Some perspective from a veteran oil trader on the current frenzy
Veteran oil trader Daniel Dicker takes a look at the price of crude oil and draws some conclusions in Real Money:
The bottom line has been clear to me — speculation has been the key driver of the oil market for the past two years and will continue to be the single most important factor going forward. As crude makes new highs seemingly every day, figuring out why this destructive rally inexorably continues becomes almost more important than the rally itself. As a floor trader of oil for 25 years, I have, I believe, a unique perspective on this rally — after all, I was immersed in this market, almost exclusively, every day of my trading life…
the growth of commodities as an asset class is unprecedented…At the end of 2007, Nymex reported average daily volumes of 1.485 contracts per day, an increase of 25% over 2006. So far in 2008, growth has continued at an astronomical pace: January volumes increased 6% over the same period in 2007, February was up 28% and March increased an astounding 62%…it all represents an enormous increase in flow of speculative trade…
speculative action in crude is swamping out other fundamental factors, while gasoline prices are being arrived at still using fundamental measurements…In previous years, refiners would depend upon the summer driving season to return margins to profitable levels. This year, however, it hasn’t happened yet, and it’s unsure if it will. This is in spite of shutdowns, lower utilization and bullish weekly EIA reports for gasoline in the last several months — no matter what fundamentals are applied, it can’t seem to catch up. Gasoline is trading fundamentally, while crude is trading speculatively…
the speed of global growth, as compelling as it is, is just not sufficient to explain the 60% rise in price last year and the more than 20% rise we’ve seen so far this year. As my old trading mentor used to tell me, “In an up market, all news is bullish.” He’s right…
take a look at the crude curve — the representation of how the market feels crude will be trading one, two and three years from now…what do we see? In the midst of global recession, when oil consumption and demand should be decreasing (this year), crude is at its highest price, while further back in the curve, when demand should ramp significantly and inexorably, you can purchase the crude barrel today for future delivery for far less. In fact, the crude barrel gets cheaper the further out on the curve you go. How is this possible? This condition, called “contango,” where prices run in reverse further out in the curve, as opposed to run in premium, has always been an indicator of speculative action.
“At the end of 2007, Nymex reported average daily volumes of 1.485 contracts per day, an increase of 25% over 2006. So far in 2008, growth has continued at an astronomical pace: January volumes increased 6% over the same period in 2007, February was up 28% and March increased an astounding 62%.” So there is a frenzy in volume to complement the frenzy in price. We hope the speculators get the ending they deserve.
May 13th, 2008 at 6:35 pm
On the contrary, crude oil supply/demand fundamentals are very bullish and are the key driver pushing crude oil prices steadily higher. Specifically, global crude oil production has been flat for three years. Growth in production from important new sources like West Africa and the Caspian Sea has been offset by production curtailments in the Middle East. Saudi Arabia, by itself, accounted for two-thirds to three-fourths of total production curtailments that began in 2006.
Crude oil buyers for refineries everywhere are very aware of how little spare capacity the global market currently has and essentially all spare capacity is now concentrated in the hands of Iran and Saudi Arabia. The market correctly perceives that risks to supply are greater than at any time since the late 1970’s. These are fundamental factors not speculation. Until the risk to supply diminishes (due to either declining demand or increases in production or both), supply/demand fundamentals will remain bullish for crude oil prices. We may indeed see WTI prices reach $150 per barrel this summer