Oil prices are surging so oil traders are having the time of their lives, right?
Well, no. Oil's startling price surge this year has actually driven many traders to the sidelines as wild intra-day swings magnified by powerful speculative funds confound traditional trading strategies, market sources say.
Many oil companies and major trading firms most closely involved in the day-to-day business of producing, refining and shipping crude oil have all but stopped betting on outright prices, scared off the unpredictability of daily movements.
"People have been put off trading everything due to the extraordinary state of the market, but flat price particularly. Crude swaps hardly trade at all any more," said Nigel Saperia at European trading powerhouse Glencore.
Traditional traders are still active in the market, but prefer to trade time spreads - the difference in price between one month's crude and the next - or crude-to-product refining margins, which carry much smaller risk than "flat" or outright prices.
"I can count the number of people I know still trading flat price on the fingers of one hand," said one experienced crude trader at a major oil company.
ERRATIC PRICE SWINGS
Oil prices have surged nearly 50 percent since January, a rise that has been accompanied by extreme volatility in individual trading sessions.
This year, nearly 44 percent of London Brent crude trading sessions have seen prices swing between extremes of a dollar or more apart. Between 1995 and 1999, only three percent of trading days had a $1 intra-day range or more.
These fluctuations can be triggered by news headlines or technical factors, and are often quickly reversed.
Spread or differential bets are seen as a relatively safe haven for traders offering shelter from the dangerous arena of flat prices, as they are thought to relate more closely to supply and demand information.
However, in the new landscape of this year's bull market, where far-out prices have risen to unheard-of levels, even spreads have defied traditional expectations and burnt the fingers of many a trader.
Analysts say this increased volatility comes from a tighter oil market, with little spare capacity and thinner stockpiles to cushion potential supply disruptions.
"Spare capacity within OPEC is so low that every news item makes the price go up and down," said Deutsche Bank's Adam Sieminski.
"Until we get more inventory, or more spare capacity from OPEC in the form of new fields on stream or lower demand, the higher level of volatility is likely to persist."
Higher speculative involvement from non-oil trade investors has also contributed to wider intra-day movements, traders say.
Hedge funds, particularly those using purely technical trading methods, can buy into market trends based on the steepness of a rally or decline, without any consideration for the fundamentals underlying it.
Some active speculators will also attempt to push the market one direction in hopes of finding major "stops" - "buy" or "sell" technical levels set according to a trader's book to try and limit losses or lock in gains. Triggering one of these levels can add up to 50 cents to a major move, dealers say.
"There are a lot more systems traders in commodities as a whole, not just in oil, and trend followers tend to exacerbate a trend," said Barclays Capital's Kevin Norrish.
Front month Brent futures volume has grown over the last year - to an average 43,000 lots so far in 2004 compared to 39,000 in 2003 - but has not kept up with the volatility. Traders say that fewer transactions are needed for larger moves.
"In general, people are trading many fewer lots for much more money," one trader said.
Oil industry professionals have traditionally made money through their knowledge of fundamental supply and demand, by selling the market when it gets ahead of itself and buying it when it they see supply shortages coming up.
Now they increasingly fear that a play based on a solid grasp of market fundamentals could fall prey to a sudden fund-driven surge or collapse.
"The funds have blown up the market," said one trader. "It can go one way, or the other way, on a headline with nothing to do with fundamentals."
Story by Toby Reynolds
REUTERS NEWS SERVICE