Interest Rates - A Ticking Time Bomb [View article]
Monetary stimulus can only stimulate asset price inflation.
Only fiscal measures can stimulate retail price inflation, and in fact we are seeing the reverse of that, as firstly, barking mad austerity measures bite, and secondly, a secular ICT/automation productivity trend puts increasing numbers of the middle class into McJobs at best and no jobs at worst.
The 300 year paradigm of debt-based finance is over.
Brent Crude And WTI: When The Same Thing Becomes Very Different [View article]
@Alex_G
The culprit is macro manipulation of the increasingly dysfunctional Brent/BFOE price.
If the history of commodities tells us anything, it's that if producers can support a market price with borrowed money, then they will.
For the last few years producers have been able - via the good offices of investment banks using prepay instruments - to support the physical Brent/BFOE price at the upper bound where demand gets destroyed rather than at the lower bound where production gets locked in.
The producers have made out like bandits from the resulting 'super-rents' , and the investors who made this possible by providing the funds are Goldman's 'muppets' who through buying oil ETFs to 'hedge inflation' have thereby caused a bubble, and the very inflation they sought to avoid.
Are You Expecting Oil Prices To Fall? [View article]
The market is being supported - as it has been since early 2009 - through manipulation of the completely discredited and dysfunctional Brent/BFOE benchmark.
If buyers, particularly the Chinese, merely paused their programme to fill reserves the price would collapse overnight to and temporarily through $60 /bbl.
Commodity Chart Of The Day: Crude Oil [View article]
Brent has been in manipulated bubbles for the last eight years, with the exception of the period between July 2008 (when the private sector bubble collapsed) and 2009 (when the Saudis and JPM pumped the bubble back up).
This has led to a transfer of wealth from oil product consumers to crude oil producers and the middlemen who run the casino.
All commodity bubbles come to an end through new supplies and demand destruction via substitution, and it has only been financial demand from sovereigns building physical reserves against Iran (and other risk), and also from 'inflation hedgers' which has kept prices up.
When the Iranians cave - which I believe is imminent - I do not see anything holding the markets up, and without the flow of new money into the market from 'greater fools' the bubble must collapse.
The proof of the manipulated bubble is in the massive premium of Brent over WTI.
There is no reason for this premium other than manipulation of Brent.
gold is IMHO capped in the medium and long term and will vary in price only with the yield curve for as long as we are at the zero bound....which is forever (at least within a deficit-based market paradigm), since the system is terminally broken.
USCF's Hyland: SEC Correct That Metal ETFs Don't Impact Prices, But Wrong About Hoarding [View article]
I disagree.
Of course financial demand impacts prices, just as much as demand by consumers does.
What we are seeing is producers being able to support prices at the upper bound where demand destruction sets in, through borrowing dollars from muppet investors, and lending metal to them in return.
Simon Hunt is good on substitution effects in the copper markets and the true state of supply and demand.
Copper is in my view in a financialised bubble (as are the equities and oil markets), and those inflation hedgers who were convinced by investment banks to pump these bubbles up - and perversely caused the very inflation they aimed to avoid - are in my view sitting on the edge of a precipice, unless they can sell to a Greater Fool.
Sooner or later, the flow of money into the markets - which is necessary to keep funding the flow out of excess profits to producers - will come to an end, and the market will collapse to the lower level clearing price at which production is locked in.
We saw just such a collapse in the (producer manipulated bubble) tin market in 1985. It went overnight from $8,000/tonne to $4,000/tonne, and the same risk exists today, since the intermediaries are not capitalised to prevent it.
Why The Next Few Years Will Be Incredible For Commodity Investors [View article]
Not sure about my pedigree but I do have a broad and long experience.....
When a government spends it does through instructing the Fed to spend dollars into existence as the Treasury's fiscal agent.
There is a myth that in doing so the Treasury thereby owes the Fed dollars, but that is just a myth.
Being pedantic, or precise, in an agency relationship, the credit created by the agent is equivalent to the credit created by the principal. There is no debt between a principal and an agent: the agent keeps a note (a memorandum account) of his actions on behalf of the principal.
Sorry to be pedantic.
Now the truth of that relationship is demonstrated by the fact that the few remaining US Treasury Notes spend precisely the same as do Federal Reserve Notes and it follows that they are bearer versions of virtual credit instruments returnable in payment of taxes.
