Hello, and welcome to another episode of the All Thoughts Podcast. I'm Tracy Alloway and I'm Joe. Wisn't Joe? Big news today from Europe, which is that Russia is cutting off supplies of gas to countries Poland and Bulgaria specifically that refused to pay in rubles. And you know, this is something that has sort of been expected in some sense, but lots of people are viewing this as the beginning
of the weaponization of commodities. Yeah, and it fits with you know, a theme obviously we've talked about several times, which is this sort of I guess there's two things. I mean, on some level, it's like this fracturing of the commodity supply chain, trade route changing, but then also the changing nature of like the financing side of commodities and of the idea that okay, you can have you can buy the same commodities, but you have to do
it differently. Currency. This is, you know, this fundamentally is beginning to shift just the way commodities are paid for in finance. Right. So this is a point that I think a number of our guests at this point have made. So Salton Poesar, Pierre and Duran Jeff Curry. If countries aren't importing Russian gas anymore or oil, they need to
find that from somewhere else. And simultaneously, it means Russian gas and oil might be going elsewhere, like to China to the east, and all of that re routing is going to take additional money. And we've seen lots of players in the commodities talk about this. They've talked not only about the upfront costs of transportation of commodities, but they've also talked about what all of this means for
the market itself. And we've seen intense amounts of volatility, which to some extent mean that the commodities traders are making loads of money. But on the other hand, they are having to deal with this volatility and it can disrupt their business, right And of course, and you know this is obviously and you mentioned it's something that Resulton has been talking a lot about. All these trades are financed.
There's leverage involved, there's borrowing, and when you have a really big jump in volatility, then of course financing gets more expensive. You have to put up more collateral and you get margin calls and things like that. Also adding the complications of you know, some banks have been sanctioned and you can't deal with some institutions, so the financing side of all these trades just gets much more costly
and complex. Yeah, and it's not exactly as if it was transparent to begin with, and now it's just become even murkier in some respects. So today I am very pleased to say we are going to be digging into the financing side of commodities trading, and we really do have the perfect person to talk about it with. We're going to be speaking with Happy a Blast. He has of course a Bloomberg opinion columnists, but he is also the author of the World for Sale, which is a
book on the commodities trading houses. An excellent book on the commodities trading houses. So again, the perfect guest. Have you. Thank you so much for coming on all thoughts, thank you for me I kind of I'm sort of amazed we haven't done this sooner. You're one of the most requested Yes, we're always like what are you getting via We're gonna get We're gonna get her onto it. And then we ran into Javier in the in the news rooms, like let's just do it right now. I think that's
that's that's that's my parents probably on Twitter reaching out goods. Um, why don't we start, I guess with the basics, I mean sort of potted history of your book. But how did we wind up with a situation where we have all these independent commodities traders who are dealing with you know, important goods, things like oil and gas that we depend on for transport and heating, food supply, vital strategic goods, with seemingly not that much oversight. Well, yeah, you're you're
absolutely right. Um, we need the commuity traders because commuities are not produced generally where they are consumed. So you need someone to take the race of moving the staff from A to B. And and that's the role that the physical commuity traders play. I mean, these are not guys who are betting on the futures market or the
options market behind a screen. These are guys who go into up country, as we call it a mind in the DRC, deep into Africa, Peru, oil fields in Iran, and they get the oil, they put in a tanker and they transport to um the consuming markets, and they finance all that process. They deal with all the logistics which are mind blowingly complicated. In some cases, you know, the main reason is because commorities are not produced where they are consumed, and they need someone to intermediate that risk.
And that's quite a lot of races. Financial is logistics, is credited? Is operational is whether it is risky in terms that you know, some of these commoti traders are often operating on words and you still need them to to get the commorities out, and they get paid very
well for for that service. Yeah. So when I think about like traders, typically in my mind, you know, I imagine someone looking at a screen and there's like, you know, one basis point difference between a tenure treasury and a tenuere treasury futures, and this finds some way to like
make a penny off of that. But when we're talking about commodities, we might be talking about equivalent barrel of oil moving out of Russia that's sixty dollars cheaper than something, you know, another the same barrel of oil and continental Europe, and then someone their job is to find a way to get that cheaper barrel of oil to someone who wants it. And if you can do that, that that seems lucrative. Yeah,
that's exactly what they do. At times that is very complicated because well, you know, you are dealing with all those logistics, you are dealing with all that risk, and because you you actually have to put a lot of money at work. Uh, the size of the business. I mean, some of these companies they have turnover of three hundred billion, four hundred billion dollars a year, which is a mind
blowing number. And obviously they don't have, uh the profits equivalent to what appoll or Coca Cola or Amazon will make if they were having those sales. But the size of the turnover is just amazing because of the of the volumes that they move. I mean, Beetle, which is the world's largest oil trader, moves enough oil to supply five or six of the largest European economies. So it's not an easy business at the best of times. You
just described it as really complex. What's it like in a moment like we've just experienced over the past month where we've seen intense volatility, We've had drama with a particular commodities exchange over this volatility and canceling trades and things like that. What actually happens in a period of intense volatility for the commodities traders. Well, the first thing to understand, which is very importan done, is that physical
commuity trading is a highly leaberage business. These companies operate with theen equity and they borrow money from banks. And these are not typically borrowing from Wall Street banks. They're borrowing money from commoity trade finance which are the typical European bank where you may have a mortgage. Actually, my my mortgage bank for my flat in London probably is a big finance here of the commuity trading houses. So these are not the big that they are not borrowing
money from the likes of government SAT. They are used borrowing money from europe and commercial banks and sorry just to be specific, like a BNP parableut that sort of thing. Yeah, I mean BMP was the largest lender to the industry. It just decided a few years ago to shut down the business after they got involved in some bad case
with with the U S Department of Justice. But we're talking about the likes associating it all of I n G suits um so unique credit of Italy that that kind of European banks and well when commoti prices go through the roof has happened in recent days and weeks. Two things happen for the commoty trading houses. First of all, they need to borrow a lot more money because a
barrel of oil is more expensive. So if a barrel of oil a year ago was close to actually almost negative, but you know, say that it was dollars and you were moving a million barrels of oil and a super tanker, you need million dollars to borrow. Today at more than a hundred it means that you need a hundred million dollars.
