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Days of Frenzy in the Energy Pits

February 28, 2007 on 9:07 pm | In Money |

It had been a rather uneventful workday for Ray Carbone, a 47-year-old oil and gas trader who owns Paramount Options, a small energy commodities trading firm in New York. Perched on the outer edge of the options pit at the New York Mercantile Exchange—one of six arenas on the floor where traders bellow and gesture wildly to move their wares—Carbone was biding his time. There had been a sharp decline in oil prices the previous day, refusing to break $60 a barrel for the third straight session. Other traders had started taking short positions, but Carbone remained stubbornly long on it for himself and his clients.

But suddenly, at about 2 p.m. on Feb. 8, the lull gave way to a price explosion as the market rallied. In the half-hour preceding the closing bell, crude prices surged by $2 a barrel, as energy traders piled back into the market. The news was good for Carbone, who learned later that the impetus for the 3% burst was news of a fire at an Occidental Petroleum (http://www.businessweek.com/ticker/) field in California, which would affect supplies.

“Good result today,” says Carbone. “I’m a believer in crude because I’m a believer in Asian demand and demand in this country. When we were down [earlier this year] I started to doubt my instincts, but we’re back.” Up and Down

These days, energy prices are exhibiting extraordinary volatility. Prices are jostled by big-picture factors like ongoing geopolitical tensions threatening to disrupt supply, the booming Chinese and Indian economies boosting demand, and OPEC’s mysterious machinations as well as shorter-term blips like unusually warm winter weather patterns and short-term production hiccups. Add to these factors the rapid movements of new energy market players—speculators like banks and an estimated $1.5 trillion hedge fund industry intrigued by commodities—which tend to exaggerate price movements. With nearly 180 funds focused on energy commodities, the entry of these new forces has helped make energy prices even more sensitive.

The results of each day’s session ripple rapidly throughout the world economy. No sector is untouched by energy prices: oil producers and refiners who invest billions to explore, airlines nervous about jet-fuel prices, auto companies who must adjust models rapidly to survive, and retailers like Wal-Mart Stores (http://www.businessweek.com/ticker/) keen to know how deeply its shoppers will be dunned at the gas pump.

The clearinghouse for much of this buying and selling is the trading pit at the New York Mercantile Exchange, the largest physical commodities exchange in the world. Oil contracts are also traded through the international Intercontinental Exchange (ICE) in London, as well as electronically 24 hours a day. Traders like Carbone sit at the front lines of these movements in the global oil market, battling price gyrations to turn a profit for clients and their firms. Here in the pit, the dull moments are many, but they never last long. Feb. 7: A Long, Cold Day

Wednesday, Feb. 7 begins at 16 degrees in Manhattan, and an icy northwest gale makes it feel subzero. The bitter cold isn’t just chilling the traders barreling into the New York Merc before the 9 a.m. bell, it also influences prices. Two weeks of freezing temperatures in the northeastern U.S. have helped oil prices rally from a lull in January, an unusually balmy month.

Carbone has been inside since 8:30 a.m. Later this morning, the weekly data on U.S. oil inventories will be released, promising an exciting day on the floor. Wearing a simple blue-and-green jacket with “Paramount” lettering on the back, he’ll be shoulder-to-shoulder in the options pit, working for eight of his clients, including banks, oil companies, and funds. Carbone trades primarily in natural gas and the crude benchmark product, West Texas Intermediate (WTI) oil.

The previous few days hadn’t been so eventful.