Trading is a cruel game. We all like to think that the game is just to win and keep winning.
It’s more like Gladiator and one kills or gets killed. For every Britney Spears, there’s a Tiffany. One makes it to stardom, the other gets booked as an opening act for the REO Speedwagon/Survivor reunion tour. We tend to forget that for every million that’s made, there’s another million that’s being lost. Many will tell you that opening a restaurant is one of the toughest businesses that you can start, but trading has no mercy and I will bet that that mortality rate is that much higher. The thing is, you can’t get around the opportunity to rule.
Anyone that has a good idea about real oil moves can be successful beyond their dreams and be showing their home on MTV Cribs. The one thing that traders are taught is to be aggressive and trade beyond their limits. This becomes a goal to failure because one can only successfully around what one knows. Knowledge is limited and in oil, so is the commodity.
I might be losing some of the teeming millions here, but you’ll need to stay with me. What has changed in the past few years in oil trading is that we’ve become much more transparent. The U.S. now produces close to 60% of it’s own demand of crude oil and if we count Canada it’s closer to 70%. That’s an important figure because we can get a much clearer picture about that oil because of simple logistics; pipelines, trucks, barges and storages. Before the shale revolution, we were only producing about 33% of the oil we were using and relying on imports for the rest.
What mattered then was so out of our control. We didn’t know what oil was loading in what port and what kind of oil was on the ship. We had assumptions, but this is where all the risk in trading really was. Traders could use that risk to make the big bucks. Big Oil made so much money, not betting on oil they didn’t know, they made it on the oil they did know.
Today, the opportunities are shrinking in oil trading. Last week I had heard that an oil major was planning on exiting oil trading and moving to solely hedging. Nothing wrong with that, it’s worked for Exxon forever. The interesting thing though is we can see this trend continue. What’s left in oil trading is real physical trading, which in itself is really hedging, and speculators. There’s not a lot of room to let those two cross over anymore. What I think we’ll see is that if oil companies want to be involved in trading, they will have to create a more speculative focused group.
One that will lie outside the traditional hedgers. One that is going to have traders who make better than good money, but will have worse than normal career opportunity. It’s going to be a position where only the fittest will survive and the room for error will be razor thin. Not that this is a bad thing, but as we see the oil trading on the screen trade heavy on volume and volatility these days, more people are going to see through and realize that price discovery is following a bad map to get where it should be.