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       THREE The Master Trader

      Andy Hall was cheered by the reports from the Gulf of Mexico. Bad news from oilfields usually satisfied the tall, unshaven trader. Moving from his barren cubicle into the adjoining trading area, he gazed at one of the 15 screens and calculated how much he was up that day. As usual, at 5 p.m. he headed off to practise callisthenics for an hour with a ballet teacher in Norwalk, near the Connecticut coast. The rising price of oil in spring 2005 seemed to confirm Hall’s bet that the world was running out of crude. ‘The trend is your friend,’ he frequently told his staff. ‘Ignore the trade noise. Play it long, because I’ve got ample time to pay.’ Anyone, Hall knew, could buy oil. The skill was to sell at a profit. Ever since John Browne had predicted in November 2004 that oil prices would stick at around $30 a barrel – although they had already reached $50 – and had gone unchallenged by oil’s aristocrats including Lee Raymond, Hall had believed that his massive gamble on soaring oil prices was certain to pay off. Although he was coy about the exact amount, his first stakes were quantified at around $1 billion as oil hovered at about $30, the price, Hall believed, was heading towards $100 and possibly higher.

      Lauded for being ‘clever as sin, outgunning everyone in the brains department’, and referred to as ‘God’ by rival traders, Hall immunised himself from daily market sentiment because he was not part of the herd. An Oxford graduate and art connoisseur, soft-spoken and deceptively shy, he abided by the old adage, ‘Oil traders work in a whorehouse, so don’t try to be an angel in this business.’ Originally trained by BP, he understood the mentality of Big Oil’s chiefs, and believed that Lee Raymond, John Browne and the rest were in denial. Some of the smaller oil producers, like the Austrian and Italian national oil companies, had even bought hedges pricing oil at $45 to $55 a barrel, which would lead to huge losses as prices rose. In March 2005, two years after Hall had made his first bet, and oil was at $55 a barrel, Arjun Murti, a Goldman Sachs analyst, predicted that the price would reach $105 ‘in a few years’. This was greeted by widespread scepticism, and Murti was criticised for serving the bank’s interests. Unusually, Henry ‘Hank’ Paulson, Goldman Sachs’s chief executive, was required to defend him. By late spring 2008, as the oil price rose beyond $105, Hall had personally pocketed over $200 million in bonuses, and expected to make even more. Murti was being hailed in some quarters as brilliant.

      Hall had traded oil for nearly 30 years. Since he had arrived in Manhattan in 1980, disenchanted by England’s claustrophobic social system, he had metamorphosed into an aggressive trader. ‘I’m basically interested in one thing – business,’ he told his trusted circle. ‘I come in every day to make money.’ Whatever the oil price’s wild fluctuations, and regardless of whether he was earning or losing millions of dollars, Hall coolly controlled his emotions: ‘This is not a zero-sum game because we’ve been doing it for too long to get excited. Emotionally the ups and downs get evened out.’ Over the years Hall had attracted both praise and loathing for perfecting the ‘squeeze’ – causing the oil market to change, and forcing other traders to buy from him at a premium. ‘We’re not here to help others,’ he said. In the old days when trading was carried out on the floor of the stock exchange, and dealers had occasionally yelled, ‘Am I fucking long or fucking short?’, Hall had smiled about the screaming losers who always heaped blame on everyone except themselves.

