Thursday, March 19, 2015

Economy: Oil Price - Cue Ball Of The Speculation

(Drivebycuriosity) - Yesterday the oil market showed again that it doesn`t care about the fundamentals. The oil price is just a cue ball of the speculators - at least in the short run.

In the morning we learned that the already record high US inventories climbed another 9.822 million barrels; they are now 37% above the historical average for this time of the year - another proof of the growing oil glut (bespoke). There is also a deal with Iran in the making which could lift the sanctions and raise the supply from this important producer (geopolitics).

Nevertheless the oil price (Brent Crude) jumped 6% yesterday - ignoring the fundamentals. According to the media hedge funds and other speculators raised their oil bets because in the afternoon the US Federal Reserve gave a dovish outlook and signaled that they will raise interest rates slower than expected (cnbc). The US stock market responded with a gain of 1.2% (S&P 500). Related to the moderate stock market reaction the oil price jumped 5-times.

How can the oil price rise so strong when the oversupply is growing? Oil is represented by futures (financial contracts for delivering oil at a date in the future). When the media report about oil prices they usally refer to the future for Brent Crude, the future for international traded oil, or the WTI (the American type of oil). Theses future are traded on financial markets and behave like stocks and other traded assests. In the short run the future prices reflect the behavior of traders on financial markets, mostly hedge funds and other speculators. Therefore the oil price is shaped by the bets on the financial markets.

From 2009 till last autumn hedge funds, pension funds and other huge speculators have been betting billions of dollar on rising oil prices fueled by speculation on geopolitically induced supply disruptions (Iran Conflict, wars in Iraq, Syria and other countries  driveby). These bets kept oil expensive (above $100) even that the oil supply was already rising thanks to the climbing US production and return of oil suppy from Iraq. Last autumn the oil price bubble burst because the oversupply couldn`t be ignored anymore.

Today oil prices gave parts of their gains back, in the moment of writing Brent Crude down 3%, WTI minus 2.7%. Another proof that the price of oil is a cue ball of the speculation.

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