"The World of Trading" Interpretation Series (3): How Commodity Traders Affect the World# [Q&A: What is the impact of European and American central banks on commodities with interest rate hikes and global inflation hitting record highs]
Thanks for the invitation!
Noting that there are nearly 50 (many of them good) answers to this question, starting today, I will borrow part of the interpretation of the book "The World of Trading" to respond to a few related questions.
In response to "What is the impact of skyrocketing commodity prices?" (https://weibo.com/1592917513/MvU5ZaTAw)" finally talked about the following, at this time, commodity traders struck. Glencore, the world's largest trader, for example, began organizing forces to buy oil from struggling oil companies. They buy at about $10 a barrel while selling at a higher price on the futures market.
Here's the way we go.
Of course, the oil they bought had to be stored first, so they chartered many tankers, including the world's largest tanker, the Europe, whose deck was higher than the Eiffel Tower and could store 3.2 million barrels of oil. Many traders did this at the time, so there were a lot of tankers full of oil floating at sea, and these large mobile warehouses, along with other facilities, stored a total of about 1 billion barrels of oil.
Next, as the pandemic eased and the economy recovered, oil demand and prices began to rebound. The oil that Glencore bought for $10 sold three times the price a few months later. This allows you to make a profit of 50% to 100%, even after deducting the cost of chartering and upfront funds. As a result, in the first half of 2020, Glencore made $1.3 billion from energy trading, and some other traders also made records.
As can be seen from the above example, commodities not only have spot trading, but also futures trading; Spot trading is one hand of money and one hand of delivery, futures trading can receive money first and then delivery, is a cross-time value exchange, so it has financial properties. As mentioned above, Glencore bought oil at $10 a barrel at the outbreak, which was spot, and agreed to sell it at a higher price a few months later, which is futures. People who buy futures receive real commodities as long as they hold the contract expiring; The person who sells this futures must deliver the commodity at the expiration time. This is the basic pattern of futures.
Incidentally, the futures market for grains and metals is hundreds of years old, while oil futures only appeared on a large scale in the 80s of the 20th century. The original intention of this transaction is to reduce the risk on both the supply and demand sides. For example, a farmer who does not know what will happen to the price of grain next year, in order to avoid losses caused by falling prices, can sell grain futures to determine future income; An airline that does not know what the price of fuel will be next year, in order to avoid the impact of rising oil prices on operations, can buy oil futures to determine fuel costs and so on. This is the initial function of futures.
But as the market evolves, futures trading becomes more and more complex. People who hold commodity futures do not have to wait for the contract to expire to cash out the real commodity, but can sell futures at any time in the financial markets to obtain funds. People involved in futures trading are not only the supply and demand sides of resources and middlemen, but also various institutions or individuals who want to profit from trading, including investment banks, wealth management funds, professional speculators and so on. These participants are not interested in real commodities and just want to buy and sell futures in price fluctuations to earn the difference. At this time, commodity trading has obvious financial and speculative nature.
According to this book, the emergence of oil futures and the financialization of the oil market in the 80s of the 20th century was a milestone in the development of commodity trading. It not only changes the industry ecology, provides traders with more sources of funds and ways to make money, but also produces a group of senior talents, who are both entities and understand finance, and can seize more opportunities and profits under the new format. The most typical of these is the story of Andy Hall.
Andy Hall was the head of oil trading at Philip Brothers, a commodity trader at the time, and was good at analyzing various political and economic factors to determine market trends. He has a unique advantage over other traders, as well as direct access to market conditions through its refineries. At the beginning of 1990, he synthesized all kinds of information and judged that the oil market was oversupplied and prices were low. Then he saw that the price of oil futures six months later was higher than the spot market, so he bought a large amount of oil spot and sold futures at the same time, locking in a wave of profits. Because futures are delivered after receiving money first, its price is higher than that of spot, as long as you buy spot and sell futures, you will generate profits. His approach is similar to the one mentioned earlier, which is to charter more than a dozen large oil tankers and store tens of millions of barrels of oil.
Unexpectedly, after June 1990, relations between Iraq and Kuwait suddenly became tense, and Saddam Hussein publicly threatened to attack Kuwait. Andy Hall judged the risk of war to be extremely high. So he made a bold move to redeem some of the oil futures that had been sold. That is, he believes that oil prices are about to rise sharply, and he does not earn enough to sell at the original futures price, he wants to earn more. But in this way, the oil he stored on the tanker loses the protection of the futures price, and if the price falls in the future, it will suffer significant losses.
Hall proved right. Soon after, Iraq invaded Kuwait, the Gulf War broke out, oil production in the Middle East was reduced, and world oil prices soared. Hall's bets paid off handsomely. The cost of his oil on the tanker was $20 per barrel, and after the outbreak of the war the oil price rose to $40, and the book profit was 100%. But in fact he earns more because he redeems a part of the futures beforehand, and the price of this part of the oil is higher than the price agreed upon by the futures. In response to "Where do commodities go?" Let's share with you some of the content in yesterday's #Sijin US stock overnight news comment#: https://www.toutiao.com/answer/7207423830737502525