The problem is that we (opaquely) permit private banks ALSO to act as agents of the Treasury by manufacturing look-alikes of Fed credits and to spend them and lend them into circulation.
In particular, we get the ludicrous situation that banks manufacture this credit money, which they THEN spend on buying interest-bearing Treasury debt.
ie what is in reality Treasury credit simply passes through the bid/offer spread of private banks, for the profit of their fat-cat managers and shareholders.
Sorry about the rant, which aims to provide background
Turning to your question, If governments were to spend by crediting every citizen with an annual dividend of (say) $10,000 then the first thing most would do is to repay crippling debt, and only having done that would most of them start spending - and yes, eventually causing inflation once productive capacity is soaked up.
Personally I think that one could stipulate that such a national dividend could be paid in 'property credits' which could be returnable against mortgage debt, or property rentals.
Or maybe in energy credits returnable in payment for (say) electricity, heat or fuel.
Or both.
People could then spend them profligately or save them by investing them directly in property or in renewable energy production or savings.
Why The Next Few Years Will Be Incredible For Commodity Investors [View article]
Major misconception here, I think.
Inflation is either demand-pull or cost-push.
Firstly, the only way there can be demand-pull inflation is if purchasing power gets into the hands of Joe Public. I see no signs of any possibility of that, in fact, rather the reverse.
Secondly, the reason commodity and equity prices are in a bubble right now is that 'muppets'/inflation hedgers have been mis-sold market risk by investment banks and have piled into ETFs and Index funds.
In a classic example of Soros' reflexivity they have thereby caused - by cost push - the very inflation they set out to avoid.
Unless there is a rush of 'greater fools' into the market, the next move is down, since the high prices which have enabled producers to make out like bandits inevitably lead to demand destruction.
Boom and bust are hard-wired into intermediated markets.
Producers have $ costs and hence tend to hedge by off-loading oil risk in favour of $ risk.
Historically they have done that expensively through futures markets, but more recently have found that they can bypass futures markets (and the casino 'take') through the use of (unleveraged) 'prepay', where they essentially lease oil to risk averse (inflation hedger) funds who lend dollars in return.
Indeed, the dark inventory of oil which is leased to investors is owned by the investors for the duration of the lease, and is therefore unavailable to a market blithely unaware of the two tier nature of the physical market.
Those in the know as to the existence of the Dark Inventory make out like bandits from their asymmetric knowledge.
I do not see any other debt-based currency replacing the dollar as a global reserve currency, but it is possible to use the dollar as a pricing reference while settling in something else.
In my view, it is possible - on a transitional basis - to create a next generation asset-based currency with global acceptability simply by monetising natural gas.
ie instead of oil priced in dollars, and natural gas priced against oil, we will see oil and dollars priced in gas.
Naturally, such a transitional energy-based currency would not be issued by banks, although banks as service providers could manage the issuance by producers.
Such new global market in gas is a work in progress. There is scope for (say) gold as collateral/backing for an energy crdait clearing union.
I hope my long post covered most of your points, particularly the circumstantial evidence (which is all you will get until the current 'bezzle' comes to light).
I agree that the long term trend of oil market prices is up, but this trend takes place between an upper bound price at which demand gets destroyed, and a lower bound price at which production gets shut in.
We have already seen one cosmic bubble and collapse, and that alone is in my view evidence enough that oil market price formation is completely divorced from the realities of underlying production and consumption.
In my view we are about to see another collapse, because it is only financial leverage which is holding up an over-supplied market.
I think that the trade, not unnaturally, because it does not have the true physical market information, is mistaking financial purchases of oil (either prepay or genuine reserve building) for consumer purchases by Chindia or otherwise.
Nick Butler, formerly of BP, said in the FT a few months ago that in his (cornucopian) view the market was now anything up to 3m bpd over-supplied as demand in the developed world has contracted and high-cost US supply has kicked in.
Hamanaka manipulated the copper market for ten years, and five years of THAT was after David Threlkeld blew the whistle, but was not believed. Massive macro manipulation has been going on in the oil markets for at least seven years.
Ask yourself cui bono from high oil prices? It's the producers of course, and if there's one thing that the history of commodity markets tells us it's that if they can find leverage to support the market price, then they will.
