Chapter 54
Translator: Dreamscribe
Futures and options.
They are investments made either for hedging purposes or for speculation.
That is what derivatives are.
In particular, derivatives are also called a zero-sum game.
It means one of the two must lose.
Because of that, people usually don’t trade alone.
They join hands with someone, move together, formulate a strategy, and then enter the operation aiming for a specific position.
Many people have lost their entire fortune due to such forces, and who those forces are can never be known.
Also, in futures, the general public can receive up to 10x leverage, so while the potential returns can be huge, the losses can be just as devastating.
That’s why sometimes people mistakenly enter into futures trading and end up with billions of won in negative balances in their accounts, this is the reason.
The reason why people go to the Han River after investing is usually because of derivatives.
Due to this risk, it’s recommended to invest in ETFs rather than engaging directly in futures or options.
“In the case of crude oil futures, the daily global trading volume is currently in the hundreds of billions to, at most, trillions of won. But as you know, oil prices have only been falling continuously. So, the trading volume has also significantly decreased.”
In Korea, to trade futures, you must go through a securities firm first, and that firm then purchases the volume from the world’s largest futures exchange, CME.
Futures exchanges also operate actively 24 hours a day, but unlike FX, hundreds or thousands of trillions of won do not move in a single day.
Crude oil, in particular, is among the more actively traded items, but even then, the daily trading volume barely reaches several trillion won at most.
“Trying to handle 2 trillion won all at once would be impossible, right?”
“Yes. If you suddenly release 2 trillion won worth here all at once, CME will immediately suspend the trading.”
Because of that, if you suddenly try to purchase 2 trillion won worth of crude oil at once here, it can shock the market, and CME will judge it as a market-disrupting force and immediately halt the trade.
“So, the only way is to buy it in portions. With a few days’ gap. If we do it like this, it seems possible to digest the 2 trillion won volume somehow.”
When it comes to futures, what comes to mind first is leverage.
In the stock market, the general public can usually apply leverage up to 2x, and securities firms up to 3x. But it’s different in futures.
The general public can use leverage of more than 10x.
And securities firms?
Securities firms can also use leverage, but when the scale goes beyond hundreds of billions, it gets rejected.
Naturally, there is no one who would accept leverage on the scale of trillions.
Even with extremely high credit ratings, going into the trillion-won range far exceeds the limits of risk management.
If someone accepts trillion-won scale leverage and ends up with forced liquidation, the broker is also at high risk of bankruptcy.
“We are buying while keeping the price from breaking under a maximum of 40 dollars… but even though we are purchasing buy volumes, the price keeps falling. For example, just today, we bought at 38 dollars.”
“According to what I heard, there aren’t many buyers of crude oil right now, so ships fully loaded with oil are just drifting aimlessly.”
“If you try to store it, the storage fees alone are enormous per day.”
No matter where you dig, it’s just more oil.
Leaving oil in storage would incur significantly higher fees, so it’s better to just load it onto ships and let them drift.
“If it continues like this, everyone will just be doing futures trading, and there won’t be many places actually receiving the oil, so prices are expected to drop down into the 20-dollar range.”
“The Research Team also came back with analysis saying that unless a major war breaks out, it seems difficult to clear this much volume…”
“What about the possibility of production cuts from OPEC?”
OPEC.
An organization of oil-exporting countries, including Saudi Arabia.
“There’s been talk of production cuts for a while now. But even if they do implement cuts, the general consensus is that the impact won’t be very significant.”
“Besides, the member countries over there are all growling at each other and in chaos lately. Even if they want to discuss production cuts, most believe they’ll be too busy fighting to do it.”
The report I saw last time was, in short, merely a scenario prepared for a worst-case situation.
With this much oil in the market, it’s naturally better to cut production to slightly raise the price.
The problem was that the current OPEC member countries were in a state of war with each other, so the real question was whether they could even sit at the negotiating table.
Even if they somehow managed to hold negotiations, it was obvious there would be conflicts of opinion, and most predicted that any production cuts would be minimal at best.
It was precisely for these reasons that oil prices remained at such terrible levels.
‘I’m getting a bit nervous.’
Seeing how everyone else was reacting, I started to feel a little worried too.
If oil prices really hit rock bottom like this, we’d end up losing all the money we put into futures trading.
Furthermore, since the 2 trillion won is being injected in intervals over several days, the fact that we can’t liquidate the position all at once was a major problem.
“…….”
However, the production cut scenario report that I had by my side was still gleaming with promise.
“Please continue buying. Until the full 2 trillion won is used.”
***
Do you know how much oil Korea consumes on average in a single day?
About 2.5 million barrels.
But currently, around 13 million barrels of oil were coming into the port.
It was bunker fuel for container ships, but purely in terms of oil, it was an enormous amount that could easily last the entire country about five days.
