Streetwise Professor

May 13, 2016

Surprise, Surprise, Surprise: Guess Who Squeezed (and May be Squeezing) Brent

Filed under: Commodities,Derivatives,Economics,Energy,Regulation — The Professor @ 7:44 pm

Cue Gomer Pyle. It is now being reported that Glencore was not just bigfooting fuel oil in Singapore, but it was the firm stomping on Brent as well. It took delivery of 15 or more cargoes of the 37 available for June loading. There is also talk that the firm had accumulated a position in excess of the 37, and had already had contracts to sell Brent to refineries in Asia and Europe.

Thus all the elements of a squeeze were in place. A position bigger than deliverable supply, and a grave pre-dug to bury the corpse. It was able to liquidate some of its position (25 cargoes or so, or more than 15 million barrels) at an artificially high price (as indicated by the flip from contango to backwardation in the last couple of weeks of trading).

The July contract has also flipped into a backwardation, suggesting that the play is on again.

Two (and perhaps three, if Glencore is behind what’s going on now) squeezes in short order is pretty audacious, even for Glencore. Makes me wonder if this is part of the company’s resurrection plan. Trading needs to perform in order to offset the carnage in the mining operation. That means taking more risks. Including regulatory and legal risks. Though truth be told, both the UK and Singapore have been quite supine in responding to market power manipulations for years. For instance, with all the squeezes that have taken place on the LME over the years, what have UK regulators ever done? What have they ever done in Brent? Or in the softs, where some pretty big squeezes have taken place in cocoa and coffee in recent years?

Inspector Clouseau would be proud.

The bigger risks are economic and commercial. Squeezes can be very profitable, but they can go horribly wrong. Recall that Glencore’s qua Glencore’s genesis was Marc Rich’s failed attempt to squeeze the LME zinc market in 1992. Marc Rich & Co. lost around $200 million, which resulted in a coup led by Ivan Glasenbeg that ousted Rich, and the renaming of the company as Glencore.

But desperate times sometimes call for desperate measures. Yasuo Hamanaka comes to mind. When his massive rogue trading operation was teetering on the precipice, needing a big profit in a hurry he carried out a massive corner of LME copper in December 1995. He wrote his co-conspirator “this is our last arms” (quoting from memory). In other words, do or die.

I’m not saying that Glencore’s problems are at all similar to Hamanaka’s, but the company does have big issues, and a need to make a lot of money in a hurry. The kind of issues that can lead big risk takers to take bigger risks, and push the envelope. The envelopes in Brent and Singapore fuel oil are pretty expansive, but Glencore seems to be pushing them nonetheless. Not part of the official resurrection plan, but most likely part of it nonetheless.

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  1. Hey Prof, July/August Brent futures are still around -30 cents contango. It’s the prompt dates now which are now backward as a result of their June keeps.

    Comment by Mlgb — May 15, 2016 @ 8:18 pm

  2. @Mlgb. Thanks for the clarification. Much appreciated.

    The ProfessorComment by The Professor — May 16, 2016 @ 10:50 am

  3. How does the ability to export unrestricted WTI & other reasonable Brent substitutes from the US Gulf Coast limit the profitability of this squeeze? While it might move Brent a bit, it would seem that it would make specific physical Brent barrels less attractive vs. similar non-Brent barrels and there would be a greater supply of LLS & other US crudes to arbitrage and hence limit the upside. Of course is that perhaps part of the sought payoff? To lift LLS, Bonny, etc.? If the export restrictions in the US were still in place, wouldn’t there be a lot more room to run on Brent?

    Comment by JavelinaTex — May 16, 2016 @ 11:21 am

  4. I don’t understand. If they buy up most / all of the cargo supply, then the price of prompt cargoes should tank. They’re taking delivery, but have no onward buyers for it all, so they’d have to hit any bid they got, however low.

    Prompt oil is *not* tanking however. It’s in backwardation. So they must *not* be distress-selling. This says they already have a home for the cargoes.

    How is that illegal?

    Comment by Green As Grass — May 17, 2016 @ 3:58 am

  5. @Green. Yes. They have a home for the cargoes. That’s a common part of a cornering scheme. The most dangerous part of a squeeze is “burying the corpse,” i.e., dumping on the spot market at a low price the excess deliveries taken during the squeeze. Smart manipulators anticipate this either by (a) using a bear spread trade, or (b) selling the anticipated deliveries forward prior to springing the trap of the corner. Having a bull spread position, or pre-selling what is delivered, is therefore not exculpatory. To the contrary.

    Cornering/squeezing is illegal in the US, and has been for almost 100 years. It is economically inefficient because it (a) distorts production and consumption (because excessive deliveries are taken), and/or (b) it causes artificial and unpredictable fluctuations in spreads and the basis, thereby undermining the futures/forward market as a hedging mechanism. In Brent (b) is much more important than (a), because the supply of Brent is almost perfectly inelastic. But given the importance of Brent as a world-wide hedging vehicle, distortions in the basis/spreads can be extremely detrimental.

    Even though squeezes/corners are illegal in the US, there are legal challenges to proving them. This is something I’ve studied and written about for over 20 years. My 1996 book goes into the economics, law, and regulation in some detail. A later article (2004) studies one episode in considerable detail.

    The ProfessorComment by The Professor — May 23, 2016 @ 1:56 pm

  6. Clouseau’s magnificent neglect of reality does set a standard for Progressive aspirations. I can’t imagine the heights he would have reached in the DOJ if not for the wrong passport.

    Comment by pahoben — May 23, 2016 @ 2:17 pm

  7. Lately the paper bias was extremely high (switch to net long), it might not take a big paper position for Glencore or another co to realized a profit at the roll on Brent BFOE EFP.
    However, because of oil non-stotability relativeness compare to a Metals/Softs I argue that this trade cannot be executed and will not end well W/O a physical disruption / maintenance on the North Sea. Trader must have a strong view regarding the latter.

    Comment by Simon jacques — May 30, 2016 @ 3:15 pm

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