Andy Hall was cheered by the reports from the Gulf of Mexico. Bad news from
oilfields usually satisfied the tall, unshaven trader. Moving from his
barren cubicle into the adjoining trading area, he gazed at one of the 15
screens and calculated how much he was up that day.
As usual, at 5pm he left the office in Westport to practise callisthenics for
an hour with a ballet teacher in Norwalk, nearby on the Connecticut coast.
The rising price of oil in spring 2005 seemed to confirm Hall’s bet that the
world was running out of crude. “The trend is your friend,” he often told
his staff at Phibro, a subsidiary of Citigroup. “Ignore the trade noise.
Play it long, because I’ve got ample time.”
Hall knew that anyone could buy oil; the skill was to sell at a profit. Ever
since John Browne, chief executive of BP, had predicted in November 2004
that oil prices would stick at about $30 a barrel — although they had
already reached $50 — and had gone unchallenged by oil’s aristocrats, Hall
had believed that his gamble on soaring oil prices was certain to pay off.
Although he was coy about the exact amount, his first stakes were quantified
at about $1 billion as oil hovered at about $30. The price, Hall believed,
was heading towards $100 and possibly higher.
Lauded for being “clever as sin, outgunning everyone in the brains
department”, and referred to as God by rivals, Hall immunised himself from
daily sentiment because he was not part of the herd. An Oxford graduate and
art connoisseur, soft-spoken and deceptively shy, he abided by the old adage
“oil traders work in a whorehouse, so don’t try to be an angel in this
business”.
Hall had traded oil for nearly 30 years. Since arriving in Manhattan in 1980,
disenchanted by England’s claustrophobic social system, he had metamorphosed
into an aggressive trader. “I’m basically interested in one thing —
business,” he told his circle. “I come in every day to make money.”
Whatever the oil price’s wild fluctuations, and regardless of whether he was
earning or losing millions, Hall controlled his emotions. He had attracted
praise and loathing for perfecting the “squeeze” — causing the oil market to
change, and forcing other traders to buy from him at a premium.
Experience honed Hall’s pedigree. Unlike his younger rivals, he had started
his career in BP’s supply department in the midst of the first oil crisis in
1973. Until then, BP and the other oil majors — Exxon, Mobil, Shell,
Chevron, Gulf and Texaco, together known as the Seven Sisters — who
controlled 85% of the world’s oil reserves, had perfected a cosy arrangement
to fix the price. Their representatives met regularly to discuss their costs
and calculate their required profits.
Resentful of the cartel, Saudi Arabia and other leading oil producers met in
Baghdad in 1960 to form Opec, to challenge the Seven Sisters. Peter Walters
of BP was meeting Opec representatives in Vienna in October 1973 when he
heard that Egypt and Syria had invaded Israel.
The relationship between Opec and the Seven Sisters had changed unalterably.
The public and politicians blamed the oil firms for creating chaos and
making excessive profits. In the vacuum of considered energy policies,
western governments were accused of perpetuating a “fool’s paradise” by
relying on arrogant oil executives to supply civilisation’s lifeblood.
Eric Drake, BP’s chairman, told Hall and other graduates recruited during that
epic year that oil would probably rise from $2.90 to an unprecedented $10 a
barrel. Prices actually rose to $12, provoking the Seven Sisters’
disintegration.
Oil was no longer a concession or a product for refining but a tradeable
commodity attractive to cowboys.
In 2003, the chief executives of the majors spoke confidently about oil
continuing to trade in the mid-to-high $20s, the average price since March
1991. Hall disagreed. Prices, he was sure, were about to increase. The
market suggested the opposite. Hall believed the market was wrong. “It’s a
lay-up,” he said. But before placing an enormous bet against the market, he
immersed himself again in the recent history of oil.
Oil prices at $20-$30 a barrel were encouraging the heads of the big oil
corporations to misinterpret the market. In unison, they ignored the size of
China’s growing demand and the Kremlin’s use of oil to increase its
political influence. None anticipated that the cushion to cope with
increased demand was diminishing.
To feed the increased domestic and industrial demand, China would need an
extra 1m barrels of oil every day. Reports in New York and London about
China’s increased demand were common but Hall knew that no one could
accurately predict the amount. Even he did not anticipate that it would
increase in the following year by 2.6m barrels a day. Global demand for oil
in 2004 would increase to 82.4m barrels a day, and in 2005 would hit 84m.
“How did we miss that?” American experts would ask three years later,
contemplating the consequences of a decade of underinvestment. Hall could
claim to be the exception.
He had been “mulling the idea for about two years”. The best oil traders spent
more than half their day reading — everything on the internet and in trade
journals about politics, geology, economics and commodities. Unlike traders
who feared competing against the intelligence fed to BP’s, Shell’s and
Vitol’s traders, Hall trusted his sources, and everything he read suggested
it was “a perfect opportunity to place the bet”.
He was sure that oil would eventually be priced far above $20. The uncertainty
was whether his superiors would support his gamble against the whole
industry. Fortuitously, he was asked by Robert Rubin, a former US Treasury
secretary who had been appointed a board member of Citigroup, to offer a
presentation to the bank. Hall’s theme was the world running out of oil.
“I’ve dug into the facts,” he told his audience, “and saw that supply will not
meet demand.” He intended, he said, to bet against the oil majors and his
rival traders. “It’s a three-to four-year bet,” he explained. “It’s not a
question of ‘if’ but ‘when’.” Oil prices, he thought, would head towards
$100 a barrel. “Everyone else,” he said, “is behind the curve.”
In June 2008, the oil price shot above $140. Shares fell and gold hit a record
$915 an ounce.
Andy Hall was counting his profits. Going in and out of the market since his
original bet in 2003 had notionally earned Phibro more than $2 billion in
profits. Hall had enjoyed the market of a lifetime. His envious rivals spoke
of him “shooting the lights out over the profits”.
Hall had not anticipated in 2003 that high demand for diesel — but never a
shortage — would spook the market, but he knew the value of trading on
ignorance. In his small way, he had squeezed the world. Quietly, he decided
to call it a day.
Recession, he believed, was looming. “The whole thing is in danger of
collapsing,” he realised. “If the fundamentals suck, it’s no use being
‘long’. There’s no point in standing in front of an oncoming train.”
Over just two days Phibro offloaded contracts worth more than $1 billion.
Hall’s personal profit was at least $125m but the credit crunch, triggered
in part by oil speculation, would sting Phibro. Citibank would need
government funds to survive and Hall’s $100m pay supplement would be frozen
as a result of Washington’s edict banning bank employees from receiving
bonuses. (Hall is still fighting that decision.) Blissfully unaware of the
position to come, in summer 2008 Hall noted: “In liquid markets, it’s easy
to sell off.” The buyers, he believed, would be burnt; even he did not
anticipate the speed of the turn.
Extracted from The Squeeze: Oil, Money and Greed in the 21st Century, by
Tom Bower. Published on October 1 by HarperPress
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