Brad Zigler

Red Flag: Oil's Faltering

Jack -

We're actually seeing some marginal mprovement in margins, which is a function of oil's relative price (versus products). Normally, crack spreads trough in October to set up a run-up into spring.

Of course, this has hardly been a "normal" year.

More telling, perhaps, is the developing carry market in WTI which is backing up at the Cushing, Okla. terminus.

On Nov 25 02:13 PM Jack Walker wrote:

> Brad,
>
> How much of the current weakness can be attributed to usual seasonal
> weakness that is not yet apparent?
>
> Jack

Oil Market Dithers as Funds Buy

Jack -

The index represents the cumulative net long position (futures and options by delta) held by money managers reporting to the CFTC. The index is normalized at 100 as of June 13, 2006.


On Nov 12 11:22 AM Jack Walker wrote:

> Brad,
>
> Can you provide some more details of the Money Managers Index? <br/>
>
> What's included?
>
> Thanks,
>
> Jack

Oil: Three Month Roll Breaks the Buck

Better check what you "know" ...

See the history of HAI articles trailing back to mid July when gold was, in fact, BELOW $950 encapsulated in "Gold's Breakout Revisited ( www.hardassetsinvestor...).


On Oct 07 10:29 PM Albertarocks wrote:

> "Yeah, I know. Gold made a record-breaking move Tuesday morning.
> But you saw that coming, right? Not exactly a surprise, that."<br/>
>
> Easy to say after the fact, isn't it! One thing we know for sure,
> you wouldn't be puffin' your chest out like that when gold was rising
> toward $950.

Why Pros Spread Oil and Gas

Historic figures arise from spot prices. To avoid the roll effect, though, retail traders ought to employ the January contracts in a "spread-and-hold" position. Forward contracts, too, qualify for a lower margin tier.

Why Pros Spread Oil and Gas

January contracts for both commodities.


On Sep 28 08:06 PM Ron2008 wrote:

> Brad, in your article "What (Or When) Is Up With Natural Gas?" you
> never said what contracts (month) you were using to play the long
> NG and short CL spread. Which ones did you use?

Why Pros Spread Oil and Gas

Perhaps you failed to note the embedded link to the foundation article, "What (or When) is Up with Natural Gas?" (www.hardassetsinvestor...) which laid out the historical basis for the natural gas/crude oil spread.

That article, published on JULY 8 while natural gas was still cycling lower, cautioned investors that buoyancy shouldn't be expected in gas prices until Labor Day. As it turned out, the market nadir was Friday, September 4 (Labor Day was Monday September 7).

You state: "That rebound in NG had nothing to do with the stupid oil/gas ratio ..."

The oil/gas ratio is a manifestation of the underlying markets' fundamentals; It's an EFFECT, not a cause. No one, in the above article, the linked foundation piece, or in the articles published last year about the spread (starting with "Spreading Oil and Gas," www.hardassetsinvestor..., from August 2008) claimed the ratio was driving market fundamentals.

It's perfectly appropriate to trade seasonal spreads to capture market tendencies. It's been done for years in the agricultural markets and now it's done in the energy complex as well. Spread traders simply note marketthese tendencies and attempt to trade WITH them; ratio plays aren't a causative force themselves.

Even NYMEX recognizes the connection between natural gas and crude oil. That's why the clearinghouse grants margin credits for the NG/CL spread.

Aricool wrote:

> this is a lame article because you waited until Nat Gas got a technical
> rebound after Labor Day to publish it. If you would have published
> this article any time this year before Labor Day you would have looked
> like an idiot within two weeks. That rebound in NG had nothing to
> do with the stupid oil/gas ratio, but was just a matter of OFO's
> getting annually lifted on Labor Day, which kept the Henry Hub spot
> price from heading towards $1. Same thing with oil, it is going down
> b/c distillates have been piling up all year and are maxing out storage-
> crack spread going towards zero. So speculators and oil market manipulators
> cannot overcome such blatant evidence of collapsed demand so they
> bug out, maybe quicker because its a soft time of the year, but nothing
> special about the oil/gas ratio none-the-less. This article is completely
> hog wash and opportunistic to look smart about a stupid oil/gas ratio
> that the traders always love for some reason!
>
> Ari-

Oil Supply and Contango: Drawn Down

The quarterly contango implied by NYMEX futures at Friday's settlement was $1.39/bbl. That represents the roll from nearby October to January, or three months.

After paying paying finance and storage costs, there is indeed a negative carry now. Using nominal fee assumptions, you'd be in the hole by 67 cents/bb, for an annualized loss of 3.7%.

Historically, the reversal of the carry trade precedes a flip into backwardation. The question now is whether we'll see history repeat itself.

On Sep 13 12:44 AM JeffDB wrote:

> On Sep 11 01:51 PM Ron2008 wrote:

Gold or Oil: What's a Better Inflation Hedge?

Something to keep in mind: historically, the oil market's spent more time in backwardation than in contango.

The average three-month roll since 1985 is -17 cents a barrel. That means there's more likely a PROFIT, rather than a LOSS, awaiting a long-term oil investor.

The likelihood of a inverted market increases, in fact, in a bull market (when inflation's more likely).

Investors can use ETFs like USL, rather than USO, to minimize the contango affect.



