Curde Oil Market: A $2.5 Trillion a Year Global Fake Out? (Guest Post)

By Ilene

From Phil Davis:

Speculators at the NYMEX are doing it again and have NO INTENTION WHATSOEVER of accepting delivery of even 1/10th of the 367M barrels they had as open contracts last week. In fact, Wednesday (June 8) they traded their contracts 454,043 times.  It's a 123% daily churn rate!


Of course, it's easy to churn 454 million barrels of crude because the only one that ends up paying for all those fees is the end consumer of crude.  All those fees are passed on to consumers as part of the price of oil.

Don't forget to thank Lloyd and Jamie when you fill up your tank, as Exxon's CEO Rex Tillerson told us, without those speculators, a barrel of oil would be $70. You can see Jamie sweating as President Obama said a Justice Department probe will examine the role of “traders and speculators” in oil markets and how they contribute to high gas prices.

Goldman Sachs (GS) and Morgan Stanley (MS) today are the two leading energy trading firms in the United States. Citigroup (C) and JP Morgan Chase (JPM) are major players and fund numerous hedge funds as well which speculate, and some other alleged big player. 

In June 2006, oil traded in futures markets at some $60 a barrel and a Senate investigation estimated that some $25 of that was due to pure financial speculation. That would mean today that at least $40 or more of today's $101 a barrel price is due to pure hedge fund and financial institution speculation.


However, given the unchanged equilibrium in global oil supply and demand over recent months amid the explosive rise in oil futures prices traded on Nymex and ICE exchanges in New York and London, it is more likely that as much as 60% of today oil price, is pure speculation.

No one knows officially except the tiny handful of energy trading banks in New York and London and they certainly aren't talking. But I will point out that it's not XOM that makes the lions' share of the excess profits as speculators drive the price of oil from $40 to $100, it's JPM, GS et al.

On Wednesday, June 1, I noted that there were 367,620 open contracts (1,000 barrels per contract) on the NYMEX at $103 per barrel and I said that the number was total nonsense, and that real demand was 35M barrels at most.  One week later, how many contracts are still open for July delivery?  288,420! (See Table)


On a global basis, this is a $2.5 TRILLION annual scheme that funnels money from the bottom 99% to the top 1%, but mostly to the top 0.01%. Those guys will do ANYTHING to keep the price of oil as high as possible with no consideration as what that would do to regular consumers and the global economy.

On Wednesday, June 8, OPEC failed to come to a supply agreement and President Obama said he would release oil from the Strategic Petroleum Reserve if necessary and also, we had an oil inventory report that showed a 2 million barrel BUILD in gasoline over the holiday weekend, indicating a tremendous drop in demand. You would think that would drive prices DOWN but, instead, oil went UP yesterday, from $98 at 8:30 am to $101.89 at 12:30pm!

These speculators do not REALLY want 288,420,000 barrels of oil delivered to them in July. That would cost them (at $101.60) $29.3 Billion! It's not just the cost of the oil, they would also have to find a place to put 288M barrels of oil and the US storage system is full. So once we drop 1,000 barrels off in Jamie's garage and put another 2,000 barrels in Lloyd's swimming pool (84,000 gallons) - they begin to run out of space pretty quickly.

The retail investors are essentially the "bag holders" who end up taking the contracts off the IBanks hands at the very top of the market (usually a couple of days after Goldman Sachs predicts $200 oil), with their 401K money tied up in ETFs like United States Oil Fund (USO), which was at $40 in June of 2009, when oil was $70 a barrel and is still at $40 with oil at $101.60 a barrel.  Yet retail investors own $1.4Bn worth of futures contracts and, even worse, they tip their hands on what they are going to trade!


Most commodity ETFs end up just taking whatever hedge funds are dumping, but as you can see from the chart above, USO is one of the worst as their constant rolling over of contracts and 0.45% "management expenses" virtually guarantees long-term holders nothing but PAIN.

When you buy USO, it is the same thing the speculators are doing at the NYMEX, pretending you want oil that you will never accept delivery of, so all you can do is hope to find another patsy tomorrow to take the contract off your hands.  As you can see from the performance of USO - there are no other marks - the buck (or the barrel) stops right there!

If you want to invest in oil long-term, buy ExxonMobil (XOM) - they are UP 40% over the same period with a 2.4% dividend.  If you are playing along at home, futures trading is dangerous!  If you are going to play you need to scale in and use stops, and also need to take profits and run on small reversals. 

(Edited from the original post by Ilene)

About The Author - Ilene is the editor and affiliate director at Phil's Stock World with a fascination with the markets.  She also maintains a blog at Phil's Favorites.

The views and opinions expressed herein are the author's own and do not necessarily reflect those of EconMatters.

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