The Secret Club That Runs the World: Inside the Fraternity of Commodity Traders (6 page)

On June 6, Andurand had his gallbladder removed at a North London hospital. Awakening from general anesthetic, he looked around the room hazily, focusing first on the window shades,
then the shapes of a girlfriend he was then seeing and a few other friends who had come to check on him.

His first focused thought was about the markets.

“Can I have a look at the BlackBerry?” he asked. Someone handed the device over. In his dreamlike state, Andurand pressed a few buttons to check the market’s prices. His eyes widened. Oil contracts were up $10 from where they had been when he had gone into surgery a few hours earlier. In fact, they were experiencing the biggest single-day increase—over $10 at their maximum point that day—they had ever seen.

It figured. Andurand was still betting on higher prices in his portfolio, though not as doggedly as he had been in early May. He wondered whether he should have reduced his risk after all, since his hunch had proved right as usual.

I should have surgery more often, he thought to himself, easing back to sleep in his hospital bed. His self-assuredness was calming. Maybe the operation had been a lucky break, he thought, providing him a few hours off at a terribly exhausting time. BlueGold sprinted to another set of double-digit gains for that month.

On July 3, crude futures in both the Brent and the West Texas Intermediate markets reached what would be their all-time high: $147 apiece. It was the Thursday before the Fourth of July holiday weekend in the U.S., and volume was somewhat light, allowing prices to throttle past traditional ceilings in the market that held firm when more parties were trading. Nonetheless, the upward price pressure, whether driven by supply threats, by continued demand in the developing world, or simply by a crowd of speculators
all making the same bet, were moving prices well past the market’s traditional price range.

A hundred and forty-seven dollars per barrel wasn’t sustainable, Andurand knew. Unemployment was climbing in the U.S., and its gross domestic product, or GDP, the best measure of the country’s overall economy, was shrinking. An actual bank failure could really topple an already shaky global financial system. The oil market had to be near a tipping point, if not already at one.

But after pulling back some of the cash he had bet in the markets, Andurand was hesitant to make another big move. “Nothing makes sense to me,” he told colleagues, “so I’m going to wait.”

Brent crude contracts slid off their highs, but remained elevated at $130, then below $120 as the summer dragged on. Their amped-up levels were creating new fissures in the economy. While 2008 was a bonanza for the oil companies—Exxon Mobil and Royal Dutch Shell were producing record profits—anyone who had to actually buy oil or refined oil products was struggling with the new prices.
Companies like Marathon Oil, the U.S.’s fourth-largest refiner, were considering spinning off their more cost-intensive operations to preserve profits, while global conglomerates such as
Ikea and DuPont were shifting to local suppliers to save on transportation costs.

Still, oil prices remained strong. Andurand’s conviction was slipping. He’d gone into the summer expecting a sharp drop in oil, but the market hadn’t delivered. As tenuous as things were in the financial markets, prices were resilient. He began waiting for an opportune dip in which to buy a new set of options betting that oil would go higher.

Then came September. In the course of a week, the very sorts of events that Andurand and others had feared all summer
actually came to pass: a teetering Merrill Lynch was sold to Bank of America in a last-minute deal, and Goldman Sachs and Morgan Stanley rapidly converted into bank holding companies that could borrow from the government in order to assuage investors’ terrors about a future bank run. The century-and-a-half-old investment bank Lehman Brothers filed for Chapter 11 bankruptcy protection. The insurer
American International Group, beleaguered by bad investments in subprime mortgages that were now creating windfalls for traders to whom AIG had sold insurance policies to guard against defaults in those very same loans, had to accept a massive government bailout.

It was another roller-coaster period in the oil markets, but this time they were spinning downward. On September 15, the day that Lehman filed for bankruptcy protection, West Texas Intermediate, or WTI, oil contracts slipped below $100 for the first time in months. (Brent was already there.) But just days later,
WTI experienced a record pop of more than $16 in a single day, closing once again above $120.

Andurand believed that there were two or three good trading opportunities in every year, and right now he was deep into the second one: a breathtaking crude rout. Sensing the shift in the markets, he abandoned his plans to bet again on a crude price spike and instead began betting the reverse.

“The October correction in crude has taken the market into steep contango,” he and Crema wrote the following month. BlueGold appeared yet again to have called the inflection point in the markets. The little fund was now managing close to $1 billion, and every investor who had put money in that year had gotten returns, regardless of his or her entry point. “We believe that such an extreme contango is unsustainable,” the hedge-fund
managers added. “We now believe oil prices could fall lower to the $50 level.”

With a variety of wagers that the crude markets would fall and a handful of more complex trades pitting WTI, Brent, and diesel against one another, and hoping to capture small profits on the price differences between the three contracts, BlueGold waited for the bigger drop in crude oil to occur.

