Monday, July 30, 2012

forget LIBORgate - oil market manipulation is much worse...,

zerohedge | Since the Global Community all the sudden seems to be preoccupied with Market manipulation even though the authorities knew it was a problem for over 5 years with Libor Rate Fixing. It is high time authorities look at the Crude Oil market which has been manipulated for the last decade and all the sophisticated participants know it is rigged or artificially higher than the fundamentals of the economy dictate. Consumers are paying an easy $35 dollars per barrel over what they would otherwise dole out for a barrel of oil if fund managers didn`t use the benchmark futures contracts as their own personal ATMs.

Just a month ago Crude Oil WTI was $78 a barrel and today it is $93. Do you think the fundamentals changed one bit to merit this price swing? Nope! Supply levels are all at record highs around the world. Is it Iran? Please!! It is all about the money flows, nobody takes delivery anymore. Assets have become one big correlated risk trade. Risk On, Risk Off. If the Dow is up a hundred, you can bet crude is up at least a dollar! It has nothing to do with fundamentals, inventory levels, supply disruptions, etc. It is all about fund flows.

So how this affects the average Joe is that if Wall Street is having a good day, i.e., fund flows are going in, then Average Joe is having a bad day and paying more for Gas. Yes, it is that simple. A good day for Wall Street is a bad day for consumers at the pump these days as Capital flows into one big Asset Trade: Risk On!

It should be separate in that equities respond to stock valuations, and energy responds to the market conditions of supply and demand. But that isn`t the case in the investing world today, it is all about Capital Flows in and out of Assets. The economy could be doing really poorly, Oil inventories can be extremely high, the economic data very bleak but Oil will go up and consumers will pay more at the pump just because some Fund Manager pours capital into a futures contract.The Fund Managers goals are in direct opposition to the consumers who actually uses the product. Funds flows and not supply and demand ultimately carry the day in the energy markets, and that needs to change!

The key is equities, crude oil (both Brent and WTI) are essentially equities for Fund Managers to trade in and out of and they make a fortune in these instruments. When I refer to Fund Managers this includes Hedge Funds, Oil Majors, Pension Funds, Investment Banks etc. This is part of the reason that the price of oil can be so varied in value within a 3 month span. WTI can literally be $110 one month and $80 the next because of pure funds going in or coming out of the futures contracts.

The volatility really is where they make their money, they have deep pockets and they make a fortune moving crude oil around like a puppet on a string. If you think in terms of each dollar price move in the commodity being equal to $1,000 and the size that these players employ on a monthly and quarterly basis you start to see the value of buying thousands and thousands of futures contracts and capitalizing on these huge moves in the commodity.