The Secret Club That Runs the World: Inside the Fraternity of Commodity Traders (4 page)

On that day in Paris, Andurand jelled with Ealet. About a month later, after many more interviews and what felt to him like an agonizing wait, Goldman offered him an entry-level trading job in Singapore, its hub for trading energy contracts in Asia.

Singapore was a big oil processing center, where large ships brought raw crude to ports and, using sophisticated refining techniques, altered its chemical composition to churn out more readily usable products, like auto fuel and diesel. The refined oils
would then be sold to gas distributors, airlines, logistics companies, and other bulk buyers around the region.

Andurand worked for a team that helped companies who bought or sold either crude oil or refined products in large quantities in order to hedge, or curb, their exposure to significant moves in their price. If a chain of gas stations, for instance, was concerned about a potential spike in the price of unleaded auto fuel, it might hire Goldman to reduce its vulnerability to higher prices by using gasoline contracts that locked in lower future prices in the market. The client would pay Goldman a small fee for arranging the contract trades, and Goldman was also free to use its own money to become directly involved in them, perhaps becoming the seller to a client buyer rather than simply matching that client up with another seller in the market, or using the information gleaned from the client’s market position to trade for itself elsewhere in the gasoline markets.

Goldman’s commodities business at the time was generating about a half billion dollars in revenue each year. Corporate commodity hedging, the term used to describe the sort of trades Andurand’s team was arranging for clients, was becoming more popular. Other market participants were using commodity contracts simply to speculate on where markets would go. That meant there was plenty of room in the markets for Goldman to do a little house trading, known as proprietary, or “prop,” trading, as well as whatever it was hired to do by clients.

Once a client trade was completed, Andurand would sometimes end up with leftover market exposure that he couldn’t offload right away. He could hang on to those contracts until a buyer arrived, or he could trade them on a speculative basis and try to make a little profit. He liked doing the latter, and was making
money at it. But he felt stymied by Goldman, which had strict risk controls that prevented him from making larger bets, and made him share a pool of capital with two other traders, which he regarded as a handicap.

After a year and a half, Andurand took a job at Bank of America. The old-fashioned depositor, headquartered in Charlotte, North Carolina, lacked Goldman’s track record in the commodities business, but it was willing to give Andurand his own kitty to trade. He thought the opportunity was worth the sacrifice in prestige.

In his first nine months there, he was given a relatively small purse and told he could lose no more than a few million dollars on any given day (a sum that, outside of commodities, was large enough that it could be grounds for firing a young trader in stocks or other products). He managed to turn that capital into gains of $50 million—the single best performance in his department and easily half of the bank’s entire commodities profits for that year.

Armed with a $3 million bonus check, Andurand took a triumphant trip home to France. He was learning how the game was played on bank commodities desks, and gaining valuable insight on an important regional energy market in Asia. His confidence was high. He was only twenty-five.

Still, Andurand lived a relatively modest lifestyle at home in Singapore. Now in a much happier head space than he had been after quitting the swim team, he was again working out and eating carefully. He still avoided the party scene. Instead of going out and getting bombed, as many traders in Singapore’s expatriate community did, he spent quiet evenings at home with his
girlfriend, a junior employee in Morgan Stanley’s commodities division.

The risk-taking Andurand did do was all in the markets. He was beginning to understand the ebb and flow of market sentiment in his corner of the commodity-trading business, and was making considerable money off his price wagers. His instincts soon led to another big win. In the first few months of 2003, his second year at Bank of America, a series of well-timed trades generated another $30 million, an astonishing sum for an inexperienced trader.

With his pile of cash and risk limits higher than ever, he went into the second quarter betting that jet fuel prices would trend higher as a result of new flights that Asian airlines were adding to their schedules. Instead he was hit with one of those unexpected, market-changing events: the outbreak of a respiratory flu called SARS, or severe acute respiratory syndrome, that devastated the region’s economy. In the wake of the epidemic, people stopped flying, and the price of jet fuel tanked as a result, losing Andurand $40 million in the markets.

The situation arguably could not have been foreseen, so Andurand didn’t castigate himself. He was still plenty confident. It was turning into a bad year for commodities at Bank of America overall, and management was under pressure to improve results. The SARS loss was just bad timing, Andurand told himself. He thought he might be better off at a dedicated trading firm that understood risk-taking and provided the money with which to do it, rather than in a small department within a giant bank that had other, more important priorities and would be chastened by a single bad quarter.

It was typical of his mind-set, both then and later. “He fully
expects that he will make a huge amount of money and that he’s right,” says Paul Andersen, who hired Andurand for the Bank of America job and still considers him a friend. “If the trade doesn’t go well, then the market doesn’t understand.”

Whether he was fired or quit wasn’t clear. But Andurand hit the job market with his signature attitude—admitting the missteps he’d made, but at the same time blaming the environment and vowing to do better. In an industry that valued traders with both swagger and a desire to change their errant ways, Andurand struck just the right tone, and Vitol Group, the large physical oil trader that operated a 250-man derivatives operation around the world, was impressed.

“There was no attempt to justify himself, and there was a very clear acknowledgement that things had gone wrong,” remembers one of the Vitol managers who interviewed Andurand over dinner in London. Andurand told the group that “there were a number of aspects he had not taken into account, had not understood, and he believed he could learn those aspects by coming into maybe a more rounded organization than a bank,” the manager adds, “which always takes a rather one-sided look at things. He was willing to reinvent himself to an extent.”