The leverage has come over the medium/long term from 'inflation hedgers' who thereby cause the very inflation they aim to avoid: in the recent short/medium term in oil, it has come from speculators who have paid the Iran risk premium.
When the Iranians cave in, which they are about to do pending a Romney win and an (unlikely) attack on Iran, we will see speculators closing out any remaining long positions, and also an end to physical hedging/stock-building by refiners.
We will probably also see the Chinese back off their massive programme of reserve building temporarily, pending the market price clearing at a much lower level, and probably over-correcting as it did in 2008.
The flow of risk averse dollars into the commodity markets via index funds, and then ETFs and ETPs began a long time ago when Goldman Sachs dreamt up the GSCI and the genius 'inflation hedging' meme that went with it.
They realised that their fund was structurally long of the oil market in a diametrically opposite way to the way that BP were structurally short. They then entered into what was essentially a long term 'joined at the head' co-operation. For fifteen years BP and Goldman Sachs had the same chairman - Peter Sutherland - and for about seven years BP's CEO, Lord Browne was also on the Goldman board.
I don't know exactly what BP and GS got up to during the period to 2001, but I do know that when I blew the whistle around that time on the 'date rape' manipulation of Brent futures settlement prices connected to GSCI fund roll-overs I got royally shafted and lost everything I had.
After about 2001, when Brent had declined sufficiently in production for Forties to be necessary, BP and Goldman have been in a dominant position in the Brent/BFOE complex. Add to that the creation of the dominant ICE trading platform.
However, it was Enron's re-discovery of the ancient 'prepay' technique which created the conditions for what occurred in the oil market since 2005. Enron defrauded creditors and investors by entering into off balance-sheet opaque pre-pay agreements via J P Morgan and Citigroup which essentially raised finance by lending commodities in return for a dollar loan by selling forward at a discount for dollars now.
That opaque prepay technique was subsequently taken up by BP and Goldman, and as more 'passive' (risk averse) funds flowed into the market - including transparent deals like Shell's arrangement with ETF Securities - we then saw, accompanied by vast and continuing hype, the inflation of the first 'private sector' oil price bubble.
This was always going to burst, and in July 2008, it did, after a manipulated spike in the market. Note that there was little or no speculative retail or hedge fund presence in the oil market at that time. The allegation was that Goldman 'goosed' Semgroup.
The bubble collapsed from $147bbl to $35/bbl , and then in late 2008 we saw the current bubble pumped up as the Saudis - who were desperate for revenues after the price collapse to $35/bbl - entered into WTI prepay agreements with their long-standing bankers (and author of pre-pays) J P Morgan, who had $ gazillions of post-QE fund money attempting to hedge inflation.
The effect on traders has been the creation of a two tier market in physical oil, and of a 'dark inventory' ( a bit like shadow banking) of oil which is nominally owned and held by producers as custodian, but in which the economic interest has been lent/sold temporarily to investors in exchange for a dollar loan.
The dominant presence in a market - any market - of 'passive' long only investors seeking to avoid loss, rather than active (speculative) investors seeking (two ways) a transaction profit, has been to literally kill the price formation of that market, and the effect has been of correlated financialised market bubbles across commodities and equities.
This financialisation through prepay and related techniques acted to the benefit of proucers, who will always support prices if they can, and has manifested itself in the oil market in several ways which provide circumstantial backing.
Firstly, BP's Brent/BFOE punishment of any traders with the temerity to take a large short position.
Second, the fact that the Saudis - despite periodically stating an intention to reduce the global oil price - did not then sell at Brent/BFOE prices (which set the price) but instead sent waves of tankers to the increasing over-supplied US.
This is because closing out WTI prepays is the best economic option whenever muppet financial buyers - whether risk averse 'inflation hedgers' or risk takers buying the Iran 'risk premium' - can no longer be found to roll the positions over profitably.
Third, examination of available BP cash flow information is consistent with prepays.
Fourth, I have confirmation via a very high level former insider that prepay is pervasive.
Fifth, an influx of opaque financial purchases of physical oil accounts for the Super Contango in oil in the first half of 2009.
Finally, many of the strange movements in US inventory can be accounted for by arrival in the US of oil which is nominally owned by the Saudis, but in which the economic interest has been sold/lent to investors.
When a prepay lending agreement ends, there is then a transfer of title in tank and Bingo! new inventory has magically appeared, just like the way that LME metal goes on and off warrant in warehouses.
