London Oil Trading Upset by “Daisy Chains” Breakdown
LONDON (AP) _ After several faltering days, forward trading in the London spot oil market came to a temporary halt Friday, industry sources said, because of a breakdown in ″daisy chain″ dealing due to the $10 fall in the price of a barrel of oil since December.
″Daisy chains″ refers to the long list of buyers and sellers who have been encouraged by the recent fluctuations in oil prices to deal in single cargoes of North Sea crude oil, gambling on making money when the price changes by even a few cents.
The fall in the price of North Sea oil, tumbling erratically from $26 to less than $17 a barrel, has brought heavy losses for some buyers who bought oil ahead, gambling that the price would rise to give them a profit, and were then caught when it continued to fall. A barrel is the equivalent of 42 gallons.
″It’s unavoidable in this situation that someone, somewhere along the line, was going to default and that’s what has happened,″ said Karen Yates, an oil specialist for the London daily Petroleum Argus.
London’s Daily Telegraph reported Friday that one big trader faced losses of 25 million pounds ($35 million) and that two others were locked in dispute over contracts.
″The ‘daisy chain’ character of the market, involving the same cargo changing hands many times, has added to the specter of a spectacular collapse,″ the newspaper said.
Miss Yates said that as many as 150 buyers and sellers might be in the market over one cargo of crude, buying and selling it many times over at different prices in the three months before it is actually delivered.
The crisis came over cargoes due to be delivered this month when traders who bought crude at December prices from the North Sea’s Brent field found themselves heavily in debt because of the price fall.
Some were stalling, with disagreements breaking out over what terms had been offered for each link in the chain.
The Wall Street Journal reported from London on Friday that Gatoil SA, a Swiss company, had ″brought the world’s busiest spot-oil market to a standstill with allegations that traders can’t deliver about $75 million of oil they agreed to sell the firm.″
It said trading had almost halted since the Swiss concern made its charges on Tuesday. After the publication of Friday’s Wall Street Journal, Miss Yates said trading had reached a standstill.
Petroleum Argus said that nearly 2 billion barrels of Brent crude, then worth $60 billion, was traded last year, compared with just under 274 million barrels actually produced by the Brent field.
It said that in the three months of deals leading up to February delivery, transactions in up to 500 million barrels of oil could have taken place at a time when the value of that oil fell by $5 billion.
″The forward trade is in ‘paper’ barrels - most of the people buying and selling the oil have no intention of ever collecting it,″ Miss Yates said.
″I think the very large forward market in paper barrels will be much reduced in size because of this development. In the future, people are going to be more fussy about the credit of the players they deal with and that will have (an effect) on people on the edge of the dealings - there are going to be fewer brokers in the business of bringing buyers and sellers together.″
She said a situation has now developed where buyers are willing to pay a premium of 20 cents or 25 cents a barrel to deal with ″gold-plated operators like Shell and Esso.″
″If the large players in the North Sea rally round and help each other, and the claims get sorted out without too much litigation, the problem can be overcome. But it relies on good will and that’s been cracked,″ Miss Yates said.
A well-informed British official in the oil business, not connected with any company, and who asked not to be identified, said:
″Daisy chain dealing has grown to staggering proportions over the past three to four years. The majors like Shell and BP (British Petroleum) may be quite secure, but they may be let down by other people. People who never see a drop of crude and deal with telephones and green screens are going to default and we are going to see blacklisting and some going bust and litigation.″