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June 13, 2014 6:57 pm
The Secret Club that Runs the World: Inside the Fraternity of Commodity Traders, by Kate Kelly, Portfolio, RRP£14.99/$29.95, 288 pages
On March 28 2011, Delta Air Lines delivered a plea to Washington. Traders with no business in the oil market were pushing up the price of the 4bn gallons of jet fuel Delta burnt each year. The Commodity Futures Trading Commission needed to stamp down on the speculators, the carrier argued in a letter, or risk “concrete detrimental consequences for the real economy”.
The company was a classic “commercial hedger”, in the parlance of commodities markets. It used futures to lock in fuel prices at places such as the New York Mercantile Exchange. At the time, oil was spiking for the second time in four years and airlines blamed financial investors herding on to the Nymex.
Delta’s antipathy towards speculators was soon to change, as Kate Kelly reveals in The Secret Club that Runs the World. In April 2011 Delta hired Jon Ruggles, a cocksure veteran energy trader, as vice-president of fuel. Facing a shortfall in an employee bonus pool, managers authorised Ruggles to pursue a “purely speculative trade” in heating oil that would make Delta $100m.
The airline’s bet confounds the policy debate that has raged around commodity markets since oil, metal and grain started streaking higher about a decade ago. Washington and Brussels want to reduce speculators’ influence in futures markets, convinced they can distort prices for basic materials. But if hedgers also use futures to speculate, how will regulators know whom to curb?
Kelly, a reporter at CNBC, explains complex trading strategies through lively stories about Ruggles and a handful of other high-flying western commodities trading personalities from New York to London to Zug. They include Pierre Andurand and Jennifer Fan, both hedge fund managers, and Alex Beard, global head of oil at Glencore, the giant commodities trading house. While few names will be secret to readers of the financial press, Kelly digs up vivid details of their behaviour during times of extreme market stress.
But if hedgers also use futures to speculate, how will regulators know whom to curb?
We learn how Beard “put on a massive speculative bet” that oil prices would fall in 2008 – as they did, decisively. We are told how Gary Cohn – now president of Goldman Sachs – built “enormous caches” of aluminium in the early 1990s that drove up prices, foreshadowing Goldman’s controversial entry into metals warehousing. Traders seem to make as much money when prices fall as when they rise, often via arcane structures with names such as “cap-swap double-down extendable”. This complexity underscores the challenge for regulators such as the CFTC, which meets next week to discuss speculation limits.
At times, The Secret Club feels a bit breathless. Traders are cast as “shrewd and indomitable” representatives of a world in which “a relatively small circle of powerful players take enormous risks gambling on the future price of physical raw materials like oil, corn, and copper”. Some of the details Kelly seizes on to bring her subjects to life – a penchant for designer jeans, say, or for grouse hunting – could seem unremarkable in another context.
The author can also be glib on why commodities markets rallied until mid-2008, crashed and then rallied back, in some cases to fresh records. “The commodities bubble of the 2000s is a snapshot of one of the most extraordinary periods in American finance, providing an object lesson on the role of markets, regulators, and how the money world can sometimes lose its connection to the real one,” she writes in chapter one. More than 200 pages later, this lesson is unclear. The roles of hedge funds and commodity index investors receive more attention than obvious factors such as the doubling of Chinese demand for oil over that decade.
In the three years since Kelly began reporting The Secret Club, commodity markets have become rather boring. Banks are pruning operations. Specialist hedge funds have closed. Volatility is depressed.
Meanwhile, the world is still guzzling more commodities. As the energy and metals trading house Trafigura argues in its annual report, the outlook “has not changed in any very significant way from the one that prevailed before the financial bubble burst in 2008”. Kelly’s engaging review of the previous decade may also serve as a guide to future tumult.
Gregory Meyer is an FT markets reporter in New York
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