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Sunday, June 01, 2008

Oil speculation?

Pace Nick Drew's comment on the previous post, Jim in San Marcos reckons there is indeed influential speculation in the oil market.

But Karl Denninger reckons it's just money looking for a home, like the boll weevil, and ultimately deflation caused by credit writedowns should reverse the trend.


Nick Drew said...

It's certainly complicated. Run-of-the-mill speculators typically can't ordinarily get involved in spot markets, because they have no way of taking or making physical delivery. So they play their games in financially-settled forwards/futures: but forwards don't set spot prices - indeed they are often manifestly disconnected.

In most (all other ?) commodities the spot price is used to settle derivatives. Unusually - indeed, bizzarely - in Brent crude (which is what is mostly meant by 'world oil price'), the prompt month forward price is used - and spot cargoes are priced by reference to that forward price!

(This is because of the extreme logistical problems of scheduling physical cargoes of actual Brent, or Brent-qualifying, oil)

So - you could argue speculators are able to play in the price-setting part of the Brent market (because it's a forward market = no need to take delivery), which has an element of truth in it.

However, this is one of the most liquid and professionally traded markets on the planet, with plenty of very aggressive risk capital available there.

It's my view that if forward prices spiked in a totally irrational way, i.e. due solely to mug punters' sentiment, the pro's would short the hell out of it quite promptly.

Bear in mind, the banks know the answer to this, because it's through the banks that the big mugs (the dumber end of private equity & retail funds) play.

Sackerson said...

Thanks very much Nick, though I'm out of my depth here with spot & forward pricing etc - but from your last remark it does look as though banks are better-positioned than most to see trends and identify what the smart money is up to.

Smart Trading Signals said...

Investors are playing with fire or rather OIL futures currently. With demand now slowing due to high prices in Gas and OIL we have hit a point where even the most bullish of trader would be hesitant to go LONG.

Though I am anti contrarian and rather I think we may see 140 before we see 100 again.

The rise to 135 and the massive SHORT covering we saw happen a couple of weeks ago suggest that there is still plenty of steam left in those bulls.

Also price rises in developing countries have not been great suggesting that governments there are expecting a move down in the OIL price in the next couple of months. Also inflation for those countries is a key factor. Slowing growth would only impede their development and growth rates of 4-10% are allowable to due the amount of poverty.

I think we will see a bounce of 120 and may grab some momentum and hit high 130's very quickly.

USD has not strengthened much closing at 155 on the EURO.

I think dowside weakness would be indicated at 119 opposed to 130 being a sign of downside.

Sackerson said...

Welcome, TDO, and thanks for your detailed analysis. There must be pressure to bring oil prices down soon, surely.