Naturally there will be no 'proof', unless and until the regulators were to do their job and crawl all over BP, Goldman and JPM's trading.
My case is that this prepay/manipulation narrative accounts circumstantially for otherwise inexplicable market activity and events in a way that no other explanation does.
Excellent article, but I have a couple of quibbles.
Firstly, the EFP enables the exchange of a futures contract for a BFOE forward contract, not a spot contract.
To call it a method of delivery is therefore actually smoke and mirrors, and I was surprised - when I was the Director of Compliance and Market Supervision who drafted these IPE rules in the first place - that we managed to get the UK tax-man (there were VAT issues) to swallow that interpretation.
Secondly, it has been my view for some time that we are approaching the end of the greatest market manipulation in the history of commodity trading, which makes the Hamanaka 10 year $2bn manipulation of the copper market look like a car boot sale.
The fact that Brent/BFOE is $20 over WTI reflects the fact that a couple of players have been able to put a collar under the completely dysfunctional brent/BFOE complex price through being able to deploy - directly and indirectly - the enormous funding provided by 'muppets' who off-load dollar price risk in favour of oil price risk, and thereby take the other side of producers who aim to off-load oil price risk in favour of oil price risk.
It's not dissimilar to the way that Barclays have recently been shown to have been operating in the US electricity market.
ie you take losses in the physical market benchmark, but make massive profits on derivative and physical contracts priced against it.
Through the opaque Enron-style use of 'prepay' contracts, producers have been able to monetise oil in tank, pipeline and in the ground, by lending oil to funds via investment banks in exchange for a loan of dollars.
In doing so the investment banks enabled the creation of a 'dark inventory' of oil which is not owned by those whom the market believes owns it, creating pitfalls for the unwary traders who go short on the basis of misleading market price signals.
The Iran risk premium has enabled the manipulators (ie the producers) to keep the price (and the lunatic Brent/BFOE premium) higher for longer than I expected. But if and when the Iranians cave in after the election on 6th November - which they will - then we will see the oil market price decline rapidly and probably over-correct as it did in 2008.
Interest Rates - A Ticking Time Bomb [View article]
Only fiscal measures can stimulate retail price inflation, and in fact we are seeing the reverse of that, as firstly, barking mad austerity measures bite, and secondly, a secular ICT/automation productivity trend puts increasing numbers of the middle class into McJobs at best and no jobs at worst.
The 300 year paradigm of debt-based finance is over.
Brent Crude And WTI: When The Same Thing Becomes Very Different [View article]
The culprit is macro manipulation of the increasingly dysfunctional Brent/BFOE price.
If the history of commodities tells us anything, it's that if producers can support a market price with borrowed money, then they will.
For the last few years producers have been able - via the good offices of investment banks using prepay instruments - to support the physical Brent/BFOE price at the upper bound where demand gets destroyed rather than at the lower bound where production gets locked in.
The producers have made out like bandits from the resulting 'super-rents' , and the investors who made this possible by providing the funds are Goldman's 'muppets' who through buying oil ETFs to 'hedge inflation' have thereby caused a bubble, and the very inflation they sought to avoid.
All bubbles come to an end eventually.
Are You Expecting Oil Prices To Fall? [View article]
If buyers, particularly the Chinese, merely paused their programme to fill reserves the price would collapse overnight to and temporarily through $60 /bbl.
Commodity Chart Of The Day: Crude Oil [View article]
Commodity Chart Of The Day: Crude Oil [View article]
This has led to a transfer of wealth from oil product consumers to crude oil producers and the middlemen who run the casino.
All commodity bubbles come to an end through new supplies and demand destruction via substitution, and it has only been financial demand from sovereigns building physical reserves against Iran (and other risk), and also from 'inflation hedgers' which has kept prices up.
When the Iranians cave - which I believe is imminent - I do not see anything holding the markets up, and without the flow of new money into the market from 'greater fools' the bubble must collapse.
The proof of the manipulated bubble is in the massive premium of Brent over WTI.
There is no reason for this premium other than manipulation of Brent.
BullionVault's Adrian Ash: Why Gold MUST Go Higher [View article]
But for the reasons given here
http://on.ft.com/WE3GIE
gold is IMHO capped in the medium and long term and will vary in price only with the yield curve for as long as we are at the zero bound....which is forever (at least within a deficit-based market paradigm), since the system is terminally broken.