This was the result of pooling all available company funds and pouring in about 600 billion won.
“They say that if we rent about five storage facilities, we can store it all. Currently, three of them are full, and the rest are en route to the other two.”
“…….”
Upon hearing the report, CEO Kim Doo-young felt a heavy sense of unease.
He had no idea what the hell he was doing right now.
According to Department Head Jung’s instructions, he was supposed to follow them without question, so he used all available funds to buy oil.
But no matter how he thought about it, he wasn’t sure if this was really the right move.
Thirteen million barrels.
A large container ship uses about 1,500 barrels of bunker fuel per day.
Just this alone would allow for 24 years of operation.
Even if there were ten large container ships, it would last 2.4 years.
It was truly an astronomical amount of oil.
Bunker fuel is frequently used in large container ships, but it’s cheaper than crude oil due to having more impurities and lower quality.
If the current crude oil price is 40 dollars, bunker fuel could be purchased at around 35 dollars.
“CEO-nim, I’m pretty sure we’re the only ones who would buy this much bunker fuel for 600 billion won.”
“Well, at least we won’t have to worry about oil… but the problem is that we don’t have any work. At this rate, the oil is just going to sit and rot in storage for a long time.”
“On top of that, the price keeps dropping in real time… It’s practically a creative way to lose money.”
“We have barely any funds left, and with no workload either, if this keeps up, it’ll be exactly like what happened with Hanjong before. The debt will just keep piling up.”
The employees were also starting to develop doubts.
No, actually, they had been full of doubt from the very beginning.
Even if it was an order from above, the fact that CEO Kim Doo-young followed such a decision without a single objection was seen as a problem too.
“…….”
And so, until the end of the workday, Kim Doo-young sat in his chair, blankly staring into space.
All he had done since joining the company was buy bunker fuel for several days straight.
Nothing else had been accomplished.
He had tried to secure contracts, but everything had been snatched away by China, leaving him with nothing but empty hands.
And in the meantime, he had spent all the money that could have kept the company afloat.
He had used up the 500 billion won raised from selling bonds, and even the remaining 100 billion won the company had left.
And in the end, all they had left was oil.
Why on earth had Jung Jin-ho given such an instruction…
“CEO-nim!!”
At that moment, the Vice President burst into the CEO’s Office with a crash.
“Wh-what’s going on? Barging in without knocking?”
“Ah, I’m sorry. But the situation is extremely urgent right now.”
“What on earth happened?”
“Just now, OPEC made an announcement. They’re cutting production in order to raise current crude oil prices!”
Hearing that, CEO Kim Doo-young wasn’t particularly shocked.
Production cuts? Well, OPEC had done that several times in the past.
Moreover, the announced production cut wasn’t small, it would only raise the price slightly.
“This time, it’s not on that level. OPEC has declared that their goal is to raise the current crude oil price to 60 dollars.”
“What?”
That was surprising.
No, extremely surprising.
“60 dollars!? What’s the current price?”
“It’s been fluctuating between 38 to 40 dollars. They’re basically saying they’ll raise it by almost 50%.”
“Wait. To get it up that high, how much are they planning to cut production?”
“Everyone is expecting a minimum of 30%.”
A minimum of 30%!
That was the largest production cut in history.
And the problem was, that was just the minimum.
“As a result, the moment the announcement was made, crude oil prices started skyrocketing. It’s already broken past 50 dollars.”
“……!”
In the shipping business, oil costs account for about 50 to 60% of total expenses.
The higher the crude oil price goes, the tougher the shipping industry becomes.
That’s why shipping rates fluctuate depending on oil prices, and customers always look for the cheapest options.
But until now, oil prices had been low.
That meant lower operating costs.
China had taken this a step further by offering even lower prices compared to others.
“But if prices rise this much……”
“Even China won’t be able to handle it. I think this could really hit 60 dollars.”
China had been deliberately lowering prices, even at a loss, to become the top player in the chicken game. But now that crude oil prices were surging?
This was a disaster they couldn’t survive.
“On the other hand, what we’re overflowing with right now is oil, right?”
CEO Kim Doo-young’s mind began working rapidly.
“Vice President. Call in all the executives right now. Even if they’ve already gone home, tell them to come in. This is the perfect moment. Open up all our lines and sweep up contracts with the lowest prices possible.”
“Ah, yes!”
It had been a long time since CEO Kim Doo-young felt his blood boil.
The rush of dopamine made his head buzz to the point where he couldn’t even feel it.
He had thought they were backed into a corner.
Who would’ve thought such a dramatic reversal would occur?
He couldn’t even have imagined that OPEC would make such a crazy decision.
No- no one could have seen this coming.
Except for one person: Jung Jin-ho.
‘Just what kind of person is he?’
How did that man foresee this situation?
Even if he did predict it, how many people in the world would go so far as to burn hundreds of billions of won to buy oil?