So the borrowing needs have increased significantly. Also, because of all the volatility in the futures market, if you are heading that operation on the futures market, you mean that you are long physical you are short on on the paper side. The price continues to go, so you are getting hit by marketing calls, and those marketing calls could
get very high. We have seen some commoti trading houses getting a billion dollars a day of additional variation margin calls, and that combination has really put a lot of pressure on the finance of some of these companies. That, as I said, for the starting point, they don't have a lot of equity and they rely on banks, and banks are really reaching the limits of how much money they can lend to them. What do you walk is through
a trade? I mean things you know, you sort of you walk through some of the prices of oil and the tanker. But there's the idea that Okay, there's some buyer who wants oil, there's some seller halfway around the world, and then the trading house makes it happen. But to make it happen, they borrow. They don't want to put up their own money to transport that oil. They borrow for the duration like how long are they borrowing for? They revolving lines of credit like walkers there a little
bit more like how the trade work. They have all kinds of different borrowing facilities, from from revolving to bilateral deals to to just at for for the transaction. But a typical transaction right now will be buying Russian oil, which is still legal if you are moving it into say the Netherlands rather than is the center of the
European oil industry. So say that you are a trading house Joe Commodities Incorporated Obviously on attacks Heaven because all these companies are are incorporated on on on some places like the British Virgian Islands and similar. And you are buying a million barrels of oil from Rosnev, the Russian state control company. You will have put that's gonna cost you around eighty million dollars because Rossnef is selling a
big discount to the market. You probably are gonna put perhaps as little as five million dollars of your own money, and you're gonna go to a bank and you're gonna borrow all the rest of the money, and then you will at that moment you own a million barrels of Russian oil. So you are long physical. You want to protect yourself because you don't you don't want to see a price drop hurting use. So you will take a short position on the futures market to make sure that
you you are head long physical, short paper. Everything s will be fine. And then you get a vessel, which is complicated because there are not many companies who want to go to a Russian port to pick up the crude. You will have to deal with all the operational Sometimes there is bad weather and you cannot send the rip, so it gets complicated. On that say that you get everything right, You get the oil into the tanker and then you move it to Rotterdam. You try to discharge
into a refinery. But in that period, just in mind that the price of oil goes to a hunt from a hundred to a hundred and fifty. You are going to be making You are fine because you are headed, but obviously the marketin's the change is gonna start demanding significant variation margins on that short position, and then you have this cast flow mismatch. You have not yet delivered the oil, so you have not really cash in your loan. Physical position at the same time you're shot on the
paper is massively underwater. You're getting the marketing calls, so you're going to have to go to another bank and say, please, can you give me some money and I borrow you money because I need to pay to this change. When all of these is not just one tanker, but hundreds of tankers a day floating around and billions of dollars on borrowing, is when it gets very difficult, and when some of the companies reached the limit on how much they are borrowing from the banks, as when the banks
say we cannot continue lending to you. And that's where we saw the lobby group of the European energy traders go to several central banks and saying we are running out of liquidity, we have a big problem. Marketing calls had effectively killing us. I want to get into this idea of whether or not central banks or governments should
support commodities trading and finance. But before we do one thing, I've been wondering, given the volatility and given the types of margin calls that we've seen, do people hedge more or less in this environment? Because you can kind of argue it either way. Right, you know, you don't have as much credit, so everything you have is sort of just stop in the trade plus can be used for the hedge. But on the other other hand, there's so much volatility at the moment that you would want to
make sure that you're hedged. I mean, this is the time that everyone should be hedged as well as they can, because the market is moving in huge price increases. I mean, we have seen Brent crude, a market that for many years have never traded more than thirty dollars or forty dollars. We have seen price movements of dollars in the space of a week. You are not hedged, the market could
kill you. But you are absolutely right. My suspicion is that a lot of the trading houses have reduced significantly the hedging you simply because they cannot afford it, which is extremely risky, and that's what could bring a company down. You know, I want to go back to something just in like the why of these companies and I, you know, just your explanation. It's like, look, the commodities made somewhere,
it's probably gonna be consumed somewhere else. You need someone to take on the risks and the process of doing that. Why did they these companies emerge separately from the major banks? Like why in theory is this not just something that's done inside the government sex or inside the JP. Morgan very good point. And indeed at some point government stars and Morgan Stanley were big physical traders. They were moving millions of barrels a day of crude and undefined products.
