How Traders from England Made $660 Million When Oil Crashed

A market crash is an inevitable aspect of an economic cycle. Nevertheless, all crashes are temporary. Historical data has shown that the stock market progresses after a crash in a flourishing economy. For traders, some market crashes are like jackpots. They can mint money if they have strong convictions on which direction the market is headed.

In this article, we shall discuss the story of a group of traders from Essex, London, who minted $660 million (~Rs 4,950 crore) when the price of oil crashed on April 20, 2020. The fall was so huge that the futures price of crude oil ended up below zero! 

The Story

The global lockdowns imposed due to the Covid-19 pandemic caused a severe impact on the transportation and manufacturing industries. As we know, these industries consume high volumes of crude oil for their operations. Thus, a steep decline in demand was reported in the oil market during March-April 2020. However, the supply of oil was not halted even though there was a trade war between the oil-producing nations (OPEC), which led to barrels of unwanted oil.

Traders around the globe also speculated about this event, and a heavy decline in oil prices was assured. At New York Mercantile Exchange (NYMEX), Futures contracts are available on West Texas Intermediate (WTI) Crude Oil. In a futures contract, entities agree to buy or sell a particular commodity at a predetermined price at a specified time in the future. An increase in futures prices will always make the buyer profitable. On the other hand, a seller makes money when the prices fall. Futures contracts on WTI Crude Oil expire on the 25th of every month. Retail traders must exit from the contract before the expiry to avoid physical delivery.

The Rise of the Essex Traders- April 20, 2020

The day starts off at $18 a barrel. The news agencies or analysts had already set bearish sentiments for oil prices, but nothing below zero was not expected. At 2.08 pm, the prices fell sharply to reach -$40, shrinking by nearly -300%. Amidst the panic situation, there was a group of traders from London who profited from the fall by intensively selling futures contracts. 

At the beginning of the day, the Essex traders sold futures contracts to receive an amount worth the contract value. Later in the day, when the oil price fell to negative, they exited their sell positions by buying back the futures. Since the price is in negative territory, traders are credited with the money in buying the futures contracts rather than debit. Their plan involved simultaneously buying and selling vast quantities of the oil and gambling on its future price.

The group consists of 9 independent traders aged between 20 and 50. They are affiliated with Vega Capital London Ltd, a trading firm registered in Essex. The group collectively made $660 million on April 20th. Interestingly, the futures opened in the positive territory later that day.

Conclusion

The news ultimately spread across the globe, and there were speculations that this was possible market manipulation. Futures and Options is a zero-sum game, ie, if one profits from a trade, another would have lost for the same. Thus, many institutions such as Mish International Monetary made a significant loss on April 20. Many demanded a thorough investigation against Vega Capital to find any indication of forced price manipulation. 

The lawyers of Vega Capital commented that each of the members took trades according to the direction of the market by risking their own capital. Let us look forward to seeing how the situation unfolds. 

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