February 1st, 1998.
While the Queen of Wall Street lazily rested in the Land of the Morning Calm, the global financial market continued to spin with ferocity.
Ordinarily, it might have been gripped by a crushing recession... but the children Yoo Ha-yeon had birthed and raised since her youth were proving that America’s financial system was still functioning just fine.
Though her methods were somewhat extreme, America had embraced it all—as expected of the land of liberty.
–Crunch.
Meanwhile, financiers trudging through snow on their way to work gathered in small clusters.
“Brr, it’s cold.”
“Pfft, still a rookie, huh? You’d better get used to it.”
Icicles frozen solid dangled from car bumpers in the cutting wind, but the people here went about their commute unfazed.
Reading the charts was more important.
This wasn’t Wall Street.
It was the Chicago Mercantile Exchange (CME), located in Illinois.
–Thud.
A trader brushed snow off his coat and grumbled.
“Ugh, I can finally breathe. Chicago’s winters are way too cold. And then it’s scorching in summer. Why would anyone build a city here? If the world had even a few more places like Chicago, we’d be living in hell.”
“There are plenty of places like this if you look. Take Moscow for instance—famous for its cold. Beijing, too. Even Toronto in Canada. Oh, and apparently Seoul has a climate similar to Chicago.”
“Seoul?”
“You know, that youngest director from Alpha Fund. I heard she’s from Seoul.”
“Ohh, no wonder the world feels so damn ominous lately. Makes sense now—Alpha Fund's success came straight from hell.”
–Smirk.
With faint smiles on their lips, they grabbed light breakfasts and got to work.
This place, the holy land of derivatives and America’s largest derivatives exchange, hadn’t seen a moment of rest lately.
Chicago was always windy, but this time, it was the volume of work that stirred things up. The sudden influx of new traders at the CME was evidence of that.
[WTI to be Included in Bloomberg and S&P Indexes]
[Surge in WTI Futures Trading... Investors Unshaken by Falling Oil Prices]
[“Oil Prices Expected to Rise Soon” – Banks and Oil Giants Excited by Economic Recovery... Exxon Shares Up 12%]
Economic newspapers were reporting one piece of good news after another... and the biggest headline was that WTI, West Texas Intermediate crude oil, would be added to the indexes.
North Sea crude was still under discussion, but WTI alone was enough to throw gasoline on the already blazing excitement.
“By the way, did you hear? March futures aren’t looking so stable.”
“Ah... right. Has Saudi Arabia still not announced any production cuts?”
An uncomfortable mood drifted through the office.
The CME was the world’s top derivatives exchange, and while not everyone °• N 𝑜 v 𝑒 l i g h t •° here dealt in oil futures... they were all aware.
Oklahoma’s Cushing storage was already near capacity.
“If this keeps up, Texas companies might just—”
He stopped mid-sentence. It was too absurd to say aloud.
“—Why the hell would those people cut production? More likely, they’ll start a game of chicken.”
“Ugh, exactly. Once the collusion falls apart, there’s nothing left but a fight.”
In a capitalist society, collusion is typically illegal—but when international politics get involved, it’s a different story. The oil-producing countries of the Middle East had even formed an international organization just to control oil prices.
That was OPEC.
But if OPEC clashed with other oil-producing countries... then typical “competition” ensued. The kind of competition even the most hardcore free-market evangelists didn’t want.
The free market might be effective, but when oil enters the equation, everything shifts.
Subtle internal conflicts within OPEC could already send prices swinging. And when that logic—of tolerating small sacrifices for market efficiency—was applied globally, it could lead to catastrophe.
Capitalist societies had built golden towers on top of black oil—on plastic and asphalt. When oil nations went to war, the price was paid in corporate bankruptcies. It had already been proven during the Oil Shock decades earlier.
So “agreements”—moderate forms of collusion—were absolutely necessary in these situations...
But if that were happening, March futures wouldn’t look like this. For now, the direction of oil prices would be dictated by Saudi and Russian policy.
Because the U.S. wasn’t going to budge.
“Ha, oil prices are just way too low right now. I know contango is the norm, but this is over the top. It can’t last.”
“True. If the price gap between contracts is this wide... rollover costs will skyrocket.”