Coleman starts pre I p O on an oil refiner in Rotterdam. Morgan Stanley was a big trader of all kinds of commorities including metals, agricultural, etcetera. Etcetera. But over time the business gravitated to privately owned independence because, um, you have to go to difficult places on earth, places that usually regulators will not like banks to be there.
And and because over the years the good money on community trading has been made in operating on those kind of Um, what is the nice work gray areas of the global economy. It feels like you have to have a somewhat mercenary attitude where it's like, this is the job the world that Jack and I use on the world for sale, and our book was you have to be a bit of trust, walk clean. I think that that probably is a nice way to say buccaneer or mercenary.
But look, the commority traders made a lot of money over the last thirty or forty years helping sadan Hu's saying to bypass un Sancion's, helping upper heads of Africa government to get oil, helping um Fidel Castro Cuba barter sugar for oil, and keeping the communist revolution alive. And they never have a problem whether it was a communist
regime of our right wing regime. The same commoty traders that were helping Castro were dealing with pinot chet in Chili to sell the copper, but you need to have the appetite to go to where no one goes. I mean these when I said earlier that these commoty traders are often in or songs, they are. They have executives that have been in Libya during the civil war. And the hotel lobby where it was, it was an interesting combination.
You were in Benghasi, the front line was not far away, um or checkpoints in the city everywhere, and it was a hotel where it was kind of the hotel to be in town during the Libyan war. And the people who were living in that hotel were a combination of a few diplomas, um cultural attaches of those diplomas meaning their spies, a few war reporters, and then the commodity traders find Libyan oil to put it into the global market. So setting aside, I guess the issue of morality as
as many traders have done historically. Um. You mentioned that the fact that commodities traders just make tons of money over time, and I'm curious what the money making opportunity is like right now, because again it kind of feels like a best of times, worst of time scenario. So the opportunity to make profit is there if you can secure the funding and navigate the volatility. But it seems like the industry is also starting to um split a little bit, like the big guys are taking even more
market share. Some of the smaller players seem to be really squeezed by the financing pressures. What's going on there? You're right, the banking financing is gravitating towards the big players because the banks feel that they have enough equity to withstand the volatility, and the smaller medium sized traders are really struggling to get support from the banks. The opportunity right now you can't make it through. You can whether the volatility. You could make a ton of money
in this market. I mean, think about Russian oil um the flagship of Russian Crewe is something that we call urals that is selling around thirty five dollars discount to brand, which is the main benchmark. So if you are a commuity trader, you could buy from rosnev oil at a thirty five dollar discount, put it on a boat and ship it to India where you could sell it at five dollar discount. You could make thirty percent margin on a barrel of oil right now, which is a lot
of money. I mean, this is this is an industry where making fifty cents on a barrel of oil is a big profit, and all of a sudden you have thirty dollar profitability options. Uh, and that's what they're doing. I mean, you see the same traders who are buying Russian oil at a discount of certified dollars, they're selling
it to India at a five dollars discount. There's a for anyone who is interested or if you have a terminal there we have a urals Brent spread ticker fu d b M one and you can see like you know, up until basically at the beginning of February, this was a you know, it looked like Russian oil typically traded for about a dollar fifty cheaper than brand and currently it's thirty one dollars cheaper. So here's the basically, here's this huge opportunity. All you need to do is find
the boat. It's such a crazy like that's the basic idea. If you can find a boat that can get it can ship into India for less than thirty dollars a barrel, you need the boat, and you need also bank was willing to finance that, or you need to have the equity to to to finance this operation on your own balance sheet. And then I mean, but he asked the question, will will Joe Commodities incorporated on the British Building Islands want to get involved in this? Would you want to
be trade in Russkan oil? And many many people will say no, I don't want to do anything with Russia, but a lot of the Commoity trader said, well, we are not involved in politics. We have both politics, and we are here about out making money and it's legal to move the oil, so we're going to move it
and they're obviously making a lot of money. Tracy. It actually reminds me a little bit of the same bankman freed bitcoin trade from, like the huge gap in bitcoin pricing in the U s and Japan finding a way to like but there's a reason why that that gap exists. So okay, speaking of gaps and crazy charts, there is something that you tweeted this morning, have a about the ultra low sulfur diesel futures closing like a crazy amount, And there's been a couple of charts that just look
like something weird is going on in the market. We're getting these odd technical squeezes higher. What's going on there and how is that related to the financing situation? Well, the diesel market. I mean, I have been warning that we are talking at about the problem in the oil market, the crude market, but we're real Thinness is what we
call the middle of the barrel when he's refined. That's diesel and jet fuel, and we have barely all of it because consumption is booming because Russia produced a lot of diesel. What's happening there is that on community markets, when you are on the futures market at the end of the day, some of those contrasts are still physically deliverable. You take a long or short position, and you may take or have to deliver the community to this change.
