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Oil Price & Hedge Fund Mayhem

Rick Santelli On Oil Speclation

The above was Rick Santeli last year and some analysts arguing wheather speculators were driving up the price of oil. Both of them are wrong due to the fact that they are debating speculation in the regulated market on the floor of the NYMEX. Remember when oil got to $150 per barrel during President Bushes stimulus check packages. It was then that the CFTC issued an investigation. Oil then retreated from $150 to $36 dollars a barrel.  I can’t believe the number of analysts consistently throwing out numbers and percentages in regards to oil stock inventories and consumption. Demand is down, production is up somehow the financial news outlets continue to spin for reasons the price of oil is on the rise.
Yes speculation brings liquidity. Yes speculators make up 70% of the market. But is that what drives up the price? No. Rick is right, these traders exit their positions before settlement of the contracts, or roll over to the next month.
     The Price is being driven up by the unregulated  muti-trillion dollar OTC electronic market. This trading is once only available to certain buying and producing corporations is now sold as an asset class to Hedge Funds and Commodity Index Funds. With the OTC market there is no limit on the number of contracts a fund may hold. Further more it is not reported to the Commitment of Traders Report. Why would the CFTC allow such trading to be developed? Well, initially it was meant for fortune 500 companies whose hedging practices could be disrupted by scalpers (such as many of us) on the floor. I know a trader on the floor of that trades the S&P once a month. He waits for Merrill Lynch’s representative broker to dump their S&P contracts at the end of every month. He then shorts the market and takes his profit. Several other brokers use the same technique. So what if General Mills was trying to secure their price with wheat and oats, or Nestlé with Cocoa. The commodity brokers have a hand on these markets and can throw of structured hedges necessary to forecast earnings. The OTC markets were developed to decrease exposure for these institutions in-turn creating a true man behind the curtain scenario. The situation intensified after the installation of ICE futures in the U.S. More un-regulation and disinformation on positions related to prices.  

    So now with a daily chart overlaid with a parabolic we can all see where and how heavy the Funds are herding the commodity market, no matter what the information the starved news will tell you. A trading practice that all successful traders are living by. Today’s fundamentals are flawed and full of miss and useless information, not to mention truly boring information from boring people. If there are more buyers entering the market, were going long, even if Bloomberg’s goons for the day try and predict oil stocks, or a future move by OPEC. Who cares, seriously.