February 16th.
Five days until maturity.
People who had stayed up all night with their eyes wide open checked the charts the moment they woke up.
Of course, that didn’t mean anything had drastically changed.
[WTI Futures Price Plunges to $5... No Space Left to Take Delivery]
[“We’ll Pay You to Take It,” Oil Industry in Panic]
[Physical Crude Still at $9, Outcry Over Futures-Spot Price Gap... Investors in Oil ETFs Cry Foul at a Clearly Broken Market]
Both in Chicago, where derivatives were born, and on Wall Street, the heart of American finance, this incident had stirred up a storm.
Inside the Tiger Fund office.
“Damn it, damn it!”
“What’s Alpha ❀ Nоvеlігht ❀ (Don’t copy, read here) Fund saying?”
“They claim they have nothing to do with oil futures...”
“You expect me to believe that?! With a director that active and visibly moving things around? Yoo Ha-yeon’s got a stranglehold on East Asian ports!”
“As you know, she’s also a member of Korea’s largest chaebol. Word is, she did all this while acquiring the Korea Petroleum Corporation...”
Documents and shouting flew back and forth.
Should they sell the March contracts now?
Wait it out?
Or maybe... get in touch with that witch next door who’s the only one with any warehouse space left?
That was the debate.
.
.
.
Naturally, it wasn’t just Tiger Fund stuck in that dilemma.
Oil futures—no, every industry remotely related to oil—was now fixated on the unfolding disaster.
And if one were to identify the single industry hit hardest... then surely among the top would be the issuers of oil ETFs.
– Riiing!
Blackstone Financial.
One of the world’s top asset management firms was being swamped with angry calls from investors.
“Why is my ETF dropping like this?! Down 30%?! Crude oil prices didn’t even fall that much!”
“...We’re sorry, sir, but if you check the composition of your ETF, about 70% is WTI futures. The rollover costs are expected to be extremely high.”
“What the hell...?”
People who jumped in after skimming some info, assuming commodity ETFs worked like stock ETFs.
People who did know what they were doing and still got burned.
All mixed together into a chaotic market brawl.
– Bang! Bang!
There were even people causing scenes outside the company, being held back by security.
“You scam artists! You said ETFs were safe! How is this a safe investment?!”
“We told you commodity ETFs are different!”
With people swarming from all directions, the asset management firm’s staff were at their wits’ end.
But naturally, this market wasn’t made up of idiots alone—several wolves lurked around, pretending to be lunatics.
Of course, in this business, whether one is a fool or not isn’t something decided by personal will.
– Rustle.
“If you look closely, there’s a bit of a gap between the ETF price and the total value of the basket inside... Can we redeem this ETF for the underlying basket?”
“Oh! Right, March futures are underpriced right now. Even without those, there’s still profit!”
The APs—Authorized Participants—lit up as they punched numbers into calculators.
Their role, under contract with Blackstone, was to eliminate the disparity between ETF market prices and actual NAV (Net Asset Value).
When ETFs were undervalued like this, they’d buy them up and take them to the issuer.
The issuer would then exchange those ETFs for the underlying assets at face value, which the APs could resell for profit.
To put it simply... the ETF issued by Blackstone was composed of about 50% March WTI futures.
The rest consisted of physical crude from refiners, Brent (North Sea) oil, and later-month futures like April or May used to offset roll costs. Some ETFs even held oil company stocks—since oil prices and oil stock prices tend to move together.
And naturally, just because March WTI futures had fallen below $5 didn’t mean physical crude was actually that cheap.
So—
“Should we shake this ETF a bit more? If we buy cheap and sell, we could make a nice profit.”
Using the market discrepancy to take profit was, of course, a natural move.
“That’s illegal, you idiot. If an AP manipulates the market to profit, they’ll get audited.”
One overexcited AP employee yelled to another.
“If they don’t catch us, we’re fine! It’s such a mess right now—just a little push and nobody’ll notice! Like storming in there acting like a maniac, or dumping at a low price to drag it down...”
Usually, someone pretending to be insane is, in fact, insane.
“You maniac. You want to keep acting like this after getting hired by Morgan?”
