Is Someone Playing With Oil?

By Brad Zigler

You can't say the shorts didn't see this coming. Oil slipped from its nearly four-month-long contango on Sept. 17. The inversion deepened over the subsequent two trading days. The tip-off that something big was brewing came on Friday, Sept. 19. Over the past 23 years, the nearby quarterly crude oil spread averaged -33 cents a barrel. In other words, the contract calling for delivery three months out from the spot month tended to be 33 cents cheaper. A standard deviation in the spread was $1.45, making the spread's "normal" range boundaries $1.11 on the contango side and -$1.78 on the inversion side. On Sept. 19, the crude oil market headed into the weekend with a $1.95-a-barrel inversion.

The rest, as the saying goes, is history.

NYMEX Crude Oil Quarterly Contango (Postive)/Backwardation (Negative)

It's clear somebody went into the weekend with a big bet. What's not so clear is who that might have been and who was hoisting them by their, um, you-know-whats the following Monday. The sudden collapse in the futures term structure pricked the Commodity Futures Trading Commission's ears, prompting acting chairman Walter Lukken to pronounce that the agency was working with NYMEX compliance staff to ensure that no one is manipulating the market.

More on this to follow ...

Comments

[Alex Filonov:]

Can it have any relation to the fact that bankrupt Lehman Brothers and couple of brokers which had run on them last Thursday, namely Goldman Sachs and Morgan Stanley, had big long oil positions?

2008 Sep 23 11:35 PM

[Alex Filonov:]

Have to add that there was a disconnect between price of oil futures and prices of oil-related ETFs (USO, OIL, DTO) during last couple hours on Friday. I wanted to buy some DTO, to short this obviously strange jump, but it didn't reflect price of crude.

2008 Sep 23 11:37 PM

[G. L. Turner:]

I believe that GS and MS had "swaps" that they were holding from 6 mos/ April positions on a previous 'passive long investor' CIF client of theirs and 3 month 'swaps' for July. These were struck long at teh time based on their suggestions of, remember, Oil Going to $149 by early fall and $200 by the end of the year.

These guys were scrambling to get the price up from other gullible traders to help with the lay off, and to minimize perhaps some interesting losses...What was GS so fearful of about potential losses that they needed to convert to a bank holding company to get Fed Protection. Heck, they reproted profits fo rhte last quarter jut the other week??

THere is something very fishy, or more, been going on with these guys and commodity and oil trading and price promotion all year...and they have managed to escape the examining light of the CFTC and NYMEX...thus far.

2008 Sep 23 11:48 PM

[Alex Filonov:]

Sorry, I meant Monday, not Friday.

2008 Sep 23 11:48 PM

[mixter:]

I am sure "Big Oil" conspired to reduce oil prices just like they did to raise them. What a bunch of fools there are out there making idiotic proclamations!

2008 Sep 24 09:30 AM

[tginomorebush:]

"Is someone playing with oil"???

duuuuuhhhh ......YES!

2008 Sep 24 09:50 AM