Financial speculators? An oil producer with a shortfall? Illegal manipulators? Who caused Monday’s $25 spike in crude oil for October delivery, and why? The NYMEX Commodity Futures Trading Commission (CFTC) has opened an inquiry and subpoenaed traders to find out.
Record changes in price no longer warrant second thought after this summer’s shrill highs and deep lows, but even the most jaded investors found the gain anomalous, with no supply concerns or currency drops or equity crises as cause. That day gold only increased 2.5%, Platinum increased 9%, Oil for November delivery increased 6.5% while October contracts jumped 24%.
Suspicious? Howard Gruenspecht, Acting head of the Energy Information Administration, seems to think so. He said the jump ”did not reflect fundamentals.” and suggested a ‘short squeeze‘ as a possibility. In a short squeeze, traders short selling contracts face heavy losses when the price of the contract increases. They then proceed to close the short positions and go long in new contracts in the hopes of recovering the loss. If enough traders follow, the price is pushed ever higher, creating a vicious circle. However, short-squeezes are common in small cap stocks with low liquidity, so oil does not fit the bill. . “The other option, frankly, is manipulation,” said Gruenspecht.
Who would seek to gain from manipulating oil prices? In July, the CFTC charged Dutch trading company Optiver Holding with attempting to manipulate three contracts on NYMEX, including the October delivery in question. They are not suspected in Monday’s trading, and so far no else is either.
The simple explanation would be a serendipitous amalgamation of discrete factors: Supply disruptions from hurricanes Ike and Gustav, equities market turmoil, a decrease in supply by OPEC and attacks on Nigerian oil facilities. Pure luck brought these factors in contact with traders in short positions, creating a squeeze which shot prices up.
Analysts such as Steven Schork concur with the Occam’s razor approach ”I’d be surprised if this was manipulation.” He said, ”It had more to do with either poor risk management or just plain stupidity.”
With intrigue, drama and crisis, last week has probably been exciting enough for most of us. But if the CFTC uncovers any smoking guns, you’ll find the latest updates at Oil Energy Mystery.
[...] Clearly, Wednesday’s announcement caused bullish sentiment, and even looking beyond monetary policy we see greater confidence in oil. OPEC’s December 17th cuts were initially disregarded by the markets, but are finally being taken seriously due to OPEC countries like Nigeria working together to stick to their quotas. Venezuela’s Hugo Chavez nationalized the local unit of Spanish banking conglomerate Group Santander, and governmental power plays usually put oil traders on edge. Further, as the April contract reaches expiry we may see traders caught in a short squeeze pushing up prices, much like we reported in October of 2008. [...]
By: Episode $50+: The Commodity Strikes Back « Oil Energy Money on March 20, 2009
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