USCF's Hyland: SEC Correct That Metal ETFs Don't Impact Prices, But Wrong About Hoarding [View article]
Of course financial demand impacts prices, just as much as demand by consumers does.
What we are seeing is producers being able to support prices at the upper bound where demand destruction sets in, through borrowing dollars from muppet investors, and lending metal to them in return.
Simon Hunt is good on substitution effects in the copper markets and the true state of supply and demand.
Copper is in my view in a financialised bubble (as are the equities and oil markets), and those inflation hedgers who were convinced by investment banks to pump these bubbles up - and perversely caused the very inflation they aimed to avoid - are in my view sitting on the edge of a precipice, unless they can sell to a Greater Fool.
Sooner or later, the flow of money into the markets - which is necessary to keep funding the flow out of excess profits to producers - will come to an end, and the market will collapse to the lower level clearing price at which production is locked in.
We saw just such a collapse in the (producer manipulated bubble) tin market in 1985. It went overnight from $8,000/tonne to $4,000/tonne, and the same risk exists today, since the intermediaries are not capitalised to prevent it.
Why The Next Few Years Will Be Incredible For Commodity Investors [View article]
When a government spends it does through instructing the Fed to spend dollars into existence as the Treasury's fiscal agent.
There is a myth that in doing so the Treasury thereby owes the Fed dollars, but that is just a myth.
Being pedantic, or precise, in an agency relationship, the credit created by the agent is equivalent to the credit created by the principal. There is no debt between a principal and an agent: the agent keeps a note (a memorandum account) of his actions on behalf of the principal.
Sorry to be pedantic.
Now the truth of that relationship is demonstrated by the fact that the few remaining US Treasury Notes spend precisely the same as do Federal Reserve Notes and it follows that they are bearer versions of virtual credit instruments returnable in payment of taxes.
The problem is that we (opaquely) permit private banks ALSO to act as agents of the Treasury by manufacturing look-alikes of Fed credits and to spend them and lend them into circulation.
In particular, we get the ludicrous situation that banks manufacture this credit money, which they THEN spend on buying interest-bearing Treasury debt.
ie what is in reality Treasury credit simply passes through the bid/offer spread of private banks, for the profit of their fat-cat managers and shareholders.
Sorry about the rant, which aims to provide background
Turning to your question, If governments were to spend by crediting every citizen with an annual dividend of (say) $10,000 then the first thing most would do is to repay crippling debt, and only having done that would most of them start spending - and yes, eventually causing inflation once productive capacity is soaked up.
Personally I think that one could stipulate that such a national dividend could be paid in 'property credits' which could be returnable against mortgage debt, or property rentals.
Or maybe in energy credits returnable in payment for (say) electricity, heat or fuel.
Or both.
People could then spend them profligately or save them by investing them directly in property or in renewable energy production or savings.
Beats food stamps, doesn't it?
Why The Next Few Years Will Be Incredible For Commodity Investors [View article]
Inflation is either demand-pull or cost-push.
Firstly, the only way there can be demand-pull inflation is if purchasing power gets into the hands of Joe Public. I see no signs of any possibility of that, in fact, rather the reverse.
Secondly, the reason commodity and equity prices are in a bubble right now is that 'muppets'/inflation hedgers have been mis-sold market risk by investment banks and have piled into ETFs and Index funds.
In a classic example of Soros' reflexivity they have thereby caused - by cost push - the very inflation they set out to avoid.
Unless there is a rush of 'greater fools' into the market, the next move is down, since the high prices which have enabled producers to make out like bandits inevitably lead to demand destruction.
Boom and bust are hard-wired into intermediated markets.
How Oil Really Gets Priced [View article]
If the big producers and consumers agree to start using (say) a natural gas benchmark and/or natural gas currency what choice will the US have?
How Oil Really Gets Priced [View article]
Producers have $ costs and hence tend to hedge by off-loading oil risk in favour of $ risk.
Historically they have done that expensively through futures markets, but more recently have found that they can bypass futures markets (and the casino 'take') through the use of (unleveraged) 'prepay', where they essentially lease oil to risk averse (inflation hedger) funds who lend dollars in return.
Indeed, the dark inventory of oil which is leased to investors is owned by the investors for the duration of the lease, and is therefore unavailable to a market blithely unaware of the two tier nature of the physical market.
