A Dose of Oil Reality

by | published May 23rd, 2011

The volatility in the oil market has notched up today, courtesy of another bout with debt jitters in Europe. Oil and gasoline futures are moving down – and most of the energy sector along with them.

In a situation like the current European debt mess – where maximum uncertainty is channeled into a very focused concern – oil futures will generally overcompensate, exaggerating the downside.

Of course, that is of little consolation to the traders who have seen about $3.50 cut from the near-month futures (July)…

We are just into the next month of options (this one-month cycle ends June 18), and the prevailing trend in calls remains up. That is, the preponderance of plays on the call side (buying options) are in a range betting on a price of between $27 and $31 for the iPath S&P GSCI Crude Oil Total Return Index ETN (NYSEArca:OIL).

This exchange-traded note (ETN) is the most direct way for average investors to participate in crude oil futures, with options on OIL the least risky way of insuring against high volatility.

It’s currently trading at around $25.20.

That means the market is pricing crude oil higher, despite the downturn in the first day of trading on the new month’s option.

It is not anything intrinsic in oil supply and demand that is prompting this volatility.

This one is all about what the renewed concerns over Greek and Italian debt are doing to perceptions of European oil demand and the exchange rate between dollars and euros. In fact, the dollar is improving against the euro – another sign that the debt problem is pressuring forex.

With NYMEX West Texas Intermediate (WTI) crude prices down about $3.50 a barrel, and Brent down only 50 cents, one might wonder how a European debt problem could be having a greater impact in New York than it is in London.

The spread between WTI and Brent has been a lingering concern for almost a year.

At current prices in mid-morning trade (it is approaching noon on the East Coast as I am writing this), that spread has intensified from an average of about 13% of WTI price over the past 10 trading sessions to almost 16%.

This tells us two things.

  1. First, the primary impact of European debt has been working into Brent pricing right along, augmenting the downward volatility being experienced in the market anyway of the last week.
  2. Second, the pressure ends when the debt crisis abates. This is not oil-market-induced pressure. It is exogenous to the market.

We can, of course, point out that the weight of debt can depress the demand expectation and, thereby, push the price down. Yet in the current circumstances, the default prospect is quite low.

Neither Brussels, nor Athens, nor Rome will allow that. Whatever pressure we experience will be short-term.

And this is what the OIL options are telling us.

Despite the protracted concern and distraught remarks from the tube’s talking heads, the debt situation will resolve. If it does not, the entire Eurozone is in peril. And despite the angst that possibility prompts, the likelihood of that is remote.

It’s simply not going to happen.

So stay the course, folks.



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  1. James Kussy
    May 23rd, 2011 at 12:31 | #1

    “Neither Brussels, Athens, or Rome will allow that.” (referring to a default on the debt). Sounds good but just how are they going to pay it? The fact is they cannot. They can kick the can down the road which make the problem very temporarily resolved but even bigger when it has to be faced up to. The same applies to us.

  2. simon snouckaert
    May 23rd, 2011 at 13:35 | #2

    Could not agree more. With 1 exception. The situation Greece has manoeuvred itself in is past PNR. It has become political unsustainable. European politicians who donot see this are committing political suicide. Mrs Merkel (Germany) is loosing province after province because of this and north european sentiment is turning against the Greeks, enjoying a lavish pension at 53 while Germans are required to work until 67.
    In short, Greece will restructure their debts and return to a currency of their own, the Drachme 2 or whatever.
    We also have not forgotten the false pretenses under which Greece joined the Euro and the kept submitting lies about their state of affairs until the bubble burst.
    All great actors them Greece, but exceedingly poor accountants. Pythagoras was their last, I guess.

  3. jack gordon
    May 23rd, 2011 at 14:02 | #3

    pythagoras lived on samos not on the mainland. maybe the salt air was beneficial.
    > jack

  4. marvin tarnol
    May 23rd, 2011 at 15:27 | #4

    @James Kussy
    what are you recommending? Should we buy call options?

  5. Jerry Davis
    May 23rd, 2011 at 15:37 | #5

    Dr What allows you to be so firm that Europe will bail the pigs?

    May 24th, 2011 at 09:53 | #6


    May 24th, 2011 at 10:18 | #7


  8. Bob
    May 24th, 2011 at 17:38 | #8

    I’m going out on a limb here saying. I have not the slightest idea how to handle the Greeks. The Portuguese or Irish either. I’m of the school that says failure to deal with any one of them will upset the whole EU apple cart. These “promise everything” raging socialist “cradle to grave” instigators are nothing but European versions of Obama. Why is obama visiting Ireland……………..? That lost apostrophe is completely disingenuous and cheesy. Maybe we should forbid him from returning without it. Even now that clown is just pre-politicing for the next election while Prime Minister Benjamin Netanyahu out shines and renders this little twit Obama as completely useless. Obama, “Don’t come home without your apostrophe”. Sorry for getting carried away. I just don’t like paying for the mess all the weak-kneed promise everything leaders. We here in a America seem to always have to pick up the tab. The American counterparts are the likes of Chuck Schumer,Barny Franks, Chris Dodd, Nancy and Harry. Hand cuff and frog march them all off the stage. Until then get ready to just pay up in taxes and you can just forget about any descent growth. The only exception might be oil. Its just to big to not have a need for and so can’t really be manipulated as easily as everything else is. Thats the only reason you catch me here trying to ride in Moors Posse. LOL

  9. August 17th, 2012 at 18:47 | #9

    OPEC, Libya and the laws of supply and danmed are not responsible for high gasoline prices. The high oil prices are dictated by the fraudulent round-trip trades of the dark pool trading in the Intercontinental Exchange(ICE) in Atlanta. The international Big Oil/big banking cabal owns ICE. ICE operates outside of U.S. law. The Commodities Futures Trading Commission does not have any jurisdiction over ICE, bribed by Big Oil. ICE’s energy speculators and traders can ratchet-up the oil price anytime they feel like it, and for any excuse, for their own profit and on the behalf of Big Oil, through the use of round-trip trades. Google the Global Oil Scam. ICE is a super Enron. Oil is too crtical a resource to be controlled by greedy traders, greedy speculators and greedy corporations. If the Oil and Gas Price Fraud Working Group does not investigate ICE, then, it is a waste of time and taxpayers’ dollars. The Working Group has to seize, immediately, the trading records of ICE, before they sre destroyed.

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