but also for each one of those 30 consecutive months, using, if you like, just a single contract! Do you begin to see how you can keep oil prices high, especially if you can work in concert with a number of like-minded people?

The Futures and Options trade is recorded on a daily basis, with a minimum fluctuation counted as 1 cent a barrel a day, and a maximum cap on USD 3 a barrel a day. If the market closes at USD 3 up, or down, then the cap is raised to USD 6 a barrel and if there is a USD 7.50 per barrel move on any given day, trade is halted for an hour, before a USD 7.50 cap is placed on further fluctuation either up or down depending on the trend for that day. Trading in Options, the preferred vehicle of “paper” speculators, for what would they do with a “delivery” of crude, is stopped three business days before the expiry of the underlying futures contract.
Mr. Chidambaram, coming, as he does from a country where he can control the prices of steel and cement at the Government’s pleasure, suggested a lower and upper price band at Jeddah. It’s too bad that most OPEC members would have smirked up their burnooses at the suggestion if they weren’t too polite to react...

(900 words)
Gautam Mukherjee
23rd June 2008

Also published in print in The Pioneer on 24th June 2008, OP-ED Page, and online at http://www.dailypioneer.com/ as "How to steal a trillion".