Inventories of diesel in the East Coast of the United States are at the moment at the lowest seasonal level since we have data that's thirty two years um. The pricing point for the futures market for diesel in the United States is here in New York Harbor. That is, New York Harbor is where you price diesel for basically the whole of the Americas, and what happened here really matters.
It's so important that it was a big energy trade there in the nineties at morganized Stanley, who he was known as the King of New York Harbor because he controlled all the leases of all the oil tanks and he could in some ways I think that the world manipula will be wrong, but he could sway the market on his favor very very often. Because we have so little inventory, everyone who is short in this market is trying to close the positions because came Friday they need
to deliver the diesels. There is no diesel around. The lawns are very happy holding their positions. And what we have was a hell of a squeeze over the last forty eight hours where um the premium for May to June contract balloon to an incredibly high level. I mean it's something that again, you know, this is a chart that we shall see. I spread of no more than
five ten cents will be something unprecedented. And yesterday we went beyond seven defense, which was the chart one mesical and it was it was a clear sign that it was a short position in deep trouble, uh knowing that in three days he has borrows, it doesn't have any borrows, and it needs to get out and he would pay whatever is needed to get out of the So like, it's a pretty big societal disaster. If certain commodities simply
cannot be delivered. If you if if if, if planes can't get jet fuel, that's a really big economic problem. In fact, it briefly happened at the airport in Austin, Texas that they ran out of fuel at that location.
But other things, obviously food, obviously huge implications. You know, this stuff really matters, and so it's interesting, Um, you know, talk to us a little bit about the role of regulators in the central banks, because you know, there was talked last month with the whole Nickel blow up about what should the central banks be backstopping or bailing out some of the players in this space because it's so crucial.
I mean, what is uh do does there need to be more of a reg gulatory infrastructure such that if there is need for bailout or emergency financing, the central banks or in the position to provide it. Well, using the example that I gave you, if you know, Joe commodity is incorporated. Uh, well, you have no regulation. No one is looking at you. It's pretty like that you could do whatever you please. And and and you know this,
this this happened. Just in mind that that trade that we in mind, you know, buying a barrel of of Russian oil and deliberate into rotther than you will encounter not a single regulator other than on the financial side. And the financial side, when you're putting your head, you will have the CFTC looking at you what you are doing. But on the physical side, there is absolutely nothing. You do put on a ship, put it on the shape,
and there is no regulation. And sometimes there is nothing even a single country, because you may not even buy the oil from the terminal. You may buy the oil on the high seas from you know, some science. Two oil tankers get together, we call it ship to ship transfer. They get together on the high seas. They can move the oil from one tank to the and you're on the high seas. It's literally you are almost the only rules there is the United Nations Convention of the Sea.
It's kind of propriacy level. So you you you don't have any regulation. And and it's quite interesting the things that you could get away, or you could almost get away until very recently. For example, you were incorporated in Switzerland and you decide to bribe someone to get business a businessman overseas. Not only that was considered legal until very recently, but it was tax deductible. So the Swiss were rather a commodative to what the commoti traders needed
to do. And on the book we tell the story of some commoti traders telling us that they were traveling to London with half a million pounds on the briefcase to to make payments to two people. I mean, they
call it commissions, but those are brown envelopes. There's also there's a great story in your book about the Soviet Union basically owning the US and the commodities traders in the nineteen seventies by going from commodities house to commodities house buying up grain, and no one realized they were doing this with everyone. Because they don't talk to each other, they keep everything secret, and because there is no one that they need to report all of these transactions. There
is not that registry. If you are trading on the financial market, that you are buying oil futures or options all of those trades are registries. On one there is a trade repository. The CFTC could look into it, the FED can look into it. You know, if any any indication of wrongdoing, someone can go and see exactly who bought what at what price with whom. On the physical market you could buy oil, metals, agricultural commodities and you do not have to disclose anything. There has been at terms.
I mean in nineteen seventy nine they D seven agreed to create EATE, an international repository of oil physical deals. And of course what is now forty three years later we are here and that has not happened because opposition from from the industry. I can't even imagine getting to the point where people would agree to it now much less enacted. Like it just seems like when I recently wasn't speaking to people on the regulatory wall and and say well you could do you could create a registry,
and they will absolutely bemused that. I indicate a look look at the G seven V nine communicated was the samit in Tokyo is there he says, we agree, the G seven agrees to create an international database of trades. And they were like, well, that would not happen. Now, it's no way that all the country WI will agree. So just going back to the central bank point though, so it seems like so far most of the major central banks have swatted away this idea of providing support.
