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Friday, May 23, 2008

Oil Crisis and the Blame Game

When looking for a scapegoat, just blame the speculators… its really easy. You don’t even need to know what you’re talking about.

Blame Wall Street for $135 Oil on Wrong-Way Betting (Update3): “Oil's rally to a record above $135 a barrel came as traders bought crude to cover wrong-way bets that prices would decline, according to data from the New York Mercantile Exchange.

The number of outstanding futures contracts, known as open interest, fell 8.1 percent in a week to 1.36 million at the same time that prices rose 2.6 percent, the data show. Falling open interest and rising prices are signs that traders are buying to exit so-called short positions that would profit if oil fell, and lose money as they rose.

“In a market like today, which is trending higher while open interest is falling, it's a sign that money is moving out of the market,” said Stephen Schork, president of Schork Group Inc. in Villanova, Pennsylvania. Open interest in Nymex crude futures peaked this year at 1.5 million on March 13.

Crude for July delivery touched a record $135.09 a barrel on the Nymex today. Oil futures later dropped on signs that a 15 percent run-up in prices this month isn't justified by stockpiles and demand. Oil fell $2.36 to settle at $130.81 a barrel. Prices have more than doubled over the past year.

Open interest has been sliding for months, after the number of outstanding crude futures reached a record 1.58 million on July 16, 2007.”

Futures contracts are a zero sum game. There needs to be a buyer and a seller for each open contract. Falling open interest means money is indeed leaving the market. The media has been accusing speculators of running oil massively higher. The reality is that since July 16th 2007, money has been flowing OUT of the oil as speculators reduce their positions. Granted, it would appear that shorts are getting out first, but net falling interest of this magnitude is probably foreshadowing that this oil price spike is nearing the end… and will probably correct sharply lower in the near future.

“In the last year, non-commercial market participants have raised bets on rising prices, known as long positions, by 37 percent to 263,378 contracts, the Commodity Futures Trading Commission said May 16.

The rush to buy back contracts may be linked to the record number of short positions that had been built up in recent weeks by small-sized speculators, which the CFTC refers to as “non- reportable” traders because their holdings are small. Those investors held 123,194 futures contracts betting oil futures would fall in the week ended May 6, an all-time high, and 47 percent more than the number of bets they'd placed on rising prices.”

Those with deep pockets are long and the weak hands were short. Naturally the weak hands get squeezed out first. The retail shorts have been blown out. That eliminates in large part the fuel for this parabolic move.

Maybe we can hammer out a top around here somewhere... Money has been flowing into inverse energy ETFs (DUG for example), indicating that money is for the first time attempting to call a top. Oil and Gas shares have fallen even as oil blew through $130 and immediately tagged $135.

Big energy companies, such as Exxon Mobile (XOM) failed to sustain new highs even as oil rallied hard. Something is up. Pop, and drop. XOM broke resistance and then immediately FAILED. Hmmm...

These prices exceed even the pain threshold of politicians. With their economically illiterate constituents complaining loudly, the time is ripe for the government to do something tremendously stupid in a vain attempt to bring down oil prices.

Although we may not yet know what it will be or when it will be done, you can bet on some kind of brain fart becoming official policy fairly soon…

… because on CNBC prices above $130 have resulted in new name and picture appearing on the screen called: The American Oil Crisis.

Now that it’s a crisis, look out.

I’ve been wrong on oil before (although I managed to trade these opportunities just fine):
Commodities Unravel, Confidence Collapses
Massive De-Leveraging Slams Commodities
Parabolic Commodities: The End is in Sight
Oil and Global Decoupling Theory
Crude Hits $100, Equities Freak


Anonymous said...

High oil prices have one root cause: The US government.

Chris said...

If the recent runup is due to covering short speculators, doesn't that mean the price of oil has been, in fact, surpressed up until they began covering when the EIA inventory report came out?

I think a "correction" call is more compelling when traders are speculating long and taking profits. This has the earmarks of shortsellers getting it wrong and getting out of the way, which tells me the price is either going to consolidate in the range of $125-$135 or go even higher as it becomes clearer just how much China is going to eat up between finding homes for 7 million people and hosting the Olympics...

Anonymous said...

Good question, what are those bloody fundamentals about petrol? Scarcity? Full throttle production unable to feed demand? Does anybody really know how much is left underground? Some geologists talk about 50-year lifetime.

On a technical viewpoint, will the market let crude candlesticks hover above the Bollinger Bands? Technical analysts will draw the price down and fundamental speculators will push it up.

One thing that’s really making me laugh is this whole tax rebate checks circus. It’s pretty much like that petty thief who steals money from his bird’s wallet, buy her flowers with it and get this magnificent blowjob in return. Indebt tax-payers with their own money, have them buy petrol with it and get more petrodollars in return. I’m wondering who’s cashing in on this, hmmm…

How can this help the S&P?

On the other hand, I’ve just watched the movie Network for the first time. Shame on me, I know. Can anything be any more a propos? What a great script, 1976. Are we going through this cycle again? Here’s a bit from the great Arthur Jensen speech:

Arthur Jensen: [to Howard Beale] "They say I can sell anything. I'd like to try to sell something to you."

"It is the international system of currency which determines the vitality of life on this planet. THAT is the natural order of things today. THAT is the atomic and subatomic and galactic structure of things today. And YOU have meddled with the primal forces of nature. And YOU WILL ATONE. Am I getting through to you, Mr. Beale? You get up on your little 21-inch screen and howl about America, and democracy. There is no America; there is no democracy. There is only IBM, and ITT, and AT&T, and DuPont, Dow, Union Carbide, and Exxon. Those are the nations of the world today.

"You have meddled with the primal forces of nature, Mr. Beale, and I won't have it. Is that clear? You think you've merely stopped a business deal? That is not the case. The Arabs have taken billions of dollars out of this country, and now they must put it back. It is ebb and flow, tidal gravity. It is ecological balance. You are an old man who thinks in terms of nations and peoples. There are no nations; there are no peoples. There are no Russians. There are no Arabs. There are no third worlds. There is no West. There is only one holistic system of systems; one vast, interwoven, interacting, multivaried, multinational dominion of dollars.

yoni said...

Some very interesting things you have pointed out: The volume in DUG and the price action in XOM.

I agree that a short opportunity could be coming up in crude, but am weary of picking the top. I just don't really foresee any sort of catalyst that could cause a collapse (e.g. Gold tanked after the fed meeting).

The chart is crazy, but I mean when you have democrats calling for "nationalization" oil could still have a long way to go! (I haven't heard any talk of lowering taxes or allowing drilling Alaska!).

I am looking for a potential catalyst event in the future for shorting, or just short it on the way down (when it does actually come down).

Scott Finch said...

I am glad that you covered the rediculous talk of speculators driving the price of oil. it IS simply misinformation. I posted a couple charts on my blog One chart depicting OI in light sweet going several months back and the other depicting net positions in the various catagories. forgive my subpar chart presentation

Ben Bittrolff said...


Thanks for the charts. I only took a quick look, but it would appear that non-comms are net long while, comms are net short.
The comms being net short is pretty significant, as they haven't been net short like this until now (according to you charts). Off to do some more research then...

comm = commercials.

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