How Chicken Little Is Manipulating the Oil Market

How Chicken Little Is Manipulating the Oil Market

by | published June 19th, 2019

Yesterday, reports emerged that President Trump spoke with Chinese President Xi Jinping, and that the two leaders would meet at the G20 meeting in Osaka, Japan, next week.

There was absolutely nothing specific provided in either the phone call or the anticipated agenda for the G20 tête-à-tête, but the tease was enough to spike markets; any indication that there may be a pause in the increasingly acrimonious U.S.-Chinese trade contest is likely to provide an upward push on economic forecasts.

This is the way things are these days.

As I have noted before, knee-jerk interpretations of how geopolitics (more frequently, anticipated or possible events) are going to affect global markets and economic performance have now supplanted forecasts using actual data.

And in this age of instant cable news analysis, this has usually resulted in overreaction.

Here’s what I mean…

A Lesson in Gaming the System

The genuine figures on which the real impact of events should be determined are always at minimum 90 days out; the more accurate yardsticks six months or more in the future.

Nonetheless, talking heads talk and lemmings rush to the nearest cliff in response.

With reactions set on such short fuses, magnified reactions in either direction become more common. Yesterday’s reaction to basically nothing produced daily rises in the Dow, NASDAQ, and S&P of 1.35%, 1.39%, and 0.97%, respectively.

However, the corresponding advance in West Texas Intermediate (WTI), the benchmark crude oil rate set in New York, shot up 3.8%. Meanwhile, Brent, the London benchmark comprising the more widely used international base for oil trade, increased by 2%.

These discrepancies have become commonplace.

Crude oil pricing has progressively come under the influence of variegations in the (perceived) impact of world tensions more aggressively than equity indices.

This has less to do with whether matters like shipping though the Strait of Hormuz, civil collapse in Venezuela, domestic oil production increases in the U.S., or anecdotal perceptions of declines in end user demand have primary consequence for crude pricing.

That used to be the case, in which the former two would spike prices, while the latter two would depress them.

However, these days, behind-the-scenes traders are no longer interested in market dynamics or the actual effect of external events.

Rather, mechanisms have been put in place to game the system through outright manipulation.

I discussed in detail how this was unfolding in last week’s undercover “Dark Files” edition sent out to Energy Inner Circle members on June 11. You can read that report right here.

Much of this is initiated in Europe for two reasons…

The Neutral Swiss Oil Banks

First, London-set Brent is more sensitive to international events than WTI.

Second, much of this is legal there, but would land practitioners in the pokey should they attempt it in the U.S.

An increasingly used way to manipulate the price of oil is to cut futures contracts (the “paper” barrels controlling forward oil access) based on oil consignments (the “wet barrels representing actual barrels cosigned for delivery) acquired, but not released for trade.

This “hold and not release” is the activity that would get a trading house in trouble under U.S. jurisdiction. But it is not illegal (or even frowned upon) in places like Switzerland.

That’s why most of the houses practicing this “art” are domiciled in places like Zurich, Geneva, Barr, Zug, and other Swiss locations. Traded paper on the spread between “paper” and “wet” barrels is then moved through venues using Frankfurt, Paris, London, and other European financial traders.

If this were to be the only manipulation, then prices should generally rise, since the essential result would be a limitation on supply in the face of continuing demand.

But the current chicanery has been going one step further.

The Art of Manipulation

By introducing a second manipulation to prompt market players that the supply/demand factor in turning negative, oil prices can move down because of trading perception.

Two profitable advantages then follow for the houses practicing this sleight of hand:

First, the oil supply they controlled is acquired at a discount and held until it can be released at a greater profit.

Second, in the interim, shorts are run to profit further from the declining current price.

That decline is accentuated every time one of these appears on TV or in print, and laments that the sky is falling. Oher traders believe it, the price is further reduced, and this Chicken Little cries all the way to the bank.

“The Motherlode” of Oil Is Ready and Waiting
The manipulation going on in the price of oil doesn’t change a thing when it comes to America’s oil production.

Because we’re still the proud owners of the third-most prolific oil field in the world, coming in behind only Saudi Arabia and Russia.

And it’s only getting better.

Because of one section that holds a whopping $1.4 trillion worth of oil, natural gas, and other resources under its dusty surface.

There’s one tiny company that’s managed to score prime acreage in this area of West Texas and is making even the oil majors turn their heads.

Find out how they did it – and how you could profit from it – right here.

Now, shorts work only if the assumed direction turns out to be correct.

When shorting, a trader believes a tradable will decline (or is artificially manufacturing that result), borrows it from a broker, immediately sells it to the market, moves back to buy it from market, and returns it to the original source.

If the trader is correct, a profit is made between the initial sale and the buyback.

For example, a short is entered on stock XYZ. The trader believes it will fall in price. She borrows it, sells it for $10, later buys it back from the market for $7, returns it, and pockets a profit of $3.

Shorting oil is of a much higher order with futures contracts usually cut for 10,000 underlying barrels per contract.

This can be quite dangerous for the faint of heart.

If the short seller is wrong and the underlying instrument rises in value, it must still be bought back and returned. That opens up the trader to a loss that has no theoretical limit. There are, therefore, additional options and swaps introduced to limit the risk adopted.

If the entire play becomes volatile, it will be “unwound,” involving the exercise of options and an early end to the short. Some of that took place yesterday.

But the indentation of the machinations remains.

When Nonevents Become Eventful

As veteran readers of Oil & Energy Investor recall, and as I have noted elsewhere this week:

“Almost two years ago, I developed a yardstick to determine the actual market price of crude in trade, labeled the Effective Crude Price (ECP). The rationale was to ascertain what factor was played by artificial attempts to influence price.

ECP weighs several factors to estimate the external pressure to influence price.

It reviews external attempts (i.e., those reflecting intentions of traders rather than the play of fundamentals). In rising price trends, ECP estimates moves to increase the price by limiting either “wet” barrel volume (actual crude available for trade) or changing the ratio of that volume against “paper” barrels (futures contracts).

However, the most effective calculation emerges when an estimation is made to gauge the influence of trading short contracts to force down the price of oil. We are in another of those cycles presently.

To be sure, what the ECP concludes is more comparative than absolute. Running sequential calculations will allow over time to approximate base line ranges of ECP results versus what the shipping carriage and futures contracts convey as market indicators. This exercise, therefore, seeks a relational divergence.

OK, with all such disclaimer out pf the way, this is what the number crunching concluded after trading through Friday (June 7). The closing price of WTI was a full $8 (14.8%) and Brent was $12.50 (19.7%) below ECP estimates.

Initial calculations are indicating at least a similar as in evidence for the week ending June 14.”

Let that sink in for a moment.

Even with the ECP calculation being off, the market price witnessed is well below what the commodity should command.

Now, there are several factors that apologists would employ to explain such a stark discrepancy – everything from instantaneous “analysis” of as yet nonexistent swings in oil demand to concerns about howling at the next full moon.

But the manipulation commanding wide swings in oil prices from overemphasizing nonevents is high on the list in my playbook.



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