So the e c B kind of did it more definitively, the FED has made noises that suggest that it's not interested in backstopping commodities traders. Is the a why not? Um? I guess moral hazard is the sort of big one there, But b it is part of the idea that they get support through banks that are back stopped by the third Yeah. I mean I think that the central bands have looked into commoted trading recently and they found two
things that I think that they didn't like. One and you know, the Bank of England was rather candid about it. They put opposition paper just indicating that they could not really even understand what was going on because of the opacity of the market. Uh and you know that that to to to see a central band recognizing publicly we look at these we found it to be very opaque,
so we don't really know what's going on. I was it's rather concerning both the EA CY b and the FED say, well, the threshold for intervention of an unregulated market, as they call it, is very high. And the FED, using FED to speak effectively told the industry will be a good idea if you raise equity and you show up your your own finance. I mean, let's not forget a lot of these companies are privately owned that there are very few that they are listed on the market.
But they are also owned by extremely wealthy individuals. I mean they're making billions of dollars every year, and the
partners could put money back into into the business. Um. The problem for the central banks is what if a big multi trade company was to fail and it goes under with billions of dollars on credit lines to a bunch of European banks, and all of a sudden you realize that the likes of we were commenting earlier, you know, uh banks who have branches on the highest treet in Europe have two, three, five six billion dollars of exposure, and you don't know what if anyone else gonna calm down,
the industry gets under massive stress. I think that we can get into a position in which central bands hands maybe use forced into act and supporting the industry. But it gets complicated because a difference of the a lot of the banks, a lot of these com multi trading
houses are not even incorporated in Europe. You are going to be bailing out companies that are in the British bulding Islands, in um in Dubai, in Singapore, and and companies also that you could discuss whether what Liman Brothers or band stands we're doing, we're good for society and
so on. But these companies, a lot of the trouble that they're getting now is because they are trading Russian oil, which goes so just in mindor situation in which a central bank effectively has to bail out a commulti trading house, and the central bank is either the FED or the EASYB, and you are bailing out a community trading house which is involved in shifting Russian oil, which is more or less against what the company trading and trading house and
the tax haven making it easier for latter we're to get revenue. And now coming potentially thinking the easy B or the Bank of England to the FED us in mind what the hearing in Capitol Hill when they ask cherman power and Secretary jal And why you bail out these guys? I mean, you know, you understand why the FED and the easy we were terrified at that situation.
But on the other hand, while both the EASY b and the AND and the FED have said no, I think that they're very aware that they could be a situation in which they may have to because the financial health of a number of European banks is at risk, But the political consequence of having to bail out these guys were are terrifying. Yeah, I hadn't thought I hadn't
thought about that at all. Something that you talk about is and and you know, again, I guess I'm going back to like the why these companies is that in the past, and maybe it's with oil, but I think other commodities as well, the supply chains were much more vertically integrated, and so whether from the drilling to the literal gas station where someone would get their fuel, it might have been like all one company. And then it's
sort of like as that fragmented. You talk a little bit about how the trading houses emerged out of essentially restructuring of the industry itself. It happened mostly around the seventies sixties and seventies, and and you know, oil was particularly the one that broke down. I mean it was a time where everything was particularly integrated in the oil industry exce on oil exce and oil fields will produce oil, they will put on excellent own pipelines into excellent tankers
to exon refineries and to exon gas stations. And that broke down for a number of reasons, very importantly nationalization of the oil resources in the Middle East and North Africa through the seventies, um the commoti trade. That when the Middle East countries nationalized that they're oil, all of the sudden, those countries who have never solved it on oil have plenty to sell and they needed someone to help. And that came the oil traders who became the big intermediaries.
And the industry has really broke down. There is not that vertical integration anymore, and the traders have have benefited from that. Would you expect some form of vertical integration to return, like the obvious one given the shipping shortage shipping issues would be for commodities traders to just start buying or building a bunch of huge, very large crude carriers or stuff like that would that kind of thing
come back. I think that where you may have some vertical integration is companies have come to realize now that if they need a particular supply that is in critical for their business and no one is investing, they may have to do it themselves. I mean test Lies is kind of a good example of these, I mean Elements
is talking about the shortages of lithun. So you could see at some point Tesla having to go into mining lithun or coinvesting with some traders into that because you know, in effect you have a market failure, so you may want to integrate. The one thing that I see, which is not vertical integration, but is uh the commoity traders have benefited a lot from their movement by everyone to use in time. They were the ones who were holding inventories for everyone else, and they made money from that.
