Derivative Manipulation Hits the Oil Market
Friday, the price of West Texas Intermediate (WTI) crude, the benchmark oil contract traded on the NYMEX, fell 4% ($4.14). It opens today below $100 a barrel for the first time since February 10.
The one-day decline is the steepest since WTI fell 5.1% ($5.12) on January 3.
The other major benchmark, London-set Brent, also was hit, but less significantly, falling 2.6% to open today at $113.16. It was the largest Brent decline since a 4.6% dive on December 14.
And the dip in both is likely to continue a few sessions more.
However, the Brent-WTI spread is now increasing again. As of the close on Friday, the spread as a percentage of the WTI price (the better way of looking at it) stood at 14.9%, the highest differential in more than two weeks.
Two important questions follow.
First, why did this happen? Second, what is that spread again telling us?
The answers will surprise you.
Roll Out the Usual Suspects
As prices fell, TV pundits immediately paraded the usual suspects. They cited disappointing U.S. job figures, renewed concerns over European debt in general, and the Spanish situation in particular, while so-called "analysts" clamored over a possible double-dip recession.
These concerns are not new, nor are they revelations.
Plus, the essential reasons why the price should be moving in the opposite direction – namely up – haven't gone anywhere. The constriction produced by supply/demand considerations remain, and the insufficient volume available to meet unexpected demand surges and the geopolitical environment – especially the impending European boycott of Iranian crude imports – remain in full force.
The overall market dynamics still point strongly to a rise in price.
Yet the overall movement of crude oil futures has remained peculiarly restrained. In fact, WTI has given back 6.1% in the past week, and some 2.7% for the month.
