Surprise, Surprise, Surprise: Guess Who Squeezed (and May be Squeezing) Brent

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Cue Gomer Pyle. It is now being reported that Glencore was not just bigfooting fuel oil in Singapore, but it was the firm stomping on Brent as well. It took delivery of 15 or more cargoes of the 37 available for June loading. There is also talk that the firm had accumulated a position in excess of the 37, and had already had contracts to sell Brent to refineries in Asia and Europe.

Thus all the elements of a squeeze were in place. A position bigger than deliverable supply, and a grave pre-dug to bury the corpse. It was able to liquidate some of its position (25 cargoes or so, or more than 15 million barrels) at an artificially high price (as indicated by the flip from contango to backwardation in the last couple of weeks of trading).

The July contract has also flipped into a backwardation, suggesting that the play is on again.

Two (and perhaps three, if Glencore is behind what’s going on now) squeezes in short order is pretty audacious, even for Glencore. Makes me wonder if this is part of the company’s resurrection plan. Trading needs to perform in order to offset the carnage in the mining operation. That means taking more risks. Including regulatory and legal risks. Though truth be told, both the UK and Singapore have been quite supine in responding to market power manipulations for years. For instance, with all the squeezes that have taken place on the LME over the years, what have UK regulators ever done? What have they ever done in Brent? Or in the softs, where some pretty big squeezes have taken place in cocoa and coffee in recent years?

Inspector Clouseau would be proud.

The bigger risks are economic and commercial. Squeezes can be very profitable, but they can go horribly wrong. Recall that Glencore’s qua Glencore’s genesis was Marc Rich’s failed attempt to squeeze the LME zinc market in 1992. Marc Rich & Co. lost around $200 million, which resulted in a coup led by Ivan Glasenbeg that ousted Rich, and the renaming of the company as Glencore.

But desperate times sometimes call for desperate measures. Yasuo Hamanaka comes to mind. When his massive rogue trading operation was teetering on the precipice, needing a big profit in a hurry he carried out a massive corner of LME copper in December 1995. He wrote his co-conspirator “this is our last arms” (quoting from memory). In other words, do or die.

I’m not saying that Glencore’s problems are at all similar to Hamanaka’s, but the company does have big issues, and a need to make a lot of money in a hurry. The kind of issues that can lead big risk takers to take bigger risks, and push the envelope. The envelopes in Brent and Singapore fuel oil are pretty expansive, but Glencore seems to be pushing them nonetheless. Not part of the official resurrection plan, but most likely part of it nonetheless.

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