      Experience honed Hall’s pedigree. Unlike his younger rivals, he had started his career in BP’s supply department in the midst of the first oil crisis in 1973. Until then, BP and the other oil majors – Exxon, Mobil, Shell, Chevron, Gulf and Texaco, together known as the Seven Sisters – who controlled 85 per cent of the world’s oil reserves, had perfected a cosy arrangement to fix the world price. Their representatives met regularly to discuss their costs and calculate their required profits. Blessed by a near-monopoly and a surplus of oil, the seven chairmen would travel as statesmen to the Middle East and inform the Arab producers the price the cartel would pay for their oil the following year, usually around $25.25 per ton, or $3.60 a barrel. The chairmen acknowledged each other’s ‘turf’ and, acting like governments, used their intelligence agencies and military supremacy to impose one-sided agreements. The Arab producers meekly signed fixed-price contracts, Exxon formally announced the price, and the crude continued to flow from the Middle East to refineries in Europe and America, although the USA could rely on its own plentiful supplies, supplemented by additional oil from Venezuela and Mexico. Before 1939, Europe imported 90 per cent of its oil from America, but after 1945 it switched to Middle Eastern oil, which cost 20 cents a barrel to produce compared to 90 cents for oil from Texas. Even American oil companies increased their imports. To placate small US producers, who were protesting about competition from Arab oil, in 1956 President Eisenhower limited imports, thus increasing the glut in the Middle East. Four years later, without consultation, Exxon and the other Sisters unilaterally cut prices for oil producers. Resentful of the cartel, Saudi Arabia and four other leading Middle Eastern oil producers met in Baghdad in 1960 to form OPEC, to challenge the Seven Sisters’ ownership of their reserves.

      The new, unfocused group confronting the Western cartel remained ineffectual until the Six-Day War in 1967. Resentment against America and Britain sparked the declaration by Saudi Arabia of an oil embargo, but this show of bravado descended into farce when the Seven Sisters efficiently organised increased supplies from Iran and Venezuela, and Saudi Arabia’s income plummeted. The fiasco emboldened Muammar Gaddafi after his coup in Libya in 1969. ‘My country has survived 5,000 years without oil,’ he told Peter Walters, BP’s managing director, during their first tense meeting in 1970, ‘and unless we get more money we will stop supplies.’ A huge spurt in demand had prompted Exxon to forecast for the first time a world shortage of oil, and the fear of scarcity, plus America’s increase in imports to 28 per cent of its consumption, served the interests of OPEC. The Seven Sisters, OPEC knew, could only control prices so long as there was a surplus of oil. Armand Hammer, the chairman of Occidental, was the first to capitulate, reducing production and increasing his payments to Gaddafi in May 1970. Gaddafi’s success encouraged the Shah of Iran, and then the governments of Venezuela and Saudi Arabia, to demand price hikes. The oil companies feared losing their power to threaten the producers with a boycott if they rejected the prices they stipulated. Meeting in New York on 11 January 1971, 23 oil companies agreed, with the American government’s permission, to breach the anti-trust laws, and confront Libya and OPEC. Their unity was short-lived. During negotiations in Tehran and Tripoli in March 1971, the companies’ agreement disintegrated, and prices were increased beyond their limits. ‘We’ll never recover,’ Walters lamented. ‘There is no doubt that the buyer’s market for oil is over,’ admitted David Barran, Shell’s chairman. The Arabs, he noted, felt betrayed by the West. Sensing weakness, the Libyan and Iraqi governments began partial nationalisation of Western oil interests in 1972. The United States, said Gaddafi, deserved ‘a good hard slap on its cool and insolent face’. The Shah agreed. He nationalised 51 per cent of the oil majors’ Iranian interests and increased prices again. Peter Walters was meeting OPEC representatives in Vienna on 6 October 1973 when he heard that Egypt and Syria had invaded Israel during Yom Kippur, the most holy day in the Jewish calendar. The relationship between the OPEC producers and the Seven Sisters had changed unalterably. The public and the politicians blamed the oil companies for creating chaos and making excessive profits. In the vacuum of considered energy policies, Western governments were accused of perpetuating a ‘fool’s paradise’ by relying on arrogant oil executives to supply civilisation’s lifeblood. Eric Drake, BP’s chairman, admitted to Andy Hall and other graduates recruited during that epic year that oil would probably rise from $2.90 to the unprecedented price of $10 a barrel. Prices actually rose to $12, provoking the Seven Sisters’ disintegration