By Kevin G. DeMarrais –
NEW YORK – At 9:59:59 a.m., all is calm, except for cigarette smokers rushing in from what could be their last break until midafternoon.
A second later, as the digital clock reaches 10:00:00, the floor of the New York Mercantile Exchange explodes into organized chaos, with traders in a rainbow of jackets beginning a daily ritual that will determine how much it costs to fill your gas tank.
Shoulder to shoulder, the traders shout and jump, pump and wave, buying and selling crude oil and its derivatives from the floor of the Nymex’s state-of-the-art building on the banks of the Hudson River, next to the empty hole that was the World Trade Center.
“The amazing thing is that it works,” said Anu Ahluwalia, an exchange spokeswoman.
Surging crude oil prices have transformed the 133-year-old Merc from a second-string trading floor to an economic hot spot, sparking the kind of interest once reserved for the stately New York Stock Exchange a few blocks away.
Today, the familiar late-afternoon query, “How’d the market do?” is often followed by, “Where’d oil end up?”
Consumers may not know what a barrel is – it’s 42 gallons of crude oil – but they do know that when it hit $66, as it did last week, they’re going to feel it in the wallet. That’s why the price has become as familiar in financial reports as the Dow Jones industrial average.
But some critics are concerned that the dynamics and crowd mentality of the exchange is responsible for pushing prices higher than the realities of supply and demand would dictate.
“There’s an aura of ridiculousness to it,” said Tom Kloza, chief oil analyst for the Oil Price Information Service, a Lakewood company that tracks market trends. “Markets are mostly about momentum,” and that sometimes carries more weight than fundamentals.
Also, a tremendous amount of new money is coming into oil from hedge funds and pension funds, “mostly on the long side,” and that pushes prices higher, Kloza said.
Steadily growing worldwide demand, unrest in the Persian Gulf, political unrest in several oil-producing nations and investors looking for alternatives to stocks have all contributed to the oil price spike.
As a result, crude, which was selling around $30 a barrel two summers ago, closed at an all-time high of $66.86 on Friday, and analysts say it could go to $70 or more soon.
That has translated to a record average price in North Jersey of $2.37 a gallon for unleaded regular gas – a 66 percent increase from the August 2003 average price of $1.43 in The Record’s Marketbasket Survey.
The price of crude, as well as gasoline, home heating oil and several other commodities, is determined each business day at the Merc, over 4½ frantic hours of open, vocal trading.
The exchange’s 816 traders – all but two of them men – buy and sell contracts for future deliveries of the various commodities; the price quoted these days is for oil scheduled for delivery in September.
But, as drivers saw last week, a big increase in the barrel price translates almost immediately to a rise of several cents a gallon in pump prices. And consumers who heat their homes with oil could face similar increases this winter.
“In reality, it is the price set on the floor of the Merc every day that sets the price for every nook and cranny in the country,” Kloza said.
The price is determined by “open outcry” auctions among traders acting on behalf of their customers, the companies they represent, or themselves.
The exchange is a natural successor to the Middle Eastern bazaar, where merchants come to sell their wares to the highest bidder.
Hedgers – those looking to stabilize prices – might expect to take delivery eventually. But speculators are seeking to make money by buying low and selling high and have no intention of ever taking ownership of the oil.
Combined, the two types of traders are creating a liquid market for the commodity based on supply and demand, colored by worries, fears and world events.
Futures contracts are “the most liquid paper contract that you can buy or sell,” said Tom Knight, director of trading for Truman Arnold Cos. in Texarkana, Texas, a wholesale supplier and storage company.
In the process, the Merc is setting the base-line price for energy as a whole, Knight said. That’s why Knight and others in the “wet barrel” market – those who buy the actual commodity for their own use or for customers – watch the Merc screen closely.
“We’re the Wall Street nobody knows about,” said Eric Bolling, an independent trader from Livingston who is a member of the exchange’s board of directors. “Standing in the pit, it’s you against them.”
From the outside, the exchange’s glass and steel headquarters in the World Financial Center, across from Jersey City’s financial district, is undistinguishable from other modern buildings in lower Manhattan.
But inside, it is bedlam every day, a combination of high-tech electronics (which carry news of trades instantly around the world) and low-tech mechanics (with orders written by hand and manually entered into a computer).
On one recent morning, a dark-haired 30-something in a blue smock jumped up and down at one side of the crowded crude oil trading ring, both arms extended over his head, wiggling his fingers.
Across the pit, a bald, middle-aged man in a gray jacket waves his arms in gestures that look more like a racetrack regular encouraging his horse to the finish line than a participant in a critical financial market.
Raspy voices, throat polyps, and hearing loss are common, Bolling said. “You have to be in shape.”
The ultimate goal for most traders is to go out on their own, but they often start working for a big company, working the phones while getting “a feel for what drives the market,” Bolling said.
They also need “somewhat of a gambler’s mentality, willing to take a calculated risk,” said Mike Lang, 43, an independent trader from Northport, N.Y.
Traders can “absolutely” make a good living, he said. “But you can also lose a lot of money.”
To an outsider, the hand signals seemed like strange codes, but they are apparently understandable to other traders buying and selling barrels of oil.
When a deal is made, the order is written on a slip of paper, which is tossed into the center of the ring – much the way children once flipped baseball cards – where clerks in bright yellow jackets collect and process it.
The ring for crude oil trading is the busiest of seven on the Merc floor, although similar activities are taking place at large nearby rings for natural gas, heating oil, and unleaded gas; a small pit for platinum, palladium and propane; and two half circles for options.
Trading is physically demanding, said Bolling, 43, who was drafted out of Rollins College by the Pittsburgh Pirates in 1984, but turned to commodities after his baseball career was cut short by a shoulder injury.
Once, most of the traders were young, he said. “If you were 25, you were probably done.”
But with trading seats selling for $2.5 million – up from around $100,000 only a few years ago – they are out of reach for most people starting out in the business.
“It’s high stress,” he said. “You need a stomach for risk.”
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By the numbers
Why you’re paying nearly $2.40 a gallon for gasoline
$1.57 Cost per gallon at $66 for a barrel of oil (42 gallons per barrel)
$.34 Refiner’s margin (typical)
$.04 Shipping (typical)
$.33 Federal and New Jersey taxes
$2.28 Cost to dealer, not including labor, overhead, charges for credit and bank cards
$2.37 Cost to you (North Jersey average)
Source: Oil Price Information Service
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New York Mercantile Exchange
Founded: In May 1872 as the Butter and Cheese Exchange by 62 Manhattan daily merchants.
Merger: New York Mercantile Exchange and the Commodity Exchange merged on Aug. 3, 1994, to become the world’s largest physical commodity futures exchange.
Trading: Nymex division – crude oil, heating oil, gasoline, natural gas, propane, coal, electricity, platinum, palladium; Comex division – gold, silver, copper, aluminum.
Traders: 816 (814 men, 2 women)
Seat price: $2.5 million
Trading hours: Monday to Friday, 10 a.m. to 2:30 p.m.
Survivor: Only building to open in the World Financial Center a week after the 9/11 attacks.
Contact: E-mail: email@example.com
Source: North Jersey Media Group
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