The Trade That Brought Us $100/bbl Oil Teaches Us to Be Afraid, Be Very Afraid

On January 2nd a single trade on the New York Mercantile Exchange pushed the price of oil to the psychologically freighted $100 a barrel. That trade made newspaper headlines or the front pages of newspapers throughout the world.

The trade itself was for a single futures contract of 1000 barrels of crude. The price quotation on the exchange prior to the fateful $100 trade was $99.53 so that the when that one contract at $100/bbl crossed the ticker, it jumped the market price of crude oil everywhere by nearly one half percent or 47 cents per barrel to be exact. At that moment that was the price on which all transactions of crude oil were based. The next trade on the exchange, that is the price at which the $100 contract could have been immediately resold, would have incurred a trading loss of $600 to the trader who executed the trade, understood to be one Mr. Richard Arens. Thus Mr. Arens, by being the first trader to have closed a $100/bbl trade on the NYMerc purchased a slice of immortality at a cost of but $600.

But then consider the following. By making that trade at some fifty cents above the going market Mr. Arens, by himself with an an investment of $6750, the margin required by the exchange for an oil futures contract, was able to move the market dramatically. At that moment of time and as long as the $100 marker was on the trading board, all oil produced, or shipped, bought or sold in the United States and given their close interrelationship, on markets throughout the world, that forty-seven cent jump was reflected in virtually all transactions. With some 85 million barrels of oil being produced and shipped each day, that trade alone increased the value of oil by over $40 million at that moment in time. All that based on one trade, requiring only $6750 as a margin deposit. An incredible and frightening degree of leverage. Thus we have been shown the clearest, most up to date, real time example of the risks inherent in basing the world price of oil on the vicissitudes of the commodity trading floor.

On these postings I have repeatedly tried to alert the field that the trading in oil futures on world commodity exchanges (electronic, New York , London, Singapore and on) is not a straight forward, unencumbered market (Please see "Energy Trading Oversight Awakens From Its Slumber With Anticipated BP Settlement" 10.25.07; "Oil Prices Pushed Ever Higher By Manipulating Oil Futures Trading", 04.05.06). That it is riddled with special interests (pushing up oil prices to levels as high as they will be tolerated) and oil patch agendas, or as in this case, reaching for an historic breakthrough. This argumentation has been met with considerable skepticism by the press ("the market sets the price") and outright hostility by those who have a vested interest in high oil prices, the oil industry and its friends in government.

Yet here is a prima facie evidence of the of the susceptibility by the commodity trading markets to play out specific agendas, and the ability of the trading markets to facilitate those agendas. Mr. Arens, with one oil futures contract representing 1000 barrels of oil, necessitating a deposit of only $6750, was able to bullseye the $100/bbl mark.

Now consider the following. Saudi Arabia, Kuwait, the United Arab Emirates, Russia all have Sovereign Wealth Funds. Saudia Arabia alone has $900 billion to invest, or to trade or to go dancing with. We don't know how these funds are spent or invested, because their activities and goals are completely opaque. The exception being when a Citigroup or Merrill Lynch go knocking at their door. For these countries oil is the core of their economy, and the higher the price of oil, the fatter those Sovereign Wealth Funds. It is the price of oil on the commodity exchanges that determines the price at which the physical product is bought and sold. Is it then unreasonable to assume, given the market's susceptibility to direction, as witnessed by that first $100/bbl tick, that a portion of that ocean of money in the hands of the world's most important oil producers is being used to trade oil prices toward the highest levels that the world's oil consuming economies can either bear or tolerate. What I'm trying to say in a perhaps overly long winded way, if a single trader with only $6750 can move the market, how can you expect those with billions at their disposal not to do the same as well!

It is long overdue that our government institutions, preferably conjointly with their international counterparts, take a seriously close look at commodity trading practices as they are currently structured. This to determine the likelihood and extent of manipulation, and the cost of that manipulation to the world at large. Somehow we must find ways to bring these markets back to becoming accurate and honest price mechanisms, reflecting real supply and demand. Otherwise we are participating in a game of loaded dice with purveyors of a basic commodity that exerts enormous influence on our fiscal, environmental and social well-being. Certainly anything less than a fully hands on, transparent, and effective oversight, will inevitably portend economic, social and environmental disaster.

Be afraid, be very afraid!

Comments

[Purple Girl]

If we had actually been 'invited' into Iraq, they'd probalby be willing to pay for some of their 'freedom' with their oil .
But we were not invited, they can't even figure out how to handle the product - so as ususal Bush/ Cheney buddies - the Saudis * Arab Em are making bank again.
This regime has been work against the interests of our country for decades. Underhand deals for profits, inciting unrest, screwing the locals, effectively squashing R&D of new alternative fuel, encouraging the Big 3 to return to makeing th egas guzzling Lead sled of yester year ( except bigger & more thirsty).
So they've given birth (with our money & resources) to a new army with out the restraints of the pesky american people to answer too. they have just about met their goal to cut the legs out from underneath US economically & Internationally. 4 Decades of TREASON!!!!!

[jdm58]

To trade oil on "futures" is tantamount to gambling that the Ohio State football team will win the BCS in 2010. It is a ridiculous way to line the pockets of tradebrokers. Trading necessary comodities, utilities (remember Enron?) oil, natural gas, should be illegal.

