Pressures in the pit

Here’s what setting world oil prices looks like on the New York Mercantile Exchange, the world’s largest energy marketplace: a flurry of small white cards spinning through space like off-kilter paper airplanes.
The cards, thrown by traders in the circular “pit,” or small amphitheater, where futures contracts for light, sweet crude oil are traded, are aimed at men in blue-gray jackets sitting within a net in the center of the circle.


They contain the details of the traders’ agreements to buy or sell the contracts – the main benchmark for determining the prices consumers the world over will pay for oil and oil-related products in coming months. Because those agreements result from traders’ estimates of how much oil will be available and how much will be needed, based on analyses of market fundamentals or technical factors such as price movements, the cards are more sophisticated than they look.
“You’re seeing the end result of supply and demand,” said Raymond Carbone, president of a brokerage firm trading options on energy contracts at the exchange. “That’s what’s happening down here. We’re seeing supply and demand realized.”
Crude oil accounts for more than 50 percent of the price of gasoline.
The process of converting the traders’ calculations into cold hard cash begins when the men in the middle of the circle – sometimes others if a trader’s aim was off – retrieve the cards and time-stamp them. Using hand-held computers, other men in yellow jackets immediately transmit the information to flashing signboards on the walls, and news wires convey it to the rest of the world. The closer the expiration date of the futures contract, the more it is traded, and the more closely it resembles the cash market for oil.
The oil futures pit, a shouting, waving, circle of men wearing distinctively colored or patterned jackets, is the loudest area on the enormous trading floor. But the exchange contains similar spaces for trading futures on commodities such as gasoline, natural gas, electricity and a variety of metals, as well as options on those contracts.
Futures are an agreement to sell or buy a specific amount of a commodity at a particular price on a particular date, and options convey the right, but not the obligation, to do the same thing. They don’t usually result in physical delivery of the product, but instead are eventually closed out for profit or loss.
Both instruments are a way to hedge against risk from sudden price movements, or to profit from them. Carbone, a Point Lookout resident who wears a black jacket with green trim, conducts trades for customers and also risks his own capital in hopes of making a profit.
Carbone said President George W. Bush’s strategy to curb soaring gas prices, announced Tuesday, may increase the amount of available gasoline “in the short term,” partly by easing environmental rules that encourage using ethanol, which is in short supply, for so-called reformulated gasoline. But other factors, such as the U.S. relationship with Iran, also will weigh heavily on the oil market, Carbone said.
Eric Bolling, an independent energy trader, said the president’s ideas will have “no effect” because demand for oil is extremely strong and “no one has really changed their driving habits and cooling habits.”
Bolling said that especially when consumers are worried by energy prices, the exchange serves a public purpose by bringing many buyers and sellers together in a transparent, or open, process. “It allows everyone to see the prices for everything, rather than the old way of doing things, [which was] big oil companies trading back and forth with each other,” Bolling said.
The exchange, which moved to its home in the World Financial Center in 1997, occupies a spot beside the Hudson River with a view of the Statue of Liberty and Ellis Island. But life inside can be tough. Traders stand jammed tightly together on the small steps of the pits, and sometimes lose their footing. Voices give out under the strain of incessant shouting.
Anu Ahluwalia, a spokeswoman for the exchange, said the two most common ailments among traders are “throat polyps and fallen arches.” The exchange sponsors an annual training class aimed at helping traders preserve their voices, with last year’s class led by a person who trained singers on Broadway and at the opera.
The Merc dates back to 1872, when a group of Manhattan dairy merchants established the Butter and Cheese Exchange of New York to improve the efficiency of what was then a chaotic marketplace. Eggs were added, as well as other goods such as fruits and poultry, and in 1882 the organization’s name changed to its current one.
In 1994, the Mercantile Exchange merged with the Commodity Exchange, which traded goods such as metals, becoming the world’s largest physical commodity futures exchange.
By Susan Harrigan – Newsday

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