What happened when I tried to buy an actual barrel of crude oil
NEW YORK: “Don’t buy a barrel of oil,” the broker said. “It’ll kill you.”
A fortuitous meeting between a gas trader and his broker at a downtown bar was not going the way I had hoped. After revealing a long-held plan to try to buy a barrel of crude, I was now receiving a disappointingly stern lecture on the dangers of hydrogen sulphides. The wine tasted vaguely sulphuric, too.
Oil may be king of the commodities, but its physical form is tough to come by for a retail investor. Mum and Pop can buy gold and silver, gather aluminium cans, grow soybeans and strip copper wiring, but oil remains elusive- and for very good reason. Oil, as I would soon discover, is practically useless in its unrefined form. It is also highly toxic, very difficult to store and bad-smelling.
If gold is the equivalent of a pet rock, then I can confidently say that oil is the equivalent of playing host to a herd of feral cats; it demands constant vigilance and maintenance. If gathered in sufficient quantities, it will probably try to kill you, or at least severely harm your health. The story of how I came to own physical oil begins in late 2008, when fallout from the financial crisis spurred the crude market into severe contango-meaning the price of oil for future delivery was higher than the expected price of immediate “spot” delivery. While contango is the usual and persistent state of the oil futures curve, this particular “super” version helped create the perfect conditions for an almighty oil storage trade as the price of crude for future delivery vastly eclipsed the cost- of- carry and storage expenses of petroleum bought in the spot market.
In other words, those who could move and store crude oil could make a pretty penny simply by buying it on the cheap, storing it and selling later for a higher price.
Many did so and, for awhile the technical vagaries of the oil market made headlines in even the most mainstream of media. “Sharks off the British coast: Oil tankers refuse to unload until prices rise keeping YOUR fuel costs soaring,” Britain’s Daily Mail screamed in 2009, describing the “waiting game” played by oil profiteers near the English shore.
I wanted to see if I could be such a shark. A plan was soon hatched with some ex- colleagues to source and store a barrel of oil in the name of journalistic experimentation. ( Market reporters rarely get to engage in the sort of gonzo journalism enjoyed by our nonfinancial brethren. Where Hunter S. Thompson had motorcycle gangs and Halcion, we must content ourselves with mineral rights and hydrocarbons.) But our lack of organisational skills and recovery in oil prices soon made the super- contango story a thing of the past.
It was not until a chance meeting in a Tribeca winebar during an evening thunderstorm many years later that the oil barrel plan was revivedto its less than receptive audience. Whereas West Texas Intermediate had been trading at US$ 145 a barrel at its peak in 2008, it was, in October 2015, now hovering closer to US$ 47 a barrel following an almighty reevaluation of global demand and supply.
Petroleum, I reasoned, had for all intents and purposes just gone on sale. And while the super- contango was long gone, the oil futures curve was still sloping upward. Profits, albeit meagre ones, were still there for the taking.
“Don’t buy a barrel of oil,” the broker repeated after I had outlined my reasoning, declining the offer of my business with grim finality. The gas trader nodded sagely. Lightning flashed behind him, and a waitress appeared, suddenly and bearing many wine lists, at our table.
The extra Riesling helped turn things around.
A trip was soon arranged to the tidal strait of Arthur Kill, where crude oil is stored, blended, and refined on its way to becoming wondrous such things as nylons and synthetic leather. Here, just a few miles south of the Statue of Liberty, is a whole new world of floating industry, where rusty oil tankers slip past the slick cooling towers of power generators to unload their cargoes of petrochemicals.
On a 42-foot fishing boat, the broker and I travelled with a handful of his clients for a viewing tour of New Jersey’s finest oil terminals.
“Could a barrel of crude really kill me?” I asked a petrochemical engineer now captive to my persistent and doubtlessly annoying questions. It absolutely can, he said. Hydrogen sulfide gas – H2S, for short – has a propensity to evaporate from crude, knock out your olfactory capabilities and slowly suffocate you.
Further research conducted by iPhone, somewhere in the Raritan Bay, turned up this gem from a state safety agency: “If you inhale ethyl alcohol vapours in a concentration of 1,000 ppm ( 0.1 per cent by volume) for eight hours, you may get drunk. If you inhale hydrogen sulfide in a concentration of 1,000 ppm ( 0.1 per cent by volume) for only a few seconds, you will be dead.”
I conceded defeat. Storing oil, it turns out, requires incredibly good ventilation and a rock- solid insurance policy. I doubted my ability to roll 100-pounds plus of highly toxic liquid in a bright blue barrel past the notoriously strict security guards at Bloomberg LP’s headquarters
All was not lost, however. If a barrel of crude oil would kill me, a small amount would certainly make me stronger, I suggested (inanely) to the broker. It was at this point, I believe, that the broker gave up.
A well-known oil inspection company was called and a respectable- size bottle of crude procured, soon to be winging in by FedEx. It would come by rail from the Bakken Formation in North Dakota to the Philadelphia refining complex on the East Coast. I have named it Willistona reference to the petroleumrich basin that dominates the Northern Great Plains.
Much more productivity was to be lost finding a buyer, however.
The ideal oil storage trade works something like this: Buy the crude and immediately agree to deliver it at a later date to lock in the difference between the spot and futures prices for what is, in theory, a riskless profit. — WP-Bloomberg