The Chaebol Who Flies From Space - Chapter 90



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The Tycoon Who Flies Into Space Episode 90

Episode 90 Iraq War (3)

The investment funds that entered the crude oil futures market were invested in long positions for a month. It was an investment that started generating profits when the oil price rose above $33.5.

Even in the large crude oil futures market, it took time to create an investment position worth $140 billion.

It was incredibly difficult to secure trading volume while preventing prices from rising as quickly as possible.

The good news is that most trading in the crude oil futures market is computerized.

He succeeded in building leveraged investment positions in the crude oil futures market, which spanned New York, Chicago, Singapore, and London.

The structure was such that if the oil price rose above $38.5, a buy/sell order would be automatically accepted and liquidated.

I checked the movement of the oil market in real time as it was being spewed out by the terminal. The price of Brent crude oil hit $34.2 on the London Metal Exchange (LME). An incredibly strong selling wall appeared between $34.3 and $34.5, suppressing further increases.

Below $34.2, strong buying forces built a buying wall, making it difficult for oil prices to move.

[It seems like there will be fierce selling at the current price for the time being.]

“Why?”

[Brent crude oil’s last high was $34.50. After going through a process of selling, the price will rise further.]

There were two benchmarks used globally for crude oil futures trading: Brent crude, which was mainly used on exchanges in the UK, and West Texas Intermediate (WTI), which was produced in the US.

The Middle East, which has a large crude oil production, has mostly long-term contracts, so futures trading has not been active.

So, the indices used in the crude oil futures market are Brent crude and WTI.

WTI is aggregated on the New York Mercantile Exchange, and Brent is on the CME. Brent is based on the price of crude oil produced from four oil fields in the North Sea region of the UK and Norway. The oil fields on which the index is based are Brent, Forties, Oseberg, and Ekofisk, collectively referred to as BFOE.

“The options trading volume is lower than expected?”

[Because everyone thinks that oil prices will go up in the future, there is a small amount of call options being issued. The price has also gone up a lot. Everyone is watching to see how high it will go.]

“So, will it be possible to switch positions quickly?”

[Relatively, foot sales are actively coming out.]

“The crude oil futures market is smaller than I thought.”

[Usually, WTI futures trade on average at around 1.5 million barrels. With the war with Iraq approaching, trading is increasing significantly more than usual. That’s why quick position changes are possible. After all, Brent crude futures trading is relatively small.]

The Brent crude futures prices spewed out by Reuters and Bloomberg terminals were as if they were nailed in place and barely moved.

“What about Goldman’s investment position?”

[Surprisingly, the amount of crude oil futures invested by the headquarters is not that much. The East Asia headquarters has built a strong long position.]

“How much does it cost?”

[This is an aggressive long position of over $30 billion. We are buying put options as insurance, but if oil prices fall as expected, the loss will be huge.]

“Where else?”

[The European headquarters is not investing in crude oil futures and is taking a wait-and-see approach. If they do invest, they will likely use a stable long straddle strategy.]

A long straddle strategy can generate profits even if oil futures plunge contrary to expectations.

“I guess I spoke well enough for President Song to understand.”

[If you come at me with such an aggressive attitude even though I have provided you with information that is easy to understand, then you are stupid.]

President Song Han-young prepared a report that specifically predicted the scenario of the Iraq War and delivered it to Lloyd’s European headquarters. The two worked together at Goldman, so it was easy to talk.

“I heard that you are quite competent, so you must have quickly realized how credible the report is.”

[This isn’t bad either. There will be a financial crisis within the next ten years anyway. Then, we can just blow up Goldman.]

“A financial crisis is happening?”

[There is a 10-year cycle theory. It says that a financial crisis occurs every 10 years. Although it is not accurate, it is true that economic crises occur regularly. The amount of speculative funds flowing out of the United States has increased tremendously. If the dollar is used as a reserve currency, the huge current account deficit will continue in the future. The deficit will continue to grow and never decrease. The current account deficit problem is an unsolvable problem unless the US government gives up the dollar as the reserve currency. As long as the US government does not give up the dollar as the reserve currency, the economy will inflate like a balloon. An inflated balloon will eventually burst.]

The Glass-Steagall Act made financial capital completely subordinate to industrial capital, but the position changed after the Glass-Steagall Act was nullified in the 1990s.

Even before President Nixon announced the end of the dollar’s convertibility into gold, the United States had been suffering from twin deficits.

The size of the twin deficits, in which the trade balance and fiscal balance are in deficit, has been growing larger year after year.

There was talk that the scale of dollar outflow overseas was increasing.

As supply increases, prices should fall, but on the contrary, the dollar, which plays the role of a key currency, showed stable movements. Its competitors, the Japanese yen, the British pound, and the German mark, only played a supporting role and failed to shake the dollar’s position.

The dollar, which had played such a unique role as a reserve currency, had a powerful competitor in the form of the euro. Behind the Iraq War, there was also a hidden intention to strengthen the shaky position of the dollar.

The intention was to protect the petrodollar, which was used only in dollar-based crude oil transactions after the declaration of abandoning the gold standard.

Hussein, who had lost his nerve in the eyes of the United States, tried to accept the emerging currency, the euro, as payment for his oil instead of the US dollar, with which he was at odds.

