Twitter Traders Who Predicted Oil Crash Prove Someone Always Sees the Wild Card
The news that oil prices were in the negative came as a massive shock to most. But not to the traders organized under the Twitter hashtag EnergyFinTwit (#EFT) who made millions off of the historic event. They’re living proof that somewhere, there’s always someone who predicts the unpredictable, who perceives the wild card.
The story of the #EFT traders is fascinating. For years, they’ve been discussing the oil market on Twitter, publicly, where anybody could have found them. They’ve long been bearish on American energy stocks, even making one very pointed observation on October 31st, 2019. On that date, they noted that Whiting Petroleum was “worth $0 at current strip pricing excluding option value,” had debt maturities coming up in the spring of 2020, and was probably overstating its reserves. It was a case study of the delicate state of the American energy market.
Whiting Petroleum has since filed for bankruptcy and the #EFT have finally seen their big payday. Oilprice.com writer Tsvetana Paraskova likened the #EFT group to the traders from the movie The Big Short, stating that “this goes to show that ‘outlier’ analysts could be as right about the market as all the other investment banks combined.”
Like Paraskova, we can’t help but be reminded of the 2008 Global Financial Crisis, and the ‘outlier analysts’ who predicted the whole mess. After all, we were one of them. We’re sharing that story today as part of our series on Disrupted, our 2015 non-fiction book.
In 2008, you constantly heard people say, “No one could have seen this coming.” And now, of course, we hear this sentiment repeated constantly. About COVID-19, about the oil crash, about Trump’s presidency…you name it.
But there is always someone with their eye on the wildcard.
In 2006, the economist Nouriel Roubini perceived trouble by dispensing with conventional models and analyzing historical precedent and global dynamics. Around the same time, we perceived trouble during Strategy in Action training sessions with American community groups who were discussing the predatory lending trend.
We and Roubini followed these wildcards to their logical conclusions, plain and simple. The fact that we were sensitive to them in the first place is what made the difference.
Remaining alert to conditions that deviate from patterns, sometimes inexplicably, builds strategic intelligence. The #EFT traders were sensitive to the signals companies like Whiting Petroleum were sending. They saw strategic opportunity-risk where no one else did. Now they’re celebrating while the rest of us are reeling.
The world right now is full of wildcards. Which ones do you see? If you follow them, where will they lead?
Larry and David
Voices in the Wilderness
In 2006, the economist Nouriel Roubini earned a nickname that never really sat right with him. On September 7th of that year, “Dr. Doom” took the stage at New York University to tell the economists of the International Monetary Fund that the American economy was in trouble. As he saw it, the housing market was teetering on the brink of oblivion, an oil shock was imminent, and consumer confidence would soon topple. He believed recession was coming and that it wasn’t going to be the benign hiccup he knew most of his colleagues anticipated. Instead, he assured them it would be a “hard landing.”
When he stepped down, there were sideways glances and muted titters. The consensus: Roubini was just being Roubini. A pathological pessimist. A man who lived to talk about worst-case scenarios. Besides, he was known to take an unconventional approach to analysis, relying less on mathematical models and more on a sweeping sense of historical precedent and global dynamics. His tack was all big-picture leaps and leftfield connections. He wasn’t sufficiently grounded or data-driven.
A “hard landing”? Nobody bought it.
The same year Nouriel gave his doomsday address to the IMF, I (Larry) was living and working in a city on the American east coast. I had been teaching SiA principles to different groups in the city devoted to community and economic development. The need there was great. These were largely disenfranchised communities with high unemployment and low incomes. But there was a will to improve their and their family’s futures. Many community members had migrated from poor countries and were living in the U.S. illegally. They usually held down two to three cash jobs just to make ends meet.
One day, I was leading one of these groups through the first step of the SiA algorithm: assessing conditions. The group talked about a range of forces affecting the quality of life and work in their community.
One participant spoke up: “You know, a lot of people here are being loaned money to buy homes they’re not going to be able to afford in the long run.” I questioned further and the phrase “predatory lending” emerged. Several others chimed in with their concerns about the practice.
Over the past 20 years I have personally completed close to a thousand conditions analyses. Often one condition sticks out from the rest. There are conditions that you can relate to all organizations, groups, or communities, and then there are the ones that deviate from the pattern, sometimes slightly and sometimes dramatically. Wildcards. This “predatory lending” one was definitely an attention-grabber, so I decided to investigate further.
I discovered that the practice of sub-prime lenders pushing “no and low documentation” loans onto low socio-economic borrowers with little to no experience in taking on mortgages was rife in several of the communities and states I was working in. Basically borrowers were being either duped or “sold” into signing up for mortgages with dubious credit information. Worse, the mortgages had deferred interest payments that lulled the borrowers into a false sense of ownership and security. It was clear that they didn't have the means to buy a house and that when the actual interest rate kicked in and they were expected to pay, they would have little option but to default.
I also found out that this wasn’t happening to the same extent in most other states, and relative to the total of these so-called “liar loans”, the impact would register mostly at a local level. This would mean local pain as people were forced out of their new homes and onto the street. That was bad enough as it was, but as we now know, it was only the start of a truly massive disruption.
Over the next few months, I read articles in the New York Times that clearly illustrated something was up – and that the subprime fiasco was on its way from being a localized hardship to a global disaster.
One article clearly laid out the coming crisis in plain language. Sub-prime loans had been bundled up with good loans into Collateralised Debt Obligations, which were then sold to global investors, and no one could really tell the good from the bad. The CDO market was going to hell in a hand basket. The final New York Times alert that got me was in the August 19, 2007 edition. In it, an infographic laid everything out, plain and simple. A global crisis was heading our way.
I approached banks, government authorities, and other stakeholders in the community with these concerns. I asked them, “How can we be resilient in the face of a collapse of the CDO market linked to sub-prime mortgages?”
I always got the same answer: “Why worry about that? It’ll never happen.”
One year later almost to the day, the global financial crisis was upon us. By this time I was back in Australia. I remember watching a television program in September 2008 when the bubble burst and all hell broke loose. The CEO of a major Australian bank defended the loss of $2 billion of shareholder funds with that clarion call of the M.A.D.: “No one could have reasonably foreseen these circumstances.”
If I had a brick on hand, I would have thrown it at the television.
A Series of Insights from Disrupted, the Book
Written in 2015, Disrupted was, and still is, both a book ahead of its time, and a timely guide for those committed to understanding and addressing the complexity of disruptive change, preparing for disruption, and critically, leveraging disruption to generate sustainable value.
This series of articles are extracts — some with comment from the authors — from the book and are intended to highlight some of the key concepts captured in Disrupted.
A must read (if) you want to understand the world of today and tomorrow, and look forward to the future rather than fearing it.
- Phil Ruthven, Founder, IBISWorld
To find out more visit: www.resilientfutures.com/disrupted