[FearlessFreep]

One thing you could do is introduce a speculation tax--say, $1 for every $1000 purchase of stocks and futures. It would provide hundreds of billions to reduce the deficit, and probably make markets more stable.

[alvdh1]

Let's get rid of the idots who have no business discussing the futures markets when the problem lies with profigate consumption of a nonrenewable resource. If you want the rpice of oil to start falling, then buy a smaller car, car pool or take mass transportation.

This not going to happen because we don't have the propensity to give up gains in our lifestyle. Everyone on this planet can maintain our lifestyle. If they did or do in the future, the price of petroleum will have no place to go but up. Once an oil field has 50% of the black gold removed, production begins to decline- it is a fact of life according to Hubbert's Law. We have or will reach peak oil production in the very near future.

Every economy that is based on petroleum will ultimately feel the consequences of demand exceeding production once peak oil is reached. Given the fact that we do not react to a crisis until it is at hand, there is little hope that the world will get ahead of the bell curve associated with world wide decline in production of oil. The only reason we did not actually have a decline in oil production in 2006 was because of the 5 billion barrels added from the Canadian oil sands.

I pose one maybe two questions to all of you about our ability to produce our way of the ultimate delima we face. 10 of the top 20 oil producing countries already have declining production. Their economies are growing and and so is their internal demand for oil. Is their any way for this to be corrected by increasing drilling. The answer is no. In addition, the remaining 10 countries yet to experience declining production are also experiencing increased internal demand.

In 2006 U.S. oil companies bought back $83 billion in stock and paid out $87 billion in dividends. Does this reflect an industry that is trying to increase production or profit from the high price of oil? I am confident that they could care less about anything but the latter.

[RedWhiteandBlueState]

It's all smoke and mirrors. Nothing real, nothing concrete. A foundation built upon leveraged debt and the rabid desire for more and more of it. The saving grace could be this notion Barack articulated the other night of a "rising majority" a "new" bloc of voters, made up of youth and those progressives and independents who want to salvage whatever's left of the promise of America and move forward. That this new majority could elect a generation of leaders more concerned with fairness, the constitution and serving the common good than their own financial and personal gain.

There has always been talk of this "silent majority", at least in my adult life. I took solace in knowing (or thinking I knew) it was lurking in the Reagan years. I thought for sure it would rise up in 2000 and then most definitely in 2003 - Iraq - and again in swift boat 2004. In both these elections a previously "silent" majority emerged. It just happened to be evangelical Christians.

I only hope this time - 2008 - there is this 'new majority' that Barack referenced and is ready to lead.

As I concur, it may well be the last "hope" for this young republic as we've all known it.

Peace, indeed.

[NicoleAnonymous]

I wish the person who invented the stock market never thought of it. I read somewhere that the majority of people in this country own stocks but most people I know don't have any.

It just seems like a way for a tiny number of people to get rich.

[cylindar]

So what else is new!! The speculators you are so afraid of are your neighbors in the good old US of A. They are the bandits. They are the speculators. Forget blaming everything on the Arabs. You still have not figured out who the real bad guys are yet have you?

[mjjcpa]

Another malevolent after-shock of Bill Clinton's 'asleep at the wheel' Presidency. He should never have let Exxon and Mobil merge, no matter how low oil prices went.

[peterg76]

"It is long overdue that our government institutions..."

This has taken Dick Cheney 7 years. Let's be thankful he isn't trying harder.

[EinChicago]

Of course OPEC ocuntries are manipulating the market through trading. Oil is about $50 above fundamentals but venezualan heavy oil is only profitable above teh $50 mark, so that's one country who will use their newfound wealth to make straw trades and keep oil high.

[realitytrumpsbull]

3 words: yo-yo economy. BzzzzzzZZZZZZZZZZZZZ!!!

[raptor]

On Nightly Business Report at the end of the year (I get it by delayed broadcast, so don't hold me to the date), a panel of experts prognostcated on 2008. One member predicted that the price of oil would decline, never hitting $100 a barrel. It went up to $100 a day or two later. Remember all the doomsayers, when oil was about $25-30 a barrel, predicting a world upheaval if oil went up to $100?

[Hoelder]

I think we are missing a major point: The falling US Dollar. Since the oil price is solely pegged to the Dollar (for a few exceptions), the producers have to recover that loss. It is a myth that the free trade economies are actually trading so freely. Sooner or later we have to discuss that we are selling out America when China is desperately looking to invest the trade imbalance, there will be nothing more to buy which devalues the Dollar even more. It is the basic rule of capitalism to get the best price, now on a scale unknown in generations before us.

[GTrollPatrol]

i a futures trader

that logic you have is totally bogus, learn the markets

futures and spot (cash) markets are completely separated instruments that while they do move together they do not ever trade tick per tick

peace

[GregNewYork]

That trade was deliberate by a Clinton Supporter to ensure the term $100 a barrel would be a valid talking point during Saturday Nights ABC Debate.

Ron Paul is the only guy telling the truth on the real reason Oil is so high.. it is the DEFLATED DOLLAR.

It is talked about all day on Financial Networks... but never on Idiot News Outlets.