09/19/2009 05:12 am ET Updated May 25, 2011

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??