Inside the grumbling man’s tailored suit and in the pockets of the excited one, lay some very fancy business cards.
J.P. Morgan.
They were APs contracted with Blackstone.
Nothing strange about that—being an AP in the ETF market required extreme expertise and capital, so most were major investment banks.
The ones lurking around Blackstone like thieves peeking into a gold vault were, in fact, elite JP Morgan employees.
“If I didn’t act like this, I wouldn’t be on Wall Street. If Alpha Fund’s Yoo Ha-yeon wasn’t crazy, she’d have stayed a petty warlord in East Asia. But she came to the Americas—and conquered.”
“...You’re not wrong.”
And the Morgan VP, who had played this game for quite some time, knew very well—
One misstep could mean enormous losses.
‘March contracts probably won’t drop any further... but prices might fluctuate while unloading the basket.’
If it were just pure arbitrage, APs would always win.
But risk-free arbitrage doesn’t exist.
Bridging the gap between ETF market price and NAV is a delicate process. Move too much volume and the gap might invert, causing losses—or worse, the asset might become unsellable due to dried-up liquidity.
Since APs were typically elite employees at top investment banks, any time wasted meant direct financial loss.
Still... it was quite a tempting gamble.
Returning from Blackstone, the Morgan staff laid out various oil ETFs and searched for ones without March contracts.
– Shff.
“VP. Here it is. One of Vanguard’s oil ETFs... Most of its futures have already rolled into April. It’s mostly untouched by this mess.”
“What caused the price drop?”
“Panic sell-off.”
– Gulp.
He swallowed.
“Other ETFs dropped, so this one just followed. What about physical liquidity?”
“Everything except March futures and physical crude looks good. We could probably unload within a day if we place it at yesterday’s closing price. Looks like we can handle up to $100 million.”
– Click. Clack.
The sound of Excel running on a (cutting-edge, for the 20th century) computer echoed pleasantly through the office.
Madness and logic were separated by the thinnest sheet of paper—
And with utterly rational judgment, they were now pouring more fuel on this madness.
Like oil tanker owners popping champagne over record-high storage fees.
.
.
.
Several hours later.
A junior associate returned from various ETF issuers, carrying armfuls of oil futures formerly embedded in ETF baskets, and asked his senior—
“What do we do with these?”
– Tap.
As his fingertip pressed the screen, it warped into a shimmering rainbow, before clearly displaying the words:
“WTI March Futures.”
“Hmmm...”
Under normal circumstances, they’d just sell these off with the rest.
That’s how it’s usually done.
But these weren’t normal circumstances.
March futures were utterly illiquid.
No one wanted to touch this ticking time bomb—except maybe a few crazies chasing instant riches.
And yes—this was a ticking time bomb.
Once March contracts hit expiry, someone had to physically pick them up from Cushing and store them somewhere. The whole disaster was unfolding because nobody could find a “somewhere.”
The countdown clock was already ticking—100 hours remained.
Maybe it wouldn’t actually explode, but nobody wanted to be the one holding it.
“I guess... we have to widen the ETF price gap even more?”
“Looks like it.”
The young Morgan VP stroked his chin lightly and spoke.
“Just sell it for a dollar.”
“...Excuse me?”
Grinning, he spread his arms wide and his eyes gleamed.
It was the gleam of a madman.
“What! We’ve already made our money, right? We stuffed ourselves with ETF assets—we just need to sell. No point holding on to these dirt-cheap March contracts.”
“Still, if we sell at five dollars a barrel... we could make at least a million dollars.”
“Exactly—so sell it! You think you’re the only one with that idea?”
“...You’re the one who warned us about market manipulation.”
“If you’re not gonna eat, don’t jump in. But if you have jumped in, then eat all you can.”
It was a game of hot potato—but the potato was so damn tempting, everyone held on until the very last moment.
Even though no one could defuse the bomb.
So selling early and walking away was the smart move...
He said so, smiling thinly.
.
.
.
And after that...
A massive amount of WTI futures were sold in the market for just $1.
And—
Most of them got bought.
As a bonus, the price of crude oil futures dropped below $3.