Oil Trading Machinations Turn Dark

Oil Trading Machinations Turn Dark

by | published September 6th, 2019

I am completing this column as Marina and I approach our landing into Dubai. The almost fifteen-hour-long flight combined with an eight-hour time difference has made for one very long day.

It’s nighttime here now, and I have a very cursory initial meeting later.

The folks I am advising here have largely flown in on their private jets. Another will be arriving shortly using the helicopter pad on top of the hotel. All are used to sessions in the wee hours. It is an acquired taste as far as I am a concerned, and I’ll have to get some sleep later.

However, throughout the flight I have been crunching numbers and reviewing intel on a disturbing development I want to discuss in this Oil & Energy Investor column.

I had signaled this may be coming in my advisory appearing every Monday on the issues I am following during the upcoming week.

But the reality is a bit more sinister than expected.

As I said, it’s nighttime now. That applies to the oil market as much as the time of day.

Let me explain…

What the ECP Is Indicating These Days

It began with a standard run of my Effective Crude Price (ECP).

This is a series of calculations determining what the actual price of oil would be if artificial non-market pressures were absent. While the ECP is designed to compensate for excessive movements in the price either up or down, the overwhelming direction has been down since November 27, 2014 – Thanksgiving Day in the U.S.

That was also the day Saudi Arabia led OPEC into defending market share rather than price. This move unleashed a collapse in oil prices from more than $100 a barrel to less than $30.

Successive ECP runs have identified persistently higher effective prices than those reported for both West Texas Intermediate (WTI), the benchmark for futures contracts in New York, and Brent, the other, and more globally utilized, standard set in London. These have averaged from 5% to 16%.

What this tells us is the weight of shorts and other manipulations of pricing.

It’s Not a Matter of “If” there are Manipulations – but “How Much”

A short makes a profit if the underlying commodity or equity declines in price.

Here is a simple example: a player is convinced that ABC stock will decline in value. So, she borrows it from a broker and the immediately sells it at market. Later, she returns to the market, buys back the share, and returns it to the broker. Say that the hunch is correct – the borrowed stock was sold for $10 and later purchased back for $8. The transaction has netted a profit of $2.

This can also be dangerous. The “short runner” must buy back the shares borrowed. If the target begins appreciating in value rather than declining, the holder can lose significantly since the buyback would be at a higher price than the original sale.

Shorts are a staple in markets, but the curious dynamic provided when it comes to crude oil is this: they have been particularly successful in overextending declines to maximize profit for the short runners.

This is not simply reflecting what the market provides to investors.

Rather, it amounts to an artificial manipulation that exacerbates a decline in price. Twice in the last three weeks my ECP runs have noted the overweight nature of multiple pricing declines. The last came to a screeching halt with a wave of unexpected positive news all focused upon China – better than anticipated mainland Chinese economic data; a reduction of tension in Hong Kong; and indications that talks would resume in the U.S.-Chinese tariff war.

Manipulation in the market often leads to confusion as to where things are going – and where the profits might be.

The oil and energy market is particularly susceptible to this sort of confusion.

And that’s where I come in.

I’ve been in this business a long time – nearly four decades.

As a result, I have extensive inside knowledge as to how market manipulations can be manipulated to your benefit.

This comes not only from my experience in the industry, but the large network of global contacts I’ve managed to cultivate.

I have that list sitting inside my desk drawer.

Just click here to learn how you can reap the benefits of this network.

The abrupt move up in oil required that shorts be unwound quickly to avoid accelerating losses by the practitioners. The greatest danger in running shorts is if you are wrong and the shorted commodity increases in price.

The so-called “short squeeze” serves briefly to increase prices even further as the players move back into the market to acquire the contracts sold.

Okay, so what was observed during the last several weeks has been the latest examples of a process noted by ECP on several occasions.

What has been different this time around, however, is the breadth of the manipulation.

Nosing Around for Profits from the Puppet Masters

Anecdotal evidence has emerged that attempts to manipulate commodity prices has extended to drive down the stock value of selected publicly traded oil producing companies.

This was initially brought to my attention last week by a contact in the European trading community. Since then, others have confirmed a developing pattern that involves the combination of an artificial downward pressure on oil prices with the intention of weakening selected stocks.

If successful, the targeted equities decline faster than either the commodity or the sector at large. The stock is then acquired by those running the oil shorts at an artificial discount to what should be their fair market price.

Thereupon, once the short plays on the underlying crude oil are closed, the oversold stocks recover quicker than peers, and the profits roll in for the short runners from what amounts to a parallel revenue stream.

Three matters emerge from all of this as I watch the coastline lights appearing outside my cabin window.

First, this “jump” from commodity short play to pressure on stocks is a very disturbing expansion of profit incentives from artificial manipulation.

Second, it may well be one of the approaches utilized by some of those gathering for the meetings I am soon to begin. Maybe I’ll nose around a bit.

Third, the object here is to drive down the market cap of companies available to all individual investors. If I can determine the companies whose stock value is to be manipulated, an avenue will emerge to ride right along with the short artists without acquiring the risk.

That would be a refreshing change – the little guy making money right along with the master puppeteers.



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