Dennis Gartman, the Dean Of Commodity Traders Doesn't Understand the Recent Move in Oil Prices -- Let Me Try to Explain

There he was on CNBC's Fast Money segment today, on a day the price of oil moved over four percent by more than $3.00 a barrel to over $72/bbl. To paraphrase Mr. Gartman, "when I don't understand what is happening, I get out the market."

Yes, according to the Energy Information Administration, inventories of oil dropped by some six million barrels this past week. What wasn't generally discussed was that this was a programmed drawdown of bulging oil inventories which have reached levels this year not experienced since 1991.

Perhaps Mr. Gartman could answer the following question: If you were an adviser to the finance ministries to three of the richest OPEC oil producers -- say, Saudi Arabia, Kuwait and the United Arab Emirates, what policies would you recommend to them to capitalize on their inherent strengths permitting them to maximize their earnings from the one commodity -- oil -- on which their economy is dependent?

Given certain realities perhaps you would recommend the following program to them:

• Each of your economies are almost exclusively dependent on your production and sales of oil to buyers worldwide.
• Combined you have access to one of the greatest pools of unencumbered financial resources, the trillions of dollars held in your
  'sovereign wealth funds.'


• These riches are directly linked to oil and the price you are able to get for your oil.
• The price of oil is no longer determined on a 'wet barrel' basis that is by posted prices and prices set in contracts negotiated between producer and consumer for delivery of oil (wet barrels) or the occasional spot market prices for cargoes of oil determined by oil commodity traders.


• The price of oil for your 'wet barrels' is now determined as a 'virtual price' or 'paper barrel' price on Commodity Exchanges worldwide, ranging from New York, London, Dubai, Singapore, Tokyo and on.
• These markets are lacking in transparency. They are opaque. That is to say no one really knows who is buying oil futures contracts on the exchanges and to what end. Hedging, speculation, even manipulation, is all in the same pot and remains elusive.
• The markets are large but with significant resources one can move the markets in a desired direction (please see "The Trade That Brought Us100/bbl Oil Teaches Us To Be Afraid, Be Very Afraid"), initiating trends to be followed by hedge fund traders, or simply creating an ever higher platform price.
• Given the lack of transparency, given your enormous resources, why not quietly manipulate the virtual price of oil on the Commodity Exchanges in order to maximize your return on the one commodity which is the backbone of your economy and your social structure.

What's that you say -- it's a good idea? Sorry didn't quite get that. Did you
say that is what has been happening all along??

Comments

[RTIII]

Thanks for this concise and coherent - and easily followed by the most dim-witted - description of the situation today.

That it occurs is beyond question.

What can we, consumer nations, do about it - that is the only vital question left.
.

[Rule Of Law]

A "free market" implies a level playing field with rules that everyone follows.

That is not the case in America today.

[SeaWater]

This is a free market economy,call it a casino if you like but it does not matter. Its American. Companies,hedge funds,private citizens,you name them , its entirely legal for them to trade in commodities or anything that can be bought and sold legally.

What about speculation ? Well about it - I can buy an asset and sell it the very same second, 2 days later or even a year from now, its called free market.

[noneIn2008]

Let's give them more game with cap N Trade. The traders can then run all energy markets.

[Rule Of Law]

Pro market manipulators can make money when the price goes in either direction. Driving it up, or shorting it down, they win/win.

[Playin Possum]

I should add, This is nothing except a fancy kind of theft. These traders contribute nothing to the market. They are just parasites.

[Playin Possum]

Some way to stop this trading flat has to be found. It should be banned in the US but that isn't enough. We should withdraw all support and protection from any Nation that engages in or allows this and we should even consider military action to stop it.

And if the government won't move to protect our interests, well, those VLCC's will burn real good.

[DesertDogAlpha]

All an Al Gore plot since the higher the price of crude oil and other hydrocarbons the lower the national and global carbon footprint. So cause to celebrate. Plus, now we won't need to subsidize wind, solar and other alternative energy forms since the high prices give them room to be profitable all on their own. Right? They won't be begging for handouts now, will they?

[BBackSoon]

No major initiative has ever gone down in this country without governmental help. I am thinking of the Transcontinental Railroad, the Eisenhower Highway system and our electrical grid. So why is it such a stretch to fund growth of renewable energy with government money?

[dadw5boys]

The more profits the Saudi's make the more U.S. Debt they buy !

[dadw5boys]

Must have a lot of tankers setting there to unload so they run up the market and the sell it to the refinerys.

[DuganS1]

Why would the long term path of oil prices be up? What do cars run on?

" BEIJING, Aug. 8 2009 - China's ChangAn Auto Co., Ltd., a leading domestic auto maker, announced Saturday that its sales volume rose more than 82 percent year on year last month.

The Chongqing-based company sold 107,863 units of vehicles in July, up 82.4 percent year on year."

July 9, 2009

"BEIJING (Dow Jones)--China's auto sales in June rose at their fastest monthly rate so far in 2009, putting the country on track to overtake the U.S. as the world's biggest auto market this year.

China's auto sales last month jumped 36.5% from a year earlier to 1.14 million units, and sales in the first half rose 17.7% from a year earlier to 6.10 million units...

.. Xinhua News Agency cited the semi-official industry association as saying China is likely to sell more than 11 million autos this year. That would represent a 17.3% increase from the 9.38 million units sold in 2008..."

AUGUST 12, 2009
Brazil Car Makers Leave Slump in the Dust

"SAO PAULO -- A rebound by the Brazilian auto industry this year has been so swift and so widespread that auto makers are now planning new hires and expanded output. ....