I mean a lot of companies they didn't have to carry inventories. The inventories were in the hands of the traders. The traders were financing those inventories. So a lot of chief financial officers of companies that need resources were very happy not to carry those financing course, all the sudden you realize that just in time may not be a
great idea. And you are a company that needs a lot of aluminium or a lot of copper, you may want to move from relying a bit less on the commority traders and controlling a lot more of those inventories. Which is really bad right now because we have low inventories everywhere, supplies trolling with demand and we are having is a number of companies building their own inventories right now at the worst possible time, which is exacerbating the
short Yeah, this is a real diversion. But while you're here, I'm just gonna ask you, did anyone actually get paid to take oil in spring when it went negative? Like were there's some people in a position where they like took oil and got paid the warehouse it made a fortune. Yeah, there were. There were some commoty traders certainly buying oil in cushion. Uh. And you know by buying, I mean getting paid to take the oil. There was not a
lot of it. Uh. And you know the reason that we went negative was a lot of technicality around the contract and probably some people pushing the market at closing in the in the right direction for for their for
their positions. But yes, there were commuity traders who that day, and not only that day, I mean on the physical market in the US for a few weeks before the doublet when negative we have domestic grades on kind of areas were very difficult to move the oil out where prices were negative, and some of the commuity traders were we're taking the oil I mean Mercuria, big oil trader who takes oil in some areas of the U S which had lacked lockdown, with very very difficult access over
two pipelines and so on, was buying negative and negative prices for about two weeks. There's one part of the commodities ecosystem that we haven't really discussed yet, and it was the drama that I was referring to in the intro, and that's the exchanges. And the big drama was the London Medals exchange canceling a bunch of Nichols trades after the price just went absolutely nuts. And this was really
controversial at the time. But you know, obviously a lot of what the commodities traders are doing are through futures contracts that go through an exchange. What sort of response have we seen from the exchanges in terms of adapting to this new environment, well, the response from these changes have been to increase margins massively to everyone and particularly not use variation margins. By initiation margins very expensive right now to put a trade on energy commodities oil, power, gas,
it just have got very very expensive. I think that you know that the reaction from these changes have been, Oh my gosh, we got very very close to disaster with the Leemy. I mean the Leemy have not shut down the nickel market and then canceled the trade, which is extremely controversial the session and many people on the market will say illegal decision and this is going to be uh, there's gonna go into lawsuits, etcetera, etcetera. But these changes have been quite open. Four or five brokers
will have default that morning. The market was shut down at a fifteen in the morning and the trades were canceled at a fifteen in the morning. Market calls were due and nine. So we can say that four or five big brokers at the enemy were forty five minutes from going berry. Um if they if the brokers go, uh, what happened to because then the brokers default to the exchange and the clearing house. What would have happened to
the clearing house. The change said that the clearing house will have survived, but we don't know the reality and what will have happened to some of the banks which are behind the brokers. I mean the financial consequences could have been significant billions of dollars of losses. And you know, a lot of the race today we have moved the race out of OTC markets into clearing houses. Uh, and you know, we don't know. And this was a test, I mean, having to cancel the trades. It's a massive decision.
I mean that you know, my my, my, my ward is my bond. I have a trade, I have a contract and that's dawn and those contracts were evaporated in minutes. UM, So there's changes. Reaction so far is to increase margins and trying to make sure that the buffer on the clearinghouse is there for a potential default. But obviously that's draining a lot of liquidity from from this change. We have seen liquid in the oil market at a six
seven year low that's not coming back. Um At times, the oil market, I think that I said that the bid as a spread on double T I which usually is no more than one cent. There were times that was seven eighth fens wide, which I said, well, that's
wide enough to put an oil tanker through. I mean, like you could make a fense of a dollar just basically, are we try and beat as beat as spread on dou w t I, which is as insane as it's kind of almost free money crazy, you know, you're we're talking about like, oh, these commodity traders and make a ton of money, but they weren't always. I mean, and then let you know, prior to COVID, commodities was not
booming business. And one of the themes that comes up a lot on odd lots is um you know, this idea of like under investment, under investment in physical resources, etcetera. But I'm curious also about like the sort of I guess the E S G aspect because my impression is,
and I think some people want to dismiss that. Other people say it's everything, But my impression is a lot of people just either different kinds of financial companies just sort of like cut all of their units related to restractive industries, related to mining and so forth, like we're just gonna get out of this business. It does feel like the sort of negative attitude towards dirty industries really caused a lot of these sort of financing and to disappear.
The Russian based in the Ukraine has been really the finalist draw on on on the market. That has tightened things a lot, But the market was already tightened, tightening a lot on the on the run up. And and one reason is that we have on that investment in fossil fuels, in mining, it just generally has been seen as a deity industry. E. S G has kicking. We're not having probably enough investment. I mean here we are at unprecedented prices for coal. I mean a good price.