‘So this is why he emphasized that rule.’
Rule number one.
Trust Department Head Jung Jin-ho’s words completely.
Rule number two.
Remember rule number one.
‘I won’t doubt you again.’
CEO Kim Doo-young engraved these rules into his heart once more today.
***
“He was complaining that he wasn’t doing anything since becoming CEO, and now he’s the busiest man in the world.”
“CEO Kim Doo-young?”
“Yeah. Crude oil prices are going up like crazy. Even China, who was holding out to win the chicken game, seems to have finally thrown in the towel. They just can’t handle the costs anymore, so they raised their prices.”
“And we stayed the same?”
“No, we actually raised ours a bit too. But even so, right now, Kwangwoon Shipping still has the lowest shipping prices. So we’re sweeping up contracts from everywhere.”
Thanks to that, it’s said that CEO Kim Doo-young, though incredibly busy, can’t stop smiling.
“He said he wants to have a meal with you sometime. He said if he hadn’t followed your order to buy that oil, they would’ve had to shut down again.”
“You should’ve brought him with you.”
“Keke. I told you, didn’t I? He’s the busiest man in the world right now. Contracts are flooding in, and now the problem is how to even handle all of them.”
Shipping companies don’t usually operate the ships themselves.
They typically lease them.
In other words, they rent the ships.
The problem was that as the contracts began flooding in on our side, it was simply too much volume for Kwangwoon Shipping to handle alone.
“So, it seems they’re thinking of partnering with Daekwang Shipping. We take the contracts, and Daekwang handles them for a fee. A bit expensive, though.”
“You think they’ll accept it?”
“What choice do they have? They’ll have to, even if it’s pricey. Kwangwoon is sweeping up all the business right now. If they don’t take the work we give them, they’ll have to shut down too.”
Kwangwoon Shipping currently had over 13 million barrels of oil in storage.
Sure, storage costs might add up a bit.
But if all that cargo keeps the ships running continuously, then it wouldn’t be a waste.
“If they utilize it well, they could earn three to five times the investment. That is, if oil prices hold up until then.”
The current crude oil price had already broken past 50 dollars and was climbing toward the 60-dollar mark set by OPEC.
With a 600 billion won investment, even a threefold return would mean close to 2 trillion won in profit.
“They’ve said they’ll fix the minimum price at 60 dollars, so they’ll probably continue the production cuts to match the supply.”
“Then Kwangwoon Shipping can just sit back and rake in the money?”
“Yes. Honestly, we’d like the price to go up a bit more… but if it goes too far, there will be too many issues, so OPEC is likely trying to hold it at 60 dollars.”
That was the only disappointing part.
Why not go all the way to 70 dollars instead?
But there were too many conflicting interests involved. In fact, even 60 dollars was an extreme decision.
The entire world was in chaos from the sudden spike in oil prices.
Just look at the shipping industry.
If China raised the white flag and started screaming, that meant the situation was serious.
On top of that, gas stations in Korea were rapidly raising prices.
“Even the gas stations are going nuts. The price per liter is about to hit 2,000 won.”
Due to the shock, prices were rising abnormally, but they would eventually normalize. Before that, we needed to liquidate our position.
“We haven’t sold everything yet, right?”
“No. Once the right timing comes, we’ll start unloading the volume slowly.”
Unlike the FX market, where you can throw around trillion-won amounts at once, here we had to sell in parts. And the target price we had in mind was 60 dollars.
“So that’s nearly 1 trillion won in profit.”
“I think it’ll be around that.”
“Whew…”
Hyung shook his head and emptied his glass.
In truth, once you deal in hundreds of billions, it gets harder to generate large returns.
Not many markets can absorb that kind of capital, and even the FX market has low volatility nowadays.
“But you invested 2 trillion won and earned a 50% return…”
We had recovered the amount we used to acquire shares in Kwangwoon Shipping.
“This feels like some kind of cashback deal. Haha.”
“Exactly. Our Middle Eastern hyungs gave us a cashback. Haha.”
At my small joke, hyung chuckled and filled my glass.
“I’m a lucky guy. If it weren’t for you, the company wouldn’t have grown this much.”
“Well, I only got this far because you pulled me out of the gutter, hyung.”
“Even if it hadn’t been me, you would’ve made it somehow.”
The way he was suddenly saying nice things made it seem like he had something else he wanted to talk about.
“Hyung, you’re acting all serious… What is it you want to say?”
“I guess we’ve known each other for a long time. Every time I open my mouth, you see right through me.”
Hyung emptied his glass in one go and stayed silent for quite a while.
“Jin-ho.”
“Yes?”
“I’ve been thinking about this for a really long time.”
I smiled as I grilled the meat.
“What is it?”
“Do you want to be CEO?”
I stopped grilling and looked at hyung.
“My seat. I want you to take it.”