It came. On Christmas Eve, days before BlueGold closed its books for the year, Brent sunk to less than $37, cementing Andurand’s reputation as one of the most successful energy traders of all time. His fund was up 209 percent for the year.

“We made money all the way to the bottom,” he says.

N
ot far from Andurand’s trading desk, a commodities giant was struggling. Ensconced in their Mayfair office tower, oil traders working for the Swiss multinational trading company Glencore International were fighting longtime business associates who were suddenly leery of trading with them.

It was the fall of 2008, the period during which Andurand made so much money as the oil market sunk toward its low point, and financial firms were all under scrutiny as the U.S. banks flailed. Nobody in the financial markets wanted to take any risk. But Glencore, an infamous trading firm known equally for its opacity and its high tolerance for risk, was now especially vulnerable. By October, the price of a standard credit default swap, or CDS, on its debt—an insurance-like policy that would pay the holder if Glencore couldn’t pay its creditors—had zoomed past its already heightened levels, fueling the increasingly widespread belief that it was about to go under.

Like any trading company, Glencore borrowed heavily to finance its operations, and depended on a steady flow of credit to keep the lights on. But now Glencore’s seventy-odd oil traders,
who, like their counterparts at Vitol, bought and sold physical barrels everywhere from Asia to West Africa and used futures contracts to hedge their short-term exposure, were fielding concerned calls from the banks and other oil companies with which they normally did business almost daily. Glencore had always traded with the likes of Goldman Sachs, Morgan Stanley, Shell, BP, and other oil majors. But suddenly competitors were asking detailed questions about Glencore’s debt levels and cash stores before they were willing to continue with buying and selling as usual.

The British driller BP, which ironically had employed Alex Beard, the trader who now ran Glencore’s oil division, as a junior trader when he was fresh out of college, seemed particularly spooked. BP traders were refusing to work with Glencore under anything but the most conservative terms. Transactions had to be supported by letters of credit from banks that would pay BP if Glencore couldn’t, and any bespoke commodity trades had to be finalized with a third-party registry, which would insulate BP from any issues with Glencore’s creditworthiness that might arise. BP even asked at one point to be paid in advance for a delivery of ship fuel valued at $500,000—an insultingly small amount for which not to be trusted.

Glencore traders were frustrated. Hoping to improve morale, Beard arranged an emergency department call.

“We have plenty of liquidity, don’t worry,” he told a few dozen of his top traders, who had dialed in from Connecticut, Singapore, Switzerland, and other locations. He was referring to the amount of cash Glencore had on hand, which, in his view, was plenty. “Forget the CDS,” he said, “it’s a bullshit measure! It’s a broken measure.”

Glencore had plenty of access to credit, he assured the group:
$
4 billion in bank lines, in fact. He urged them to keep calm and avoid being distracted by the inquiries from Glencore’s trading partners. But it would be months, in fact, before things actually got better.

Glencore’s oil business was one of the largest, most complex trading empires then in operation. Founded by the commodity trader
Marc Rich in 1974, it had been one of the
first to take advantage of the nationalization of some of the world’s top oil producers by supplanting the distributors they had historically partnered with by offering to speed up the delivery of crude so that it was available almost immediately, or “on the spot.” By the mid-2000s, Glencore was sourcing, loading, shipping, and delivering oil to nearly every corner of the developed world. Its logistics business rivaled FedEx’s, and its financial trading desk competed with that of Goldman Sachs.

For Beard, a pale, sandy-haired Englishman who wore oxford shirts and ties jauntily and tipped his chair back for comfort during business meetings, oil became an attraction early on in life. Born outside London, he studied biochemistry at Oxford’s Christ Church College and became intrigued by an entry-level program at BP during his final year of school. His first placement as a young trainee was in a Rotterdam refinery; he soon progressed to arranging long-term delivery contracts for the driller in the Middle East and Asia. The Soviet Union was dissolving, and securing crude from a newly independent Russia was big business at the time. Beard began traveling to Moscow frequently and developed an expertise in the Russian crude market, becoming a passable speaker of Russian along the way. It was an unglamorous job at times, involving long journeys to Siberia and other oil-production
sites in the country’s weather-bitten interior. But Beard, who was focused, competitive, and quick to anger when impatient, was willing to make the effort.

He joined Glencore in 1995. His knowledge of former Soviet states, which had made him a specialist in the region’s native high-sulfur grade of crude, made him a huge asset to the oil division, where he quickly rose up the chain of command. His work life there was all-consuming. He traveled constantly and was available to clients and colleagues at any hour. During his time at the company’s drab office in London, he got to know a Glencore ship operator whose job involved coordinating sea cargoes from land, and married her. Once Beard started earning more significant money, the couple bought
a
£
7.5 million house in West London where an embassy had once stood. They had three children.