If you have told a coal miner a couple of years ago that two hundred and fifty dollars a tone, whether they will take it, I mean they will have signed a contract right now, thank you very much. That's a great price. And the market is now at four hundred and no one is building a mine, no one is opening that. Everybody got out of coal finance. Everyone everyone is out of coal finance. You could not get
a bank to finance a coal mine. And you know some of the call companies I speak to the CEOs and said, why you are not now announcing a big expansion and so on, because he said, if I announced that we're expanding products and capacity, my share price goes down ten percent. Because that's the last thing that you know,
we have targets that we have to reduce. And you know, the sad thing right now of the energy transition is that we have been told about cutting emissions, reducing CO two and so on and two we're going to see record demand for oil, record demand for natural gas, and record demand for thermal coll and that's despite the fact that we have been trying to reduce reliance on thermal call for the last I mean, some people will say hundreds and fifty years, but seriously for the last twenty years.
I have a related but slightly weird question. Um. But speaking of under investment, you know central banks around the world gearing up for rate hikes if they haven't done so already, and the whole intent there is to try to bring down inflation, which presumably with lower commodities prices.
But I'm curious how do commodities traders feel about rate hikes at the moment, because the other argument you could make is that you're increasing the cost of capital, the cost of funding at precisely the wrong time for that particular industry. I mean commodity traders. They feel that demand is outstrapped in supply and that the only thing that could bring down the market is just a good old fashioned procession. Uh So, can you reduce commotive prices via
interest rates hikes? Yes, but at the court of killing the economy. But if you're going to achieve the south landing, I don't I don't think that you are. I mean, the demand is going to be still there. I don't see how that's just gonna reduce inflation. I mean, nothing that the FAT can do other than killing the economy can bring more oil, or more coal or more wheat.
I mean, you know that just we have a problem with with supplies right now because we have lost the number one and number three supplier to the Wall and the e c B, the Bank of England or the FAT cannot do anything about that. I mean, you know, higher interest rates are not gonna produce more wheat, and they're not gonna produce more oil. But you know, interestingly, I'm interesting it is the designed statement of the obvious. Why now the global economy faces much higher energy, cause
much higher food costs, and higher cost of money. So you know, I I have a hard time wrapping my head around how big of a deal it is to say, Okay, some European countries are gonna buy Russian gas in rubles, or maybe China is going to enter into some contract of Saudi Arabia to use you end. Some people when these headlines hit there's a huge deal at the end of the dollar, And I'm always like not sure how
to think about it. Just what's your take, and like how significant is pricing commodity sales and non dollar currencies. Is it a big deal or is it sort of just accounting? Depends on what we are talking about. We are talking about pricing the commoity in a non dollar currency, then I think it's a big deal. But a lot of what we are talking about is about embosing the commodities pricing dollar, but you are you are pricing dollars.
But when you you transfer the money, you you wire the money in a different currency, which is a very different thing from you know, no, non pricing indollars. Look, I do think that it does have an impact. Obviously, there are a number of countries that they try to reduce their reliance on the dollar. But it was quite interesting. I was recently speaking to a senior executive of a Middle East company about what would you would you want
to to get pay in juan? And and you know, he's not a friend of the United States, this this particular gentleman. But he he said, and then what do we do with the duan? We get paid with the juan. It's not converted, it's not properly convertible. We can pay for for Chinese goods, but we have enough demand for Chinese and staff. And say, like, they may not like the dollar, they may not like policies with the United States, but they know that the moment that they have the dollar,
they can compare that to anything that they want. They can move it around, etcetera, etcetera. So you've been covering commodities for a very long time, and obviously your book deals with the long term history of commodities trading. What about the past month or so has surprised you? What's been the most striking to you? A couple of things. I have been a struck by how little regulators in
this day know about the industry. The fact that a lot of them seem to be completely in the dark of what's going on and who are the big players and how things work. Considering that we have had several white cup calls, I would have thought that the regulators will have really getting up to a speed onto that. And I that is really concerning because I am not a big believer that you need super extra heavy regulation
on commodities. But really concerns me when when regulators and policymakers basically have no idea what's going on, that that remains a surprise. The other one, on the other hand, has been sell sunsoning how you know, public pressure has led to so many players to say, even if this is legal, we're not going to touch it. I don't know. This is an era of social media where public pressure
goes quicker to companies. But in the past I would have expected a lot more companies to continue dealing on scan oil with no problem, and we have seen a number of companies just you know, taking a step back, and the companies that tried to use the old tricks like the blending and things like that getting name and shame and very very quickly saying, oh yeah, I would mistake, We're not gonna do that. Yeah, you've had some great columns about blending. They called Latvian oil and that's that.
