How a generation of oil traders were trained by the Gulf War

Lifestyle

By Brad Schaeffer

In August 1990, Iraqi leader Saddam Hussein invaded is far-smaller neighbor, Kuwait — seizing the nation’s valuable oil fields and setting off a global scramble to rein in his imperialistic ambitions.

As a global military coalition began to form to oust Hussein from Iraq, his invasion set off a spike in oil trading and prices as the world reeled from such a major disruption in the global oil supply.

But that disruption also proved an opportunity for canny-eyed commodities traders, particularly those at the New York Mercantile Exchange.

Brad Schaeffer, author of the new finance memoir “Life in the Pits: My Time as a Trader on the Rough and Tumble Exchange Floor,” was one such trader — who made a mint (and lifetime of memories) doing deals as war raged in the deserts of Arabia.

While stories of mayhem and murder and plunder dribbled out of the imprisoned Kuwait, a looming question remained: in the face of the awesome firepower of the international coalition arraying against him, would Saddam blink and hightail it back into Iraq?

Or would the US and its United Nations allies have to blast him out? No one knew.

But such uncertainty over  there in the sands of Arabia meant a license to print money for the giddy traders over here at the New York Mercantile Exchange (NYMEX) at 4 World Trade Center. 

And the longer the tensions dragged on the more money these traders would make. 

Trading is not the same thing as investing. An investor in the stock of a concern like Apple is betting that the company will  keep on growing in value and thus buys a share in the company.

The company then uses the proceeds to build and expand and in turn make each share that much more valuable.

But trading futures on raw materials, which is what commodities are, is not an intrinsically bullish operation.

Commodities’ prices fluctuate depending on supply and demand. Prices go up and they go down with indifference.

And since a futures contract is an agreement to buy or sell a certain standardized amount of a commodity (in oil’s case each futures contract equals a thousand barrels) at a specific price at a predetermined time, one can effectively go “long” or “short” with equal dexterity and thus profit from both a rise (long) or a fall (short) in prices.

As I learned the ropes of a new exchange, oil trading reached a fever pitch on the NYMEX floor.

Every day from August into the fall through to Thanksgiving and Christmas, traders voraciously gobbled  up profits in the heavy volume and extreme volatility of the whipsawing crude oil futures and options markets driven by hair-trigger uncertainties that would suddenly lurch prices this way and that.

On Nov. 29, 1990, the UN Security Council officially authorized the use of force against Iraq if it did not voluntarily evacuate Kuwait by Jan. 15, 1991.

The war clouds were growing ever more dark and ominous.

This was just more good news for the oil pit as uncertainty not only begets pricing inefficiencies but heavy volume, allowing one to simultaneously buy low and sell high large blocks with little exposure.

The world was taking no chances, and they were buying or selling futures as needed at a frantic pace to mitigate risk.

And what could be riskier than being dependent upon a commodity wherein much of it at the time was produced right smack-dab in the middle of a potential Armageddon?

Not only was the flow of oil from Iraq and Kuwait suddenly off the market, but Saddam’s misadventure had the potential to ignite a regional conflagration by threatening Saudi Arabia’s daily output while tempting the fanatical theocracy of Iran (Saddam’s arch enemy) to choke off the Strait of Hormuz, through which 20% of all crude oil exports passed.

It was a global crisis of literally biblical proportions as Saddam vowed to launch missiles at tiny Israel should the United Nations try to expel him from Kuwait by force of arms.

His hope…