Profiteering in Oil Futures Made Easy (to Understand)

At about 6:50 a.m. Eastern Time on Monday, March 23, a slumbering market for trading futures in crude oil sprang to life. At 7:04 a.m., just 14 minutes later, President Donald Trump posted his message on Truth Social announcing that he had deferred strikes on Iran and had begun “productive conversations” with the Iranian government to put an end to the war. In that quarter of an hour before the announcement, roughly 62,000 contracts for oil futures were bought and sold with about $580 million changing hands. And just five minutes prior to Trump’s announcement, investors bought $1.5 billion in Standard and Poor’s (S&P 500 index) stock futures.

With Trump’s announcement, the price of oil futures fell, the market price of a barrel of oil dropped, and stock futures and stock prices surged. And investors who sold oil futures and bought stock futures just prior to Trump’s announcement made a killing.   

The spike in trading, however, was downright suspicious. A market strategist told the Financial Times that, “you would have to wonder who would have been relatively aggressive at selling futures … 15 minutes before Trump’s post.” Economist Paul Krugman pointed to the obvious explanation, “somebody close to Trump knew what he was about to do.” Democratic Senator Chris Murphy called it “mind-blowing corruption,” convinced that the move relied on illegal insider trading (buying or selling a security—a tradeable financial asset such as stocks or bonds—to one’s own advantage through having access to confidential information). 

Let’s look at exactly what did happen Monday morning and what makes it is so suspicious.

How to Make a Killing in the Oil Futures Market 

The best place to start our explanation is at the beginning: What are futures contracts? They are agreements to buy or sell an underlying asset on a specific date in the future at a particular price. Here’s the classic example of how futures work. Once Kansas wheat farmers have planted their crops, they run the risk of losing money if the price of wheat falls before they can harvest their crop and sell it.  Farmers minimize their risk by selling wheat futures contracts, which sets the price of the crop they will deliver. The futures contracts also reduce the uncertainty for the buyers of wheat, such as millers, because they then know in advance how much they will pay for the wheat.

We’re not in Kansas anymore, and there are multitudes of futures markets for different commodities, including oil, and financial transactions. And investors regularly rely on buying and selling futures contracts to hedge (or guard) against uncertainty—or to speculate. For instance, if you expect prices to rise, you would buy futures and then sell them later at the higher price for a gain—if the prices actually rise. That is called “going long.” But if you expect prices to fall, you would sell your futures and then buy them back at a lower price for a gain—if the prices actually fall. That’s called “going short.”

What we saw in the oil futures market early morning on Monday was a classic example of investors going short. Investors, who seemingly had good reason to believe that the prices of oil futures were about to fall, furiously sold their futures before the president made his 7:04 a.m. announcement that he had begun talks with Iranian officials about ending the war. A few minutes later, but still before Trump made his announcement, investors went long, buying up stock futures with the expectation that their price would rise.

The spike in the trading of oil futures Monday morning is clear in this chart from Axios that tracks the volume of crude oil futures trading. Futures trading spiked about 10 minutes before 7:00 a.m., or about a quarter of an hour before Trump’s announcement. And an even larger spike in futures trading followed Trump’s announcement.

For example, here’s what happened to prices in the West Texas Intermediate crude oil futures market. At 6:45 a.m. Monday morning, oil futures sold for $98.55 a barrel. After Trump’s announcement, the price of oil futures dropped precipitously. An hour later, at 7:45 a.m., the price had fallen to $92.46 a barrel and reached a low of $85.81 a barrel at 11:00 a.m., before rapidly climbing when Iranian authorities denied that peace talks were underway.    

An investor with inside knowledge of Trump’s upcoming announcement would sell their oil futures at $98.55 and then buy them back an hour later at $92.46.  That’s a gain of 6% in just one hour, or $34.8 million when multiplied by the $580 million of oil futures sold right before Trump’s announcement. Waiting a little over four hours to purchase oil futures at just $85.80, the gain would be 13%, or $75.4 million. Either way, that’s quite a haul. Alternatively, going long, they would have invested the monies from selling their oil futures in the stock market, which was sure to react positively to Trump’s announcement. And the S&P 500 and its index of stock futures both rose sharply Monday morning, until just after 11:00 a.m. when Iranians officials denied that peace talks were underway.

Friends of War

The buying and selling of 62,000 oil futures contracts just before Trump’s announcement and then pouring $1.5 billion into stock futures was four to six times larger than any other trades happening at the  time, according to Unusual Whale, which tracks events that move the market. And while not yet proven, there is every reason to believe these trades relied on inside information.

It is past time to change some of the lyrics of the late 1960s protest song “War.” One line goes “War—it’s got one friend, that’s the undertaker.” These days, it has others: those who, armed with advanced knowledge of Trump’s announcement, turned the horrors of war into profit. But then again, no undertaker ever made that kind of money for so little work.

John Miller is a professor emeritus of economics at Wheaton College and a member of the Dollars & Sense collective.