On Aug 20 11:31 AM kohalakid wrote:

> chap08 makes a point that is overlooked in this article.
>
> For the average investor, the cost of rolling over a futures contract
> monthly, or paying the contango in advance by buying a further out
> futures contract, is a huge drag on any potential profit in oil.
>
>
> Currently the one year forward in oil is about 10% over spot while
> one year gold is about 1/2% over spot.

The Energy Markets According to Stupak

They're swaps. These are over-the-counter (OTC) contracts typically tied to LIBOR (London InterBank Offered Rate) on the side opposite the commodity return.

Non-cleared OTC contracts are entered into by participants in reliance on the faith and credit of the counterparties. In other words, each party investigates the creditworthinessness of its opposite and looks only to that party for performance.

Some swaps nowadays, though, are guaranteed by third-party clearinghouses.


On Aug 10 05:14 PM SeekingTruth wrote:

> Brad, what instrument typically generates the interest payments,
> and how "secure" are they?
> There are so many more arcane variables here than meets the eye,
> that many real world examples would have to be illustrated for the
> layman to grasp this all in depth. But you have given a good definition
> for those already familiar with the nuances of these techniques.
>
> I believe that at certain times, under certain conditions , speculation
> can have a tremendous and disruptive effect on the markets, i.e.
> certain people get filthy rich very quickly and others are sent to
> the poor house for reasons that have little to do with the consumption
> element of demand (or legitimate hedging or investment either), and
> some rational rules for better keeping orderly markets are wise,
> and necessary.
> Stupak is making an effort to determine what these rules should be,
> and with the help of some honest experts, maybe he can accomplish
> something. He has my best wishes for this daunting task.

The Energy Markets According to Stupak

An investment bank offers a fund a commodity return above a certain benchmark in exchange for a stream of interest payments. The fund, then, can obtain potentially unlimited exposure to the commodity (subject to the size of the market quoted by the swap-dealing investment bank). Thus, there are no speculative position limits hemming in the fund.

For its part, the swap dealer offsets as much of the resulting swap exposure against other (opposite) transaction in its risk book, i.e, swaps in which it receives the commodity return, or other long positions. The net residual risk can then be hedged in the futures market. If the swap dealer is short after netting, it'll be a buyer of futures. If long, it'll sell futures.

Those futures transactions, since they offset business risks, can claim a bona fide hedge exemption to position limits.

Noticed the Oil Backup?

WHERE did you get the notion that a central bank would contract for long metal exposure with a swaps dealing bank?

Got some proof?


On Jul 26 12:34 PM nobby73 wrote:

> The central banks are the OTC swaps counterparties for the precious
> metals shorts....

Noticed the Oil Backup?

Though, by the strictest definition, contango actually represents the premium OVER the cost of carry (storage, insurance and financing costs).


On Jul 25 10:21 PM Brad Zigler wrote:

> Contango exists when an immediately deliverable commodity is priced
> lower than a deferred delivery e.g., when September crude oil trades
> under December futures.
>

Noticed the Oil Backup?

So, would you say that this explains the oft-reviled short positions in precious metal futures held by U.S. banks?

Are these banks merely hedging the swap exposures granted to fund customers rather than colluding with the central bank in a scheme to manipulate the price of metals lower?


On Jul 26 11:10 AM The Greatest Rip Off of our Time wrote:

> When Congress passed the Commodity Exchange Act in 1936, they did
> so with the understanding that speculators should not be allowed
> to dominate the commodities futures markets. Unfortunately, the CFTC
> has taken deliberate steps to allow certain speculators virtually
> unlimited access to the commodities futures markets. The CFTC has
> granted Wall Street banks [like Goldman Sachs] an exemption from
> speculative position limits when these banks hedge over-the-counter
> swaps transactions. This has effectively opened a loophole for unlimited
> speculation. When Index Speculators enter into commodity index swaps,
> which 85-90% of them do, they face no speculative position limits.
>
> The really shocking thing about the Swaps Loophole is that Speculators
> of all stripes can use it to access the futures markets. So if a
> hedge fund wants a $500 million position in Wheat, which is way beyond
> position limits, they can enter into swap with a Wall Street bank
> and then the bank buys $500 million worth of Wheat futures.
> In the CFTC’s classification scheme all Speculators accessing the
> futures markets through the Swaps Loophole are categorized as “Commercial”
> rather than “Non-Commercial.” The result is a gross distortion in
> data that effectively hides the full impact of Index Speculation.

Noticed the Oil Backup?

Contango exists when an immediately deliverable commodity is priced lower than a deferred delivery e.g., when September crude oil trades under December futures.



On Jul 25 07:59 PM merv. wrote:

> Please don't jump on me for asking a simple question. What is contango?
> Thank you.

Playing the One-Armed Bandit at the Gas Pump

Actually, the price of crude in the crack spread computation includes the dollar risk.

We're talking about a time horizon here (through last trading day of the nearby July contract) of only two weeks.

This past week, the dollar gained 1.6% against gold. The previous week, the greenback gave up 1.8%. Pretty much a wash.


On Jun 12 09:40 AM User 357705 wrote:

> Neglecting to factor in the continued and accelerating USD decline
> skews this data and article.