Andurand stayed in Singapore during his first year with Vitol. Unlike Bank of America and Goldman, which did a little client hedging and a little house trading, Vitol was a huge dealer in physical oil and refined products and used derivatives to mitigate its exposure to short-term price changes. If Vitol bought crude oil from Nigeria at a fixed price, for instance, it might be a couple of weeks before the crude reached its destination in Europe, during which time the price could drop. It was the job of Vitol’s traders to use futures or other contracts to lock in more attractive prices for
crude that would smooth out any potential losses from that two-week lag. In so doing, traders like Andurand were made privy to perfectly legal inside information on the world’s physical petroleum markets—which former Soviet states were selling for which price, which refiners in the Singapore region were buying which grades at which price—that was invaluable to understanding the developing market trends at any given time. If demand were slowing in a typically hard-core market for crude purchasing, Vitol and its rivals would be the first to know, since they were negotiating deals with crude buyers directly. The minute a good customer reduced their order, the firm’s contract traders would be informed so that they could hedge Vitol’s exposure to price changes accordingly. Over time, the constellation of data points to which Andurand was exposed added up to a far more nuanced picture of the global petroleum markets than the version a bank trader would have seen.

In addition to receiving a more sophisticated lesson in global physical oil-trading, Andurand was learning patience in the markets. Trading oil sometimes required taking a longer-term view, he realized. It also demanded an analysis of both large, overarching factors, such as central bank policies and their effect on state economies, as well as more market-driven developments, like whether there was a floor price for crude-oil contracts below which the market’s traders appeared reluctant to go.

On a personal level, he was almost universally regarded as a sweet, self-effacing guy. When he came into money, he offered to buy his parents a bigger house in Provence and showed up the day after his mother sent him a listing in Beaurecueil, a town just east of Aix, to look at and buy it. He supported his sister and her family, at one point employing her as a secretary in London when she
needed work. His friends found him charming, even if he was occasionally a spendthrift. “He’s just a smart, good, guy and does it his way,” Paul Andersen says.

On the trading desk, however, Andurand was making the occasional enemy. Early in his tenure at Vitol, he was tipped off to a trading opportunity in the jet-fuel market by a social acquaintance at Morgan Stanley who also dealt with commodities. The other trader, a brash fellow Frenchman named Jean Bourlot who got so worked up about his ideas he almost vibrated with intensity, was convinced that the Singapore market for jet fuel was poised for price gains.

Singapore jet fuel at the time was trading at about $40, but Bourlot expected it to move much higher in the months to come. He had good contacts in the small marketplace where the product traded and was positive of it. Bourlot had placed that bet in the markets himself, and wanted to put even more cash into the trade. But he had reached his maximum trade size under Morgan Stanley’s policies—which, like Goldman and Bank of America, placed limits on the amount of risk a trader could take—so he offered to sell some of his call options, which were the right to buy jet fuel at predetermined prices, to Andurand. In return, he wanted Andurand to sell those rights back to him when the time was right.

Andurand studied the market in question and quickly agreed to purchase the contracts; Singapore jet fuel also struck him as underpriced. He bought positions from Bourlot, predicting that Singapore jet fuel would trade above $50. The cost of doing so was relatively cheap—about $2 and change per option. Andurand was under no obligation to accommodate Bourlot’s wishes in handling the trade afterward, but Bourlot seemed to have the
impression that Andurand would sell the contracts when Bourlot told him to.

A few months later, Bourlot’s market hunch proved correct. Amid a big surge in the price of crude, a series of demands for additional cash from lenders forced
China Aviation Oil (Singapore) Corporation Ltd., which was reportedly Singapore’s biggest jet trader, to liquidate its own trading positions in a hurry. The cash demands were such that China Aviation couldn’t afford to wait for an attractive price to offload its contracts, and other traders, spotting its distress, quickly drove its costs higher. Singapore jet prices flew higher to levels well north of $40, and by late 2004 they were flirting with $65. Midway through the price hike, Bourlot called Andurand.

“You saw the news,” Bourlot said. “I need to buy back jet options now,” he added, referring to the positions he had sold to Andurand earlier.

Andurand was irritated. Whatever Bourlot had envisioned at the outset, it now sounded to Andurand like Bourlot had essentially wanted to park his excess positions with Vitol until a better moment arose, at which point Bourlot would buy them back after having taken only limited risk himself. Andurand had no intention of selling back to Bourlot at Bourlot’s direction, which he thought would have been bad timing in the markets and a sure way to leave additional profits on the table.

“I’m happy to be long,” Andurand said, meaning that he continued to think the market would move even higher. In fact, he saw an extended rally coming—perhaps for another two years. He told Bourlot to find another way to add to his portfolio.

Bourlot was angry. “You’re making money from having that trade,” he said. “It was my idea. You should help me out.”

“I’m sorry,” said Andurand, “but I never bought them to sell them back. I like that position. I want to let it run.”

By April of 2005, Singapore jet had practically doubled in price from where Andurand had first bought contracts on it. Andurand says he made $40 per option on the trade, for profits of some $50 million. His bosses were thrilled and his bonus reflected it.

Bourlot, however, made less money than he wanted, and told a mutual friend that he considered Andurand at least partly to blame. The two would be adversaries for years to come, right up to the point where they were raising money for their own personal hedge funds.

Vitol relocated Andurand to London after a year. He was happy to finally be at the epicenter of commodity trading. He found an apartment in Knightsbridge, not far from his office near Victoria Station, and prepared for the explosion in energy prices he had been expecting.