This is the silly season, oil's silly season. This is the equivalent of PGA golf in Hawaii at the start of the year, NBA basketball after the playoff teams have locked up their spots -- unimportant games that no one is watching, margins of victory or loss that don't reflect anyone's ability. We've got golf pros making trips to sunny climes with their wives and kids and collecting appearance fees while some unknown walks off with the trophy.
What else do you call an oil market that goes down $9 one day and then up $6 the next? An oil market that's hanging around at $114 ½ last week and drops twenty bucks in three days and almost immediately rallies back close to ten? Driving these moves are the algorithmic traders, the commodity "renters" and the ETF hucksters with their double and triple long funds. This is the equivalent of the adults leaving the room, handing the keys of the Ferrari over to the teens and telling them to drive safe.
Only the kids don't just drive themselves into a ditch -- they take the U.S. economy and everyone who fills a tank with gas to get to work with them as well.
Put this move into perspective -- from high to low, in a week, consumers were looking at a fifty cent a gallon discount from prices, a total savings to the American driving public alone of about $175 million a DAY. In a still teetering recovery, we could really use that relief.
I'm listening to another oil trader on air talking to CNBC. I've known him for years, he's smart and knows as well as anyone what's been happening and yet he seems satisfied with the way the market is working:
"I'm for investors", he says. "No one has proven to me that speculators have anything to do with what's happening here, the CFTC has studied and concluded that too..." (He's wrong -- the CFTC actually reversed its position of 2008 in August of 2009 and concluded exactly the opposite). "Liquidity helps", he continues. "It cushions the moves up and the moves down". This is another happily advanced canard: Last week, the iShares silver ETF, the SLV, traded more shares than the ETF that covers the entire S+P 500, the SPY. Did all that liquidity cushion the 30% drop in that metal's price or add to its collapse? Could anyone argue that record volumes in oil futures being reported this month by the Chicago Mercantile Exchange and the Intercontinental Exchange are removing volatility from the oil market, or much more obviously adding to it?
Another oil trading colleague contacts me by email: "Why don't you just tell them the truth?" he asks. "Tell them that if oil prices weren't universally accessible to anyone with an Internet connection and real oil traders were still running this market, none of this would be happening".
He's right and I'm telling. Look, I'm not sure what oil is worth. I've traded oil for 25 years and I don't know if it's worth $40 a barrel or $140 a barrel today, although I have my suspicions. But here's what I do know: I do know that getting past the silly season of oil pricing, and figuring out what it's really worth is going to help us all. It'll help the commuter filling up his Ford or Chevy. It'll help Pfizer and Alcoa and J+J, Goodyear and Hershey's. It'll help the local heating oil distributor and the local trucking company, looking to maybe hire a few new drivers, but hesitant because he's unsure what it's going to cost to fill those trucks next month, forget about next year.
We could do it. The tools are all right there. We could remove the algorithmic players, the ETF hucksters, and the renters. We just have to get past the stories and the alibis. We need to look at the way oil is pricing and admit it's the silly season. It's time to take the keys of this Ferrari back. Oil is just too important to trust with the kids.