If the Iraqi Hussein regime is left alone, the petrodollar system, the greatest force supporting the dollar, will collapse.

If that happened, the central axis of military and economic power that supported America’s hegemony would collapse.

The Iraq war was a stark example for Middle Eastern countries that were moving away from the petro-dollar.

The United States maintained its collapsing economic power by printing huge amounts of dollars and draining them abroad. The drained dollars were then returned to the United States through the purchase of long-term government bonds, creating a virtuous cycle.

By trying to touch this, Hussein was effectively touching the American government’s sore spot.

“If an economic crisis comes like you said, we can just take care of Goldman then.”

When an economic crisis hits, everything becomes a mess.

If there was a company that needed to be taken care of, it was possible to take advantage of that opportunity to either destroy it or become the owner.

Nowadays, no matter how much money you have, it is impossible to become a major shareholder of a bank.

When we feel fear that our country may be ruined if we make a mistake, the difficult regulations become ineffective in an instant.

The indiscriminate attacks on Iraq began 48 hours after President Bush issued a limited declaration of war demanding that President Hussein leave Iraq within 48 hours.

Cruise missiles and air force strikes came first, followed by ground forces from Kuwait heading toward Baghdad.

After the Columbia accident, a contract was hastily signed with the European Space Agency to launch an additional century’s worth of spare satellites into orbit.

Two of them closely monitored areas of southern Iraq.

As soon as the war broke out, we could see very clearly how the situation was unfolding.

“You’re being pushed back so easily? You look like a total scarecrow.”

The Iraqi army was in worse shape than expected. The Iraqi army, once proud of being the strongest in the Middle East, had completely disappeared without a trace.

[During the first Iraq War, most of the strategic weapons were destroyed. Even if they wanted to restore them, they couldn’t do it properly because they didn’t have the money. The biggest source of income, crude oil sales, were blocked. Because of the economic crisis, the Iraqi army has less than 300,000 troops. The Republican Guard’s armament is also poor.]

Of the 250,000 US troops deployed, less than 30,000 were actually engaged in combat.

As soon as the war began, Basra fell, and the Iraqi forces blocking the American advance were virtually annihilated due to the overwhelming difference in air power.

“But is it really so easy to fall like this? Even Basra, which was supposed to be a tough battle, is on the verge of falling without much damage, even though there is resistance.”

In Basra, the most important strategic point in southern Iraq, it was difficult to find any resistance from Iraqi troops. Most of the troops stationed in the city were completely destroyed by the cruise missiles that arrived with the start of the war.

This was something that even the attacking US forces had not expected.

The American and British forces, who had captured Umm Kar, the bridgehead leading to Basra, immediately advanced into Basra.

It seemed possible to capture Basra without major casualties even through street fighting.

The changing situation in Iraq was clearly visible on the satellite screen.

[Master, the crude oil buying positions are being liquidated. The liquidated quantity is being poured into the selling positions.]

“already?”

[As soon as the war broke out, a strong buying force began to surge. Buyers who had been watching the situation began betting that oil prices would rise.]

It takes a heavy rain to get the whale out of the pond. Even though trading in the crude oil futures market has been active, it has been difficult to close the huge long positions that have been leveraged.

To close out a month’s worth of long positions, you had to act early, before the heavy rain came.

Positions on the most active exchanges, the Chicago Board of Trade (CBOT) and the New York Mercantile Exchange (NYMEX), changed at a rapid pace.

West Texas Intermediate crude oil futures hit a strong resistance level at $38, but then quickly surged to $39 as buyers joined in.

Oil futures, which had been stagnant for a while, surged upwards amid huge trading volume.

“Okay.”

I was amazed to see the price of oil futures temporarily soar to $39.70.

[All long positions have been liquidated. From now on, the position in the crude oil futures market is a short position. We are purchasing call options as insurance.]

“Whew! Can you make it over 40 dollars?”

[It’s going to be tough. Look at the explosive growth in trading volume. This is the peak. If they get news that they’ve captured the oil fields near Basra without much damage, the price of oil will plummet.]

Monitors showed troops guarding Iraq’s southern oil fields retreating hurriedly without destroying the oil fields.

Oil prices plummet when news spreads that Iraq’s southern oil fields have been taken over without major damage.

“How long does it take for information to become known?”

[It will only take an hour for the information to be fully released to the market. Several satellites are already monitoring Iraqi skies.]

The forces involved in speculation were all watching the unfolding situation with keen attention.

Ariel’s prediction that the information would spread within an hour since speculators had put straws here and there was only half correct.

After 30 minutes, trading volume exploded again.

Crude oil futures sell-offs poured out like a waterfall here and there.

As the supply poured in, the price of oil, which had been hitting $40 in succession, also fell quickly. $39, $38, $37… … As the oil futures price fell, buying power poured in again, but it was not enough to handle the selling volume.

It seemed as if the oil futures price, which had fallen to $34, was stabilizing, but as time passed, selling orders poured in again.

The news of the war in Iraq was beginning to spread to the people.

A hastily published article from Reuters blinked on the monitor hanging on the wall.

– Occupy southern Iraqi oil fields. No oil fields destroyed. Fall of Basra imminent.