Wednesday, September 24, 2008

The oil price spike

Lots of amazing things have happened in US capitalism in the last ten days. Monday's oil price spike has been lost in the noise. But it looks to have told you something about how hedge funds and oil companies behave.

Global oil consumption is about 87 million barrels per day. US oil consumption is just shy of 21 million barrels per day. At $100 oil that is an 8.7 billion or 2.1 billion dollar per day market.

It would be pretty hard to squeeze the oil market because of its sheer size.

Yet - on contract expiration - the oil price spiked from 100 to 125 dollars - and settled up $20. The forward price was not quite as strongly affected.

Somebody was short. Big time. And they needed to buy back. I have no idea how many contracts changed hands - but to push a 2.1 billion dollar per day market up 25% it had to be an awful lot.

I haven't seen the news that so-and-so-hedge-fund-I-have-never-heard-of has been roasted - but someone looks to have been roasted. And it has slipped without comment.


Now here is something to give you less confidence in the Paulson plan.

There was a US organisation with enough oil to meet the price spike and to buy back oil in the one-month forward contract and hence make a LARGE arbitrage profit. That organisation is ... the US Government and the strategic oil reserve.

They only had to sell now, offset by purchased in one month. My guess is that once done the oil wouldn't even need to be moved - you just meet with the liquidator of said hedge fund and settle up.

Ah well - the US government was never much good at trading.

But then we wouldn't normally want them to buy financial assets - and we wouldn't expect them to be able to determine fair value...

Would we now.



The Way Rider said...

Gartman had similar sentiments in his letter of 23 September, and also does not know who got taken out and shot. Truth will out soon I shouldn't wonder.

Had a great quote supposedly attributed to Daniel
Drew - "He who sells what isn't his'n, must buy
it back, or go to prison.".

John Hempton said...

One comment that I accidentally deleted (sorry) was that it was 42 thousand contracts.

That is 42 million barrels - or two days US supply.

Times say $15 a barrel loss - is something over half a billion in losses.

Its less than I thought - but it is still a big number.

The comment that I accidentally deleted though that was not an "awful lot" and thought it might be a mid-western refiner.

If it was a listed refiner we better find out promptly because that is a big number for them.

My guess remains that it is a hedge fund - but a half billion dollar loss is less than I anticipated.

John H

PS. The reason that I accidentally deleted the comment was that there was another comment advertising a debt consolidation service which I deleted because I am getting sick of advertising. I am sorry to delete real and constructive comments.


Anonymous said...

Original comment ---
The Oct contract traded 41,528 lots on Monday vs. c.335,000 lots in Nov08 (the active contract), so I wouldn't say it took "an awful lot" to squeeze Oct higher. Talk (from a bank) was that the parties 'short and caught' were two mid-west refiners, who were left short by a mixture of weather-related delays and "operational errors".

And an addition ---
John, of the 41,258 lots traded, not all of those would have gone to delivery. There were a number of daytraders actively trading Oct. intraday; they (obviously) closed out their positions prior to settlement. The open interest on Monday (which I believe would be for Friday, though I need to check as it could be Thursday, depending on the reporting lag) shows as 7780 on Bloomberg.

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