Those in the know as to the existence of the Dark Inventory make out like bandits from their asymmetric knowledge.
How Oil Really Gets Priced [View article]
Good question.
I do not see any other debt-based currency replacing the dollar as a global reserve currency, but it is possible to use the dollar as a pricing reference while settling in something else.
In my view, it is possible - on a transitional basis - to create a next generation asset-based currency with global acceptability simply by monetising natural gas.
ie instead of oil priced in dollars, and natural gas priced against oil, we will see oil and dollars priced in gas.
Naturally, such a transitional energy-based currency would not be issued by banks, although banks as service providers could manage the issuance by producers.
Such new global market in gas is a work in progress. There is scope for (say) gold as collateral/backing for an energy crdait clearing union.
How Oil Really Gets Priced [View article]
I hope my long post covered most of your points, particularly the circumstantial evidence (which is all you will get until the current 'bezzle' comes to light).
I agree that the long term trend of oil market prices is up, but this trend takes place between an upper bound price at which demand gets destroyed, and a lower bound price at which production gets shut in.
We have already seen one cosmic bubble and collapse, and that alone is in my view evidence enough that oil market price formation is completely divorced from the realities of underlying production and consumption.
In my view we are about to see another collapse, because it is only financial leverage which is holding up an over-supplied market.
I think that the trade, not unnaturally, because it does not have the true physical market information, is mistaking financial purchases of oil (either prepay or genuine reserve building) for consumer purchases by Chindia or otherwise.
Nick Butler, formerly of BP, said in the FT a few months ago that in his (cornucopian) view the market was now anything up to 3m bpd over-supplied as demand in the developed world has contracted and high-cost US supply has kicked in.
Hamanaka manipulated the copper market for ten years, and five years of THAT was after David Threlkeld blew the whistle, but was not believed. Massive macro manipulation has been going on in the oil markets for at least seven years.
Ask yourself cui bono from high oil prices? It's the producers of course, and if there's one thing that the history of commodity markets tells us it's that if they can find leverage to support the market price, then they will.
The leverage has come over the medium/long term from 'inflation hedgers' who thereby cause the very inflation they aim to avoid: in the recent short/medium term in oil, it has come from speculators who have paid the Iran risk premium.
When the Iranians cave in, which they are about to do pending a Romney win and an (unlikely) attack on Iran, we will see speculators closing out any remaining long positions, and also an end to physical hedging/stock-building by refiners.
We will probably also see the Chinese back off their massive programme of reserve building temporarily, pending the market price clearing at a much lower level, and probably over-correcting as it did in 2008.
How Oil Really Gets Priced [View article]
The flow of risk averse dollars into the commodity markets via index funds, and then ETFs and ETPs began a long time ago when Goldman Sachs dreamt up the GSCI and the genius 'inflation hedging' meme that went with it.
They realised that their fund was structurally long of the oil market in a diametrically opposite way to the way that BP were structurally short. They then entered into what was essentially a long term 'joined at the head' co-operation. For fifteen years BP and Goldman Sachs had the same chairman - Peter Sutherland - and for about seven years BP's CEO, Lord Browne was also on the Goldman board.
I don't know exactly what BP and GS got up to during the period to 2001, but I do know that when I blew the whistle around that time on the 'date rape' manipulation of Brent futures settlement prices connected to GSCI fund roll-overs I got royally shafted and lost everything I had.
After about 2001, when Brent had declined sufficiently in production for Forties to be necessary, BP and Goldman have been in a dominant position in the Brent/BFOE complex. Add to that the creation of the dominant ICE trading platform.
However, it was Enron's re-discovery of the ancient 'prepay' technique which created the conditions for what occurred in the oil market since 2005. Enron defrauded creditors and investors by entering into off balance-sheet opaque pre-pay agreements via J P Morgan and Citigroup which essentially raised finance by lending commodities in return for a dollar loan by selling forward at a discount for dollars now.
That opaque prepay technique was subsequently taken up by BP and Goldman, and as more 'passive' (risk averse) funds flowed into the market - including transparent deals like Shell's arrangement with ETF Securities - we then saw, accompanied by vast and continuing hype, the inflation of the first 'private sector' oil price bubble.