Still, Beard had limited time to relax at the house. Life at Glencore, where head partner Ivan Glasenberg insisted on having his senior team’s undivided focus, was unforgiving; a news article had once described the company as “
investment banking times three.” If managers decided their hours were too long and began leaving early to spend more time with family, their underlings would frequently work that much harder and unseat their bosses. There was no such thing as work-life balance, a philosophy Glasenberg unapologetically embraced. But unlike other energy companies or investment banks, “there are no politics at Glencore,” one employee explains. “It’s totally performance-based.”

Beard’s tenacity enabled him to cash in on a period of unprecedented success at the company. Glencore did business in two ways: by extracting raw materials out of the ground, an undertaking handled by the firm’s “industrial” arm, and by moving various commodities from one place to another, using commodity
contracts to manage price risk in transit. In the latter business, Glencore’s “marketing” arm, which contributed the majority of the company’s revenue, Beard was exceptionally good.

In 2007, a banner year in which Glencore’s top twelve executives saw their company holdings spike by $
87 million apiece, Beard was rewarded for his efforts by being named head of the company’s entire oil division, part of the overall energy business that was the company’s second-biggest stream of revenue. It was the same year he turned forty.

Beard had high hopes for the division. He was overseeing six hundred traders, ship operators, inspectors, and other support personnel, a modest but critical fraction of the tens of thousands of staff and contract workers Glencore employed worldwide. The company had always been dominant in crude marketing, the primary activity of the business Rich founded in the 1970s, but it needed improvement in its trading of certain refined crude-oil products. Beard also craved expansion on the industrial side; with a single offshore oil block available for drilling near Equatorial Guinea, its exploration and production, or E&P, business was virtually nonexistent.

He was limited, however, by the company’s finite spending power. As profitable as Glencore was, the lack of the permanent capital that could come from selling shares to the public in an IPO prevented it from investing more than a few hundred million dollars at a time on any particular mine or drill site.

Beard spent half of his first year in the job on planes traveling to Moscow, Argentina, and South Africa to visit clients and work sites while getting to know his new staff in the U.S. and Asia. He was struck by the time that human resources matters consumed. Whereas he had once managed a single trading operation, he was now buried in paperwork, interviews, and other administrative duties.

Becoming a public figurehead was also a huge transition. Beard had always prized his low profile, generally avoiding the London social scene and keeping even his charitable donations largely anonymous. (He’d soon learn what was involved in being a tabloid target, however, when British papers started publishing details of his personal life, such as his home movie cinema and his net worth and snapping photographs as he ducked into a waiting car outside his house.) One of the few things that drew Beard out was the Arsenal Football Club, whose home matches he watched from his regular seats in North London’s Emirates Stadium, a behemoth celebrating the sport known in America as soccer. He also played occasional games at a London sports facility with a bunch of guys from work, five to a side.

The supercycle in commodities benefited Glencore tremendously. For the year 2007, the company saw
record profits of $6.1 billion, as oil, metals, and other raw materials soared to astonishing price levels on their way to reaching record highs, which occurred alongside that of crude oil in July 2008.

As 2008 started off, Glencore’s performance promised to be even stronger. Oil was trading higher by the day despite signs of weakness, even crisis, in the U.S. The same market denial that had benefited Andurand was helping Beard, whose ability to lock in crude supplies at cheaper rates and resell them at a premium was helped by daily price climbs of $1 or more.

Then, in the middle of the summer, prices abruptly reversed. Oil lost significant ground in late July and August, and in September it was battered by the shock waves generated by the Lehman Brothers bank failure and other close calls in the U.S.

That month, Beard traveled to Glencore’s headquarters in Baar, the leafy valley town about a half-hour’s drive south of Zurich, for Glencore’s semiannual partner meeting. Lehman had recently filed for bankruptcy, and Brent crude was trading at about $95. The broader commodities market was off 30 percent from its high just two months earlier. Fears about a slowdown in emerging markets and slowing demand in the developed world were taking effect.

Sitting around a meeting space in the company’s squat white corporate building, which was tucked between a lush hill and thickets of verdant trees, Beard was alarmed by the tone he heard. Every single division head expressed deep pessimism about prices in his respective commodity. From metals to agriculture, nothing looked good. In copper, coal, and zinc, raw materials that had prompted astonishing growth in the developing world, customers had committed to higher prices earlier in the year, when the commodities had been trading at far higher rates, than they were now willing to pay as prices sank. Painful renegotiations were occurring, raising the specter of contentious lawsuits, none of which could end well. Nobody knew how long the carnage might last, but they were all bracing for a sustained move down in the markets.

As he left the meeting, Beard called his office in London. Above and beyond the commodity contract trading they were doing to hedge their exposure to price swings in physical energy trades, he wanted his team to put on a massive speculative bet that the price of oil would fall further.