Investors lost sight of the need for crude oil as a hedge against a weakening dollar on Monday with investors taking more seriously the prospect that global energy consumption might yet grind to a halt if the recovery flounders. Crude oil prices faced the longest losing streak in five months with prices in retreat for a fourth day.
Weakening stock prices around the world have crept up quietly behind investors and delivered a resounding "Boo!" and putting investors on red alert for further retreats in the prices of stocks and commodities as the dollar's appeal as a safety valve resurges. Near month August futures fell to $63.80 for a five-week low.
It was almost a year to the day that the price of crude oil reached its infamous $147.12 high in July 2008. That was just a month before Lehman's blew up yet almost a whole year after the credit crunch froze the world's money markets up.
Investors sense that with gasoline inventories adding 2.33 million barrels last week to stand at 211.2 million barrels, and with an expected additional 1 million due to be announced this week, that prices are likely to continue falling. Daily average fuel demand in the week ending June 26 was down 5.8% compared to one year ago and with the key Independence Day holiday now behind us, the top of the hill appears very much to be in the rear-view mirror. The AAA reckons that fuel demand during the holiday weekend was perhaps just 2.6% lower than last year. Excess supply and declining demand are a bad combination if you happen to be a bull.
Looking back at 2008's peak price of oil, only after the event did it become apparent that the last approximately $25 rally occurred as investors who had bet against further insane rises in the price of oil were forced to cover their shorts. Faced with a lack of willing sellers, illiquidity helped raise prices further to a record.
An Anglo-Dutch trading company was alleged to have rigged the market on several occasions in the last few minutes of the trading day in order to manipulate the mark-to-market value of its book. Emails uncovered by the CFTC and London's FSA revealed that traders there suspected that by 'hammering' the market on the close each day, would spur after-hours buying and so boost the value of its leveraged positions.
At the time many of the world's largest oil exploration companies and refiners were at a loss to explain the future price of crude oil - clearly none had a problem securing supplies.
According to the Financial Times on Monday last Tuesday's spike in crude's price to $73.50 on extremely heavy trading volume was not caused by geopolitical fears, but was caused by the unauthorized trading of a London broker at over-the-counter oil broker, PVM Associates. It's unclear what caused the trading frenzy in terms of whether the broker, apparently well known and respected within the futures market, was buying or closing out of a position. According to the paper, the resultant losses of $10 million might have served a substantial blow at the company, which was only up $5.8 million in the year through July.
The number of contracts traded last Tuesday morning was 32 times the typical volume, which would be enough to buy or sell 500,000 barrels of oil. The 16 million barrel equivalent that changed hands was twice the daily output of the world's king of oil, Saudi Arabia.
The crude moral is, therefore, that when logic is defied and prices move in the opposite direction to where they really should be, invariably there is a crooked reason behind it.
The Daily Jurojin is a service of Tyche Research and is written by the Supreme Council of the Secret Order of Jurojin. More information can be found at www.jurojinweekly.com.