Then it's like coffee. It's like coffee or cocktails. You you kind of you know, you mix. So it's when when Russian oil is not really Russian oil. I mean for some companies, they will say that as long and fifty one percent of the oil is from somewhere else, the other could be Russian, and then they bend all these names which are kind of you know, cocktail names. Latvian blend to many study blend to to avoid calling it Russian. I just have one more question, and I
guess it's like a culture thing again. But you know, in this world of commodities, commodities being so important, you know, and I think of traditional traders maybe they're like physicists these days, or electrical engineer or mathematicians or something who becomes commodity traders ha um. I mean, like language skills might be useful if we're talking about all these like international I think that language skills you have to have a sense of adventure and you know, be willing to
live in the middle of nowhere. Trouble two hundred and fifty days a year, take quite a lot of personal risk. Um. There is as a commoity trading house called or Land which is based in Singapore and the CEO is a gentleman called Sandy Burge. Mr Burgess started in Nigeria, so he he still sends all the down traders upcountry in the middle of nowhere for a couple of years. So they learned the business that the kind of the hard way. I mean, you need to be prepared to go to
leave in somewhere quite distant. This is not if all what you want to do is be sitting in Mayfair in London or or you know, Walla Street here in New York. That's not the business for you. You have to be you have to be willing to go too. King Shasha in the Democratic Republic of Congo and know everyone there, know the president, know your ways to get
the copper and cobal out of the country. I think a lot of people like that, Like just you're describing that, it's like I've bet a bunch of people here that It's like I want that. Even in journalism, when I started out in financial journalism, I wanted to report on commodities and it didn't happen for me, so I had to make it happen through our thoughts at various times. Well, I mean, you know, you you are a commotive reporter.
You en visiting a lot of countries that they are not the traditional you know, holiday destination, and it's kind of my dad used to say, So you look at the least of countries and the Foreign Office recommend not to travel and you basically your favorite place that you've visited that no one else has that hardly anyone else has been. Look, I have. I have had a great time every time I have been in Iraq. It's it's one of those my favorite places back back. It's a
great place. I have favorite restaurants in back back and things like that. I mean, you get to travel to a lot to the to the Middle least and and Iraq and Iran are a kind of favorite places. But also you get you need to get used to from time to time to get deported for a few countries. Well, obvious, that was fantastic. I think I said at the beginning, you're one of the most requested guests, and I can I can see why. So I appreciate you so much for coming in Lama, thank you for having me man.
That was great. Thanks so much. Having God, we could make it happen. So Joe, obviously, that was a really enjoyable conversation. One of the things that struck me is just how untransparent this market seems to be. And you know, happiest point about how we still don't have a trade repository for physical commodities is just like in in this day and age, On the one hand, everything in the world seems to be tracked except actual physical vital goods, which is insane. But on the other hand, I cannot
see anyone in the current environment actually agreeing to do it. Yeah, when you actually that's what I thought too, And when you actually think about what it would take, it's like, how would you even do that? Like how would you regulate and create a central repository for something in which you can literally swap the oil from one boat to another boat and you could mix the oil so that you know, he was talking about the lot ving blend of Okay, you have a barrel of oil that's forty
nine Russian and fifty point zero one something else. Like the just the complexity of that, like, how would you even like start to conceptualize tracking every trade when there are so many ways to just do a unilateral one to one hand off of a good you could see
why it's so tough. Absolutely. And then the other thing that was striking to me, I don't know a lot of it felt like confirmation of this idea that going forward, getting commodities is just going to cost more money, Like you're it's going to be more difficult to get financing. There's going to be extra volatility, it seems like, which means you have to pay additional variation margin. The exchanges have already upped the initial margin. So the whole thing.
And I haven't even mentioned shipping, shipping cross through the roof, it just an insurance. It just feels like everything is coming together to make it more expensive, expensive and complicated, and and and I and I you know, and so this idea of like localized shortages where even if you ostensibly have the money to pay for the price of a commodity that appears on the screen, can you actually
get it delivered to in a predictable man. It feels like that's going to get tougher, or get to stay tough, right. It's the sort of disconnect between the financial and the physical, which we've been talking about. And that's also why what was happening with the New York diesel contract that was describing is so interesting as well, because that's the kind of localized stress that could happen or you know the other.
And he made this point, which is that everybody remembers when w T I oil went down into negative forty, but there were other regional benchmarks like we don't we don't talk about them, but if you look on the terminal, there's like dozens of North American oil prices depending on what pipelines they have access to, in the cost to get them out, and some of those were already negative.
And it's like, well, who's who's who has some empty space just at the right moment to charge someone for getting their oil off a boat or out of a pipeline. Incredibly incredibly complicated during volus. Yeah, like an industry that was already insanely granular, it's just getting even more granular and specific. It feels like I thought that was interesting too. It's like the oil traders, like, what am I going
to do with that? Chinese? Un Like, Okay, even if you don't Even if you don't really love the idea of heaving your entire business being denominated in dollars, other currencies may not be that appealing. It's nice to have a fungible global reserve currency. There are some benefits. Al Right, shall we leave it there, Let's leave it there. Okay. This has been another episode of the All Thoughts podcast. I'm Tracy Alloway. You can follow me on Twitter at
Tracy Alloway and I'm Joe Wisn't All. You can follow me on Twitter at the Stalwart. Follow our guest Javier Bloss He's at Javier Blast, and also check out the book he co authored with Jack Bargie, The World For Sale. Follow our producer Carmen Rodriguez at Carmen Arman. Follow the Bloomberg head of podcast, Francesco Leaving at Francesco Today, and check out all of our podcasts at Bloomberg under the handle at podcasts. Thanks for listening, Tea Ye