This was always going to burst, and in July 2008, it did, after a manipulated spike in the market. Note that there was little or no speculative retail or hedge fund presence in the oil market at that time. The allegation was that Goldman 'goosed' Semgroup.
http://onforb.es/KwX4Ar
The bubble collapsed from $147bbl to $35/bbl , and then in late 2008 we saw the current bubble pumped up as the Saudis - who were desperate for revenues after the price collapse to $35/bbl - entered into WTI prepay agreements with their long-standing bankers (and author of pre-pays) J P Morgan, who had $ gazillions of post-QE fund money attempting to hedge inflation.
The effect on traders has been the creation of a two tier market in physical oil, and of a 'dark inventory' ( a bit like shadow banking) of oil which is nominally owned and held by producers as custodian, but in which the economic interest has been lent/sold temporarily to investors in exchange for a dollar loan.
The dominant presence in a market - any market - of 'passive' long only investors seeking to avoid loss, rather than active (speculative) investors seeking (two ways) a transaction profit, has been to literally kill the price formation of that market, and the effect has been of correlated financialised market bubbles across commodities and equities.
This financialisation through prepay and related techniques acted to the benefit of proucers, who will always support prices if they can, and has manifested itself in the oil market in several ways which provide circumstantial backing.
Firstly, BP's Brent/BFOE punishment of any traders with the temerity to take a large short position.
Second, the fact that the Saudis - despite periodically stating an intention to reduce the global oil price - did not then sell at Brent/BFOE prices (which set the price) but instead sent waves of tankers to the increasing over-supplied US.
This is because closing out WTI prepays is the best economic option whenever muppet financial buyers - whether risk averse 'inflation hedgers' or risk takers buying the Iran 'risk premium' - can no longer be found to roll the positions over profitably.
Third, examination of available BP cash flow information is consistent with prepays.
Fourth, I have confirmation via a very high level former insider that prepay is pervasive.
Fifth, an influx of opaque financial purchases of physical oil accounts for the Super Contango in oil in the first half of 2009.
Finally, many of the strange movements in US inventory can be accounted for by arrival in the US of oil which is nominally owned by the Saudis, but in which the economic interest has been sold/lent to investors.
When a prepay lending agreement ends, there is then a transfer of title in tank and Bingo! new inventory has magically appeared, just like the way that LME metal goes on and off warrant in warehouses.
Naturally there will be no 'proof', unless and until the regulators were to do their job and crawl all over BP, Goldman and JPM's trading.
My case is that this prepay/manipulation narrative accounts circumstantially for otherwise inexplicable market activity and events in a way that no other explanation does.
How Oil Really Gets Priced [View article]
Firstly, the EFP enables the exchange of a futures contract for a BFOE forward contract, not a spot contract.
To call it a method of delivery is therefore actually smoke and mirrors, and I was surprised - when I was the Director of Compliance and Market Supervision who drafted these IPE rules in the first place - that we managed to get the UK tax-man (there were VAT issues) to swallow that interpretation.
Secondly, it has been my view for some time that we are approaching the end of the greatest market manipulation in the history of commodity trading, which makes the Hamanaka 10 year $2bn manipulation of the copper market look like a car boot sale.
The fact that Brent/BFOE is $20 over WTI reflects the fact that a couple of players have been able to put a collar under the completely dysfunctional brent/BFOE complex price through being able to deploy - directly and indirectly - the enormous funding provided by 'muppets' who off-load dollar price risk in favour of oil price risk, and thereby take the other side of producers who aim to off-load oil price risk in favour of oil price risk.
It's not dissimilar to the way that Barclays have recently been shown to have been operating in the US electricity market.
ie you take losses in the physical market benchmark, but make massive profits on derivative and physical contracts priced against it.
Through the opaque Enron-style use of 'prepay' contracts, producers have been able to monetise oil in tank, pipeline and in the ground, by lending oil to funds via investment banks in exchange for a loan of dollars.
In doing so the investment banks enabled the creation of a 'dark inventory' of oil which is not owned by those whom the market believes owns it, creating pitfalls for the unwary traders who go short on the basis of misleading market price signals.
The Iran risk premium has enabled the manipulators (ie the producers) to keep the price (and the lunatic Brent/BFOE premium) higher for longer than I expected. But if and when the Iranians cave in after the election on 6th November - which they will - then we will see the oil market price decline rapidly and probably over-correct as it did in 2008.