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What's Up (Down) with the Price of Oil?   (September 26, 2006)


In the September 14 entry, "Could the Price of Oil Be Manipulated?" I made this comment:
If I were in a position to manipulate the oil futures market (oh how I wish!), I would engineer the occasional free-fall in order to panic the herd into selling. As the price fell to absurd levels in the ensuing rush to the exits, I would buy futures on the cheap and then let actual demand drive the price back up, thereby reaping vast profits once the price returned to its "market" level.


What's interesting about oil's near free-fall from $78 to $60 in a matter of weeks is: this is exactly how it would respond had a concerted effort been made to drive down the price. Now maybe this is just "market forces at work," but the first thing I would do to set up a free-fall is flood the media with stories about how the world is awash in oil, Peak Oil is bogus, we've got oil to last for 100 years, etc. etc.

And here we have Exxon and Saudi Arabia both saying exactly that:

Producers Move to Debunk Gloomy 'Peak Oil' Forecasts:
Yesterday, Abdallah S. Jum'ah, chief executive of Saudi Arabian state-owned Saudi Aramco, the world's largest oil company by production, argued during a speech in Vienna that the world has more than a century's worth of crude left at current production rates. His talk followed similar remarks by a senior Exxon executive this week. Spokesmen for Exxon and Aramco said they aren't coordinating their remarks.
To quote the Mogambo Guru: hahahahahahahahahaha! It's just coincidence that Exxon and Saudi Arabia are talking up the oil surplus at the same time.
(Exxon's) Mr. Nolan cited a U.S. Geological Survey estimate of more than three trillion barrels of conventional recoverable oil resources, of which one trillion barrels has been produced. Conservative estimates of heavy-oil and shale-oil resources push the total to four trillion barrels, while a 10% increase in recoverability will deliver an extra 800 billion barrels, Mr. Nolan said.
Nice, but the shills forgot to mention that the easy trillion--the stuff which flows out under pressure, the light sweet crude which costs $1 to get out of the ground--is nearly gone. The other 3 trillion are increasingly expensive to pump out: they're deep, sludgy, mixed with sand, etc. etc. It costs upwards of $40 a barrel to extract and refine this "limitless" oil. To reiterate a point made here repeatedly: oil isn't gone, but the cheap oil is. For a detailed debunking of the Saudi claims of unlimited reserves, please read
Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy

As for burning up that next trillion barrels in a decade or two, plus a veritable mountain of high-sulfur coal--well, maybe when our Leadership stops "debunking" global warming and starts building a seawall around Manhattan and Washington D.C., then they'll finally "get it" that even if the next trillion barrels will be cheap (it won't), we can't burn it anyway without creating a runaway warming cycle without precedent.

Now that we've created a media stupor of "oil surplus," next we sell off futures, triggering a stampede in the hedge funds. They're skittish little beggars, those hedgies, because they need to get in and get out very quick-like to make their enormous fees and still produce some gains for their very rich and very greedy clients. OK, done. The stampede has exited oil, and now we plant stories in the media about how all the "smart money" is exiting energy and entering tech. (You've noticed those stories, haven't you? That's what good PR is all about.) Here's one report on the "exit, stage right" by speculators:

Oil's slippery slope: Moves by monied speculators bear heavily on prices

The movement of all that speculative cash isn't the only reason energy commodities are tumbling. But analysts say the behavior of big market speculators has amplified and speeded up the drop.
The Commodity Futures Trading Commission keeps track of whether traders are buying or selling futures, betting that prices will rise or fall. Among speculative investors, the number of bets on rising prices has dropped by more than 50 percent since mid-August, said David Kirsch, an oil analyst at the PFC Energy consulting firm.

At the same time, the number of open contracts on the oil market -- essentially, a gauge of how many investors have an ongoing stake -- remains high. But many of the people buying futures have shifted their timing. Instead of buying futures for the coming month, previously the most common purchase for speculative investors, they're buying futures contracts for three or fourth months from now.

"They're not fleeing," Kirsch said. "They're just switching their positions around."
Voila. Now that we've engineered a free-fall to $60, we load up on now-cheap futures for December or beyond. Futures which we will sell to the hedgies for enormous profits when oil "somehow" becomes scarce again and the price rises back to $70 and above. It's like shooting fish in a barrel, isn't it?

Now let's look at a chart of an oil ETF (exchange traded fund), the XLE, which is a collection of oil stocks:



Oil Bears would point to the "double top" and the apparent break in the long uptrend as evidence oil has "topped out" in the big picture, and is on its way to $50 or lower. Maybe.

But it can also be argued that oil has just dropped back to a level of massive support before it makes another run at breaking through resistance. The technical indicators of MACD and the stochastic are both bottoming, suggesting that this free-fall has run its course and the oil market is setting up for a rebound--which as the first chart shows, tend to form a mirror-image of the drop. In other words, a big sharp decline is followed by a big sharp recovery.

That's how the big money is made, Ladies and Gentlemen. So watch the media for stories of "risks to oil supply" and the like. (What happened to the oil glut? Huh? What oil glut?) Those scary stories of possible shortages will "magically" be followed by actual declines in supply which will trigger "market forces" (so benign sounding!) and the price of oil will jump as rapidly as it declined.

So no, the oil market isn't manipulated. Ignore the man behind the curtain. Move along, we'll keep you posted on how much you should pay for gasoline. The price will rise, gosh, right after the elections. Guess I shouldn't have revealed that, huh?


For more on this subject and a wide array of other topics, please visit my weblog.

                                                           


copyright © 2006 Charles Hugh Smith. All rights reserved in all media.

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