First half sales set a record, and Brazil's National Motor Vehicle Manufacturers Association now forecasts domestic auto sales will hit a highest-ever 3 million this year."

[dnpvd51]

Did oil also get manipulated down to $32/barrel?

[leduck]

of course...,
those evil manipulators sometimes want us to pay less then we should

[adamnb]

Speculators only exploit trends, they don't create them. The reason oil rose to 140 last year was because global demand hit a high of 87 billion barrels per year, on the back of China rising to become the second large oil importer and India not far behind. The recession pushed demand back to 83 billion barrels, and that caused oil to fall. For the last 5 years speculators have bet against the falling dollar (as did others like pension funds that have long term obligations).

[leduck]

here we go..., a PEAK OIL lesson:

http://www.theoildrum.com/node/5672#more

[leduck]

rather than have learsy explain the "recent move in oil prices"
how about having someone explain it who actually knows something about oil...,
like, kenneth deffeyes, colin campbell, or someone else from aspo or the oil drum

[FreddyHutter]

Oh please! Deffeyes states at this website that 'cuz of Peak Oil, the USA entered Great Depression II in early 2008 (FYI, great depressions last 4 years & avg 8% contraction in economy). We don't need his ill advised musings.

ASPO's Campbell forecast All Liquids Peak Oil in 1989 (66mbd) and has upward revised almost 20 times since. His website says we are in a Depression (2 years & avg 4% contraction). Enuf said?

TheOilDrum told us in 2007 that Saudi Arabia had peaked, but the Kingdom went on to ramp up and virtually tie a production record in 2008. Consensus there has claimed a world peak every year since 2006...

[watchTVgetSTUPID]

In real purchasing power such as how many barrels of oil does my salary buy, My part of the GDP has dropped a lot more than 10% over the last few years. US GDP if stated in oil purchasing power his dropped by a third in the last 5 years.

[leduck]

so well most informed people argue when peak oil will occure....­,
you are trying to argue what...?
it will never occure...?

because people argue about the timimng...­...

are you hearing yourself..­.?????

[GetAbike]

Hi Freddy,
A Depression is not completely off the table. Indicators showing a bottom could suddenly turn south again.
As now, so then, there was an awful lot of happy talk in the 4 years it took for the GD to hit bottom.
I know you had a hard time with the Oildrum- but ya gotta admit that nobody has a crystal ball and as Leduck says there IS disagreement as to All liquids peak- and the arguments over IEA data will never end.
The IEA expects a Crude decline rate for 2010-2012 of 3.4 %. One person on the Oildrum thinks that is disturbingly optimistic, another says it is reasonably in line with recent data.
So f’ ing what?
To me the oildrum is more of a salon discussion or parlor game even if it does get a little harsh for those who disagree sometimes.
I have no idea how anyone can make an accurate forcast on anything other than Crude, which you yourself have said peaked in 2005.
I think there are other interpretations of the volatility that Mr Learsy wants to credit all to speculators- like the sorting out of what unconventional liquids will be needed to make up production deficits that will have an EROI of more than 1 in years to come.

This is just another case of disagreement.

[GetAbike]

Hi Freddy,
A Depression is not completely off the table. Indicators showing a bottom could suddenly turn south again.
As now, so then, there was an awful lot of happy talk in the 4 years it took for the GD to hit bottom.
I know you had a hard time with the Oildrum- but ya gotta admit that nobody has a crystal ball and as Leduck says there IS disagreement as to All liquids peak- and the arguments over IEA data will never end.
The IEA expects a Crude decline rate for 2010-2012 of 3.4 %. One person on the Oildrum thinks that is disturbingly optimistic, another says it is reasonably in line with recent data.
No big deal.
To me the oildrum is more of a salon discussion or parlor game even if it does get a little harsh for those who disagree sometimes.
I have no idea how anyone can make an accurate forcast on anything other than Crude, which you yourself have said peaked in 2005.
I think there are other interpretations of the volatility that Mr Learsy wants to credit all to speculators- like the sorting out of what unconventional liquids will be needed to make up production deficits that will have an EROI of more than 1 in years to come.

This is just another case of disagreement.

[1Eco]

short term price matters not. what does matter is long term demand which is down and dropping.
this was debated on the cash for clunkers B.S. article.
the debate is now over.

http://1eco.com/2009/08/17/cash-for-clunkers-some-dont-seem-to-like-it/

Imports slipped 15 percent to 8.53 million barrels a day,

Now what happens if that IMPORT number falls to 5 million barrels a day?

http://tonto.eia.doe.gov/dnav/pet/pet_move_impcus_a2_nus_epc0_im0_mbblpd_m.htm

Game over. Is it coming? Is US Domestic demand going to fall every year for the next 3 years?

Energy conservation. JOB 1

[DuganS1]

The oil market is global. It's not just the US. Energy demand in countries like China and Brazil are exploding, as I posted above. A big reason that demand is down in the US currently is because factories aren't running and trucks aren't delivering goods. That will change very soon and demand for oil will go back up.

[GardenerNorCal]

Short term prices matter to the consumers that have lost their jobs can't afford increasing higher food and essential prices.

$4.00 gallon took us to our knees, $3.00 a gallon is keeping us there, and record profits will be made by a few. But there are lot more stupid poor people out there to exploit. So let's drive up the anger towards China or India when we all know where our anger really honestly belongs. Speculation rules as long as a handful of people can make a bundle and blame it on the poor trying to get back and forth to work. They just aren't smart enough to understand.