Why the Oil Spike?

Why did oil breach $138?

 

Price of NYMEX light crude. Source: ino.com.

 

One key impetus certainly came from news about U.S. interest rates and the dollar. European Central Bank President Jean-Claude Trichet Thursday cautioned that the ECB may raise interest rates next month in order to contain inflation, while Friday's U.S. unemployment numbers may have put further U.S. rate cuts back on the table. The twin developments sent the dollar plunging 1.1% against the euro and the dollar price of many commodities soaring. Gold was up 2.6% and the Commodity Research Bureau Index up 3.5% (numbers from ino.com). Still, oil's 7.5% rise was clearly the Homecoming Queen.

In terms of news specific to the oil market, this story out of Saudi Arabia could be significant:

Saudi Arabia's Shura council (parliament) will hold a series of meetings over the next two weeks to discuss a controversial proposal by a key member to curb oil production to save reserves for better prices.

Also noteworthy is an increasing likelihood of military conflict involving Iran:

An Israeli deputy prime minister on Friday warned that Iran would face attack if it pursues what he said was its nuclear weapons programme.

"If Iran continues its nuclear weapons programme, we will attack it," said Shaul Mofaz, who is also transportation minister.

"Other options are disappearing. The sanctions are not effective. There will be no alternative but to attack Iran in order to stop the Iranian nuclear programme," Mofaz told the Yediot Aharonot daily.

If Saudi production has indeed peaked, or if military conflict involving Iran is indeed imminent, that would unquestionably be the kind of news that should send the price of oil soaring. But this much of a move on just the whiff of a rumor?

It seems likely that the fundamentals above warranted a big move in the price of oil, but the momentum then caught some traders short who had to scramble to buy oil to cover their positions. But who? Via Brad Setser, the Financial Times reports:

Traders who had bet on falling oil prices through short sales-- in which they sell the commodity in hopes of buying it back later at a lower level-- were forced to cover their positions, sending oil prices skyrocketing.

Wall Street banks contributed to the rally as they bought crude oil futures to cover their obligations under agreements that compensate investors and companies such as airlines if crude rises above $140 a barrel.

Hmmm.... you mean some of the big guys have been quietly raking in cash by selling far out-of-the-money options? Now where have I heard that strategy before?

I remember-- it was Capital Decimation Partners.

Comments

[Edward Janeck:]

I think it is a simple as Boone Pickens say -demand is 87 million barrel a day and supply is 85 million barrels. Pickens does think the US can cut oil dependence by 40% in ten year. I will show you how. @
theinvestingspeculator...

2008 Jun 09 01:18 PM

[sbenard:]

That quote out of Saudi Arabia was stunning! That could easily send oil up $10. I have read other news stories around the world that more and more oil producing nations are rumbling that since oil is in limited supply, they are going to hold onto their oil for their own use instead of exporting it.

2008 Jun 09 02:14 PM

[fxtrader07:]

first, the saudis: don't believe it. they still depend on America protecting the royal family. make no mistake about that.
as for israel: can't help but to digress:; wtf do the zionist idiots in the Israeli govt think that they are??? Israel has likely one of the largest nuclear weapons arsenals in the world, yet they feel that other countires in the region have no right to obtain such weapons. i certainly would like to see countries like iran being cut off from such weapons, but honestly, what right do the Israelis have to possess them? Aren't they a permanent threat to their neighbours who all have no nuclear WMDs? What double-standard is established here? I am very much in favour of not allowing any country access to nuclear weapons, but then Israel ought to be disarmed from nuclear weapons alltogether, too. As long as they possess these, every country in the region can rightfully demand some, too, for its own protection?!

2008 Jun 09 03:52 PM

[Gob:]

"Israel has likely one of the largest nuclear weapons arsenals in the world, yet they feel that other countires in the region have no right to obtain such weapons"

Yeah, those dirty Jews should just let the Muslims who hate them push them right into the sea, as they've repeatedly stated is their goal.

Stupid Jews always causing trouble with their desire to LIVE!!!!

2008 Jun 09 04:49 PM

[Jerbear:]

What happened to the mutual destruction strategy the USA had with Russia during the cold war. And probably still has for all anyone knows.

We park a couple of nuclear submarines and frigates off their coast and tell them they get 10 for every 1 they fire.

2008 Jun 10 04:19 AM

[NOWHEREMAN:]

Well, at least I now know we have terrorist sentiments in our midst.

Israel would have been wiped "off the Map" many years ago as THE IRANIAN President wants, if it did not have Nucs. The idea that it could withstand an assault from all sides is decidedly stupid. WMD is their only safeguard.

The mutual destruction strategy is good only if someone survives, Israel is just too small, all would die.

2008 Jun 10 10:21 AM

[ArtfulDodger:]

Folks:

Over and over I hear the statement claiming there are 2 mil. barrels more demand than supply. 87 versus 85.

Why then are there not shortages at the pumps? Why are there no oil shortages anywhere in the world?

You can buy all the oil and gas you can afford; there is no over demand for either.

If so, where do you find this 2 mil. barrel shortage?

I've looked at every government site and zero.

Oil bull T. Boone made this statement and since then I hear and read it every day.

Show it to me, please.

And don't send me to some oil tout's site or article that repeats what T. Boone said.

Rebeldog

2008 Jun 10 11:10 AM

[john s. gordon:]

gasoline in the usa is like health care, rationed by ability to pay cash. if you got no cash, you get no ....
> jack

2008 Jun 10 11:19 AM

[billp37:]

"Also noteworthy is an increasing likelihood of military conflict involving Iran:"

Let's hope not.

We advocate peaceful settlement of these unfortunate matters.

www.google.com/search?...

2008 Jun 10 07:07 PM

[bill d:]

Now I'm really confused.
2 Million bbl/day short - EVERY DAY ????
So after 1 month we are now 60 mill bbls short ?
Where am I f**ked with my logic ???
On the first day of the next month we will be 60 mill bbls short to start the day. So it appears there will have to be an increase of 2 mill bbls just to maintain a 2 mill bbls shortage the next day.
Is not this shortage cumulative ?
Bullshit - one of these some of these greedy bastards are going to have to take delivery or cover. And I ain't talking about the oil companies.
When I see lines & gas stations going out of business like the 70's & 80's then I'll become a believer. That problem was also an artificially created problem else we should have run out of oil 20 years ago.
It's the SPECULATORS stupid.

2008 Jun 11 12:51 AM

[bill d:]

Re: xtrader07
And as far as Israel having nukes - would you rather they or Iran have them ? If Israel didn't have them do you think Iran might take advantage of Israel?
Gee Lord Chamberlain - maybe we can send Obama or Carter to talk them out of it.
Were you born yesterday ?
Wouldn't it be nice if we could all just get along, beat our swords into plowshares, blah, blah ?
Join the real world (expletive deleted).

2008 Jun 11 12:56 AM