Oil Traders Unswayed by Bush’s Words

NEW YORK —  President Bush most likely had the frenetic traders of the New York Mercantile Exchange in mind Wednesday when he decried the “unwarranted speculation” that has driven oil prices ever higher since Iraq’s invasion of Kuwait.

But if Bush’s harsh words bothered anybody at the exchange, it was hardly evident Thursday morning as trading in the crowded oil futures pit began. The action started with an explosion of shouts and gestures at 9:45 a.m., and it was clear within minutes that oil prices were headed up--just where the President didn’t want them to go.

“People complain about speculation--even powerful people,” said Pavel Pojdl, a trader and analyst with 10 years at the exchange. “In the end, prices just go where they go.”

The traders and investors of this exchange have heard intermittent complaints about speculation since the NYMEX--the world’s largest oil futures market--was launched in 1983. But the complaints have done little to affect prices, or to alter the exchange’s growing importance as the centerpiece of the global system of pricing oil.

The futures contracts the traders swap are, in effect, promises to deliver specified amounts of oil at specified times between next month and 18 months from now. Those prices also have a direct bearing on what is charged for oil today in the current or “spot” market, which is what made the President so unhappy.

When the price of NYMEX’s benchmark West Texas crude reached $38.67 on Wednesday, Bush warned of those “who might take advantage of the crisis . . . to drive up the price of oil.” On Thursday, the market carried the price further, with November crude closing at $39.54 a barrel, after reaching an all-time high of $40.10.

These prices are based in part on the prices asked by producers, such as OPEC nations. But they also reflect such other factors as political developments, natural disasters and simply the hunches of investors.

If this process makes the President unhappy, the traders insist their buying and selling helps the economy in a variety of ways--for example, by allowing companies to buy future supplies of oil to reduce their risks from future price hikes. The market also helps to remove uncertainty about where prices are headed.

These days, some economists say the futures market’s presence may make this oil crisis a lot easier on the economy than the oil shocks of the 1970s.

The NYMEX consists of six small trading amphitheaters called “pits” where hundreds of men and women shout, gesticulate and wave slips of paper at each other in an effort to get the best prices for their contracts.

Above the pits on all sides are electronic displays showing the ever-changing prices; beside the pits are clerks who keep the floor traders and brokers in contact with customers and associates outside the exchange floor.

The floor traders aren’t just buying and selling for themselves, of course, but for customers of all kinds around the globe--oil companies, airlines, heating oil distributors and others. These companies buy and sell contracts to offset the risk that they will lose money from a sharp run-up in price. And, yes, other players in the market speculate for profit.

In interviews Thursday, a number of traders said they understood the President’s efforts to try to talk down the price of oil. They said they understood that “speculators” are often the target of politicians--as when President Richard M. Nixon damned currency speculators in the 1970s for the dollar’s gyrations.

But they didn’t have much patience with arguments that their buying and selling has hurt the country.

“I can understand that the President has to appear concerned how oil prices are affecting the country,” said Michael Wilner, a 35-year-old trader who heads his own firm. “But this kind of talk can go too far. It would be unfair to suggest greedy, unmitigated speculation is going to freeze a lot of people in Appalachia this year.”

Daniel Yergin, president of Cambridge Energy Research Associates, is among the economists who believe the presence of the futures markets will make this oil “shock” easier for the economy to handle. All those people buying and selling mean that prices get where they’re going much quicker, removing much uncertainty for energy users.

“What used to take six months now takes six hours,” Yergin said.

This price-setting process is highly volatile and for that reason can be unsettling. But it also helps bring buyers and sellers together and thus can help prevent shortages, according to Yergin.

William Hogan, director of the Energy and Environmental Policy Center at Harvard University’s John F. Kennedy School of Government, said the 1979 oil crisis brought only small reductions in oil supplies. But hoarding made the problem more severe.

Now, futures markets enable those who are worried about the risks of future price boosts to offset the risks with contracts, Hogan says. After the current crisis, if the country does not suffer gigantic disruptions, “we will conclude that the futures markets played a very important . . . role.”

In Bush’s view, the futures markets have been acting irrationally because they have been driving up prices at a time when there has been no change in world supply.

To NYMEX’s traders, however, the futures market have been reacting rationally to growing expectations that war in the Persian Gulf will interrupt supplies from the world’s largest oil-producing region.

“When I see the secretary of defense on TV and he says our blockade is really affecting the Iraqis, it’s rational for me to believe war’s more likely tomorrow than it was today,” trader Wilner says.

Some traders acknowledged the truth of one of the President’s suggestions--many have been making more money in the market since the Aug. 2 invasion.

“This has made it a good year for a lot of people,” said David Huemer, an independent floor trader with eight years at the exchange. “In fact, some people are changing their idea of what a good year is.”

One reason for the greater profitability is simply greater volatility--enabling a smart and nimble trader to reap larger returns by buying and selling futures contracts. Today, for example, the price of a barrel of crude fluctuated $2.40 from low to high, Huemer noted.

“Sometimes, prices move less in eight months,” he said.

But increased volatility means increased risk, and the ham-handed trader can easily lose his shirt.