Contango—when futures prices are higher than spot prices, or drop as the contract nears expiration (the opposite is called backwardation).
In the oil futures market, it usually refers to the former... and right now, the WTI futures market was deep in contango.
[February Futures Close at $9 per Barrel... Prices Plummet After Russian Moratorium Fallout]
[Airplanes Grounded, Tankers Idle in Port... Demand and Supply Diverge]
Reading the headlines, one oil futures trader let out a sigh.
“Production cuts are certain, but... when?”
“Oh, you’ve got March contracts?”
“Still deciding. Should I sell now and move to April... or wait it out?”
Having taken a beating from the oil nations’ stubbornness, the trader grimaced.
‘If you’re going to cut production anyway, stop with the damn pride games and just do it early...’
Futures markets were different from stocks. There were dozens of reasons why rookies struggled with derivatives, but if there was one unique feature of futures—it was the “rollover.”
A rollover means selling near-expiry contracts and buying newer ones.
As mentioned earlier, most futures markets are in contango, so longer-term contracts are more expensive. That’s just how time value works.
Because of this, “holding till recovery” doesn’t work in futures. Time value deteriorates.
The reason traders still roll over—selling cheap and buying expensive—is simple: because the contract says so.
To put it bluntly, if you’ve signed a March contract, you are absolutely expected to close that contract in March.
That’s what futures are. If you say “I’m not showing up” after agreeing to March delivery, you’ll be slammed with criminal charges and your head cracked open.
–Click, click.
[Oil ETF Rollover Price Estimates Exceed Projections... Risk Management Required]
[WTI March Contracts...]
The sound of typing echoed. CME traders were the fastest in the game—pioneers—acutely attuned to the latest trends. They knew exactly what these contract signals meant.
–Tap.
Having liquidated half of his March contracts and completed a rollover into April, one oil trader frowned and sighed.
He’d taken a $3 per barrel loss. That might sound trivial, but it amounted to a 30% loss—a truly devastating hit.
Although, in the futures market, that kind of loss wasn’t uncommon.
Stretching his stiff arms, he grumbled at another sector just for the hell of it.
“Whew, oil ETFs must be getting annihilated. Way worse than me, I bet.”
“Exactly. We’re fine, but those guys must be pulling their hair out. Most investors don’t even know what rollover costs are.”
Oil ETFs usually contain futures, not physical oil. Unlike regular ETFs (which still hadn’t quite taken root yet), oil ETFs lose value just by existing.
In a backwardation phase, rollover costs go negative—but in extreme contango like now, rollover costs outweigh any potential gains...
Naturally, the ETF’s returns would sink straight to the bottom.
“...”
A chill of unease brushed one trader’s back.
‘What if production cuts don’t happen?’
Oil, while not as inelastic as agricultural goods, was still relatively inelastic. Once crude oil is extracted, it has to go somewhere. And in today’s world, where massive volumes are consumed daily, halting production entirely was impossible.
If that happened... the world’s oil storage might just overflow.
“No way.”
Shaking his head, the trader swallowed his worry with a sip of cold water.
Surely, nothing would happen... right?
Or so he thought.
***
Cushing, Oklahoma.
A supervisor at the endless sprawl of oil tanks let out a mutter.
“...We’re running out of space.”
It was expected. And yet, somehow, it wasn’t.
Of course—if there’s no space to store oil, you simply stop accepting deliveries. If there’s that much surplus, the producers would naturally cut output.
But... not now.
Russia, crushed by its economic collapse and moratorium, had staked everything on oil. Technically, it was the falling oil prices that had triggered the moratorium—but either way, recovering the economy meant they had to sell oil.
In the long run, it would’ve been more profitable to form a cartel and raise prices—but Russia’s oil companies were trapped in a classic prisoner’s dilemma. They had no room for long-term strategy.
It was like drinking seawater just to survive. And with the rescue ship still a distant blur on the horizon, their actions weren’t irrational. In the “free market,” untouched by a dictator’s hand, Russia’s oil companies kept ramping up output.
Production, production, production.
Russia, and the Middle Eastern producers competing with them, were pumping like mad. Even as the shale boom in Texas had American companies feasting on crude...
They kept going.