Mercury Rising 鳯女

Politics, life, and other things that matter

Oil prices about to crash

Posted by Charles II on July 2, 2009

Phil Inman, Guardian:

A London-based oil broker was today under investigation after a rogue trader lost the firm $10m following a series of unauthorised trades believed to have caused a spike in global crude prices.

The trader left the firm on Tuesday following the discovery of contracts that helped push trading volumes to almost double the current daily output of Saudi Arabia, the world’s largest oil exporter.

PVM Oil Futures confirmed that it was forced to pay $10m to honour unauthorised trades by the broker, who for legal reasons could not be named. It said: “PVM can confirm that it was the victim of unauthorised trading on Tuesday 30 June.

“As a result of a series of unauthorised trades, substantial volumes of futures contracts were held by PVM. When this was discovered, the positions were closed in an orderly fashion. PVM suffered a loss totalling a little under $10 million.”

Oil is the most heavily traded commodity, with main centres in London and New York. The price is set by futures contracts placed in London’s InterContinental Exchange (ICE), which dominates European trading, and New York’s Nymex. According to some analysts, as much as 60% of crude oil prices are based on speculative trading by firms such as PVM, which place orders on behalf of large trader banks and hedge funds.

Update, Friday morning: Oil from $73 to $66.73 over the last few sessions, with some news sources blaming it on the weak jobs report.

So far, no abrupt crash. Maybe we will get through it because it’s a holiday weekend. But if 60% of oil prices are based on speculative trading, then there’s no fundamental support between $66.73 and ca. $30. Any suspension of the speculative trade, like due to Congressional investigation, could trigger the slide.

9 Responses to “Oil prices about to crash”

  1. So the recent oil rally was the work of just one trader?

  2. Charles II said

    Bingo! Oil could hit $40 within days if the report is accurate.

  3. I have a feeling that there are too many entities out there with a vested interest in keeping it above $50 a barrel to allow that to happen — though it would probably give a boost to the world economy.

    • Charles II said

      Trust your feelings, but verify. There is a decent likelihood IMO that a bunch of hedge funds and perhaps some investment banks bet heavily on an oil spike in an attempt to make up losses. If this read is correct, the pricking of the bubble will cause panic. While the magnitude is far, far smaller than the mortgage crisis, trading volume falls off in summer, so moves are larger and the market potentially more volatile.

  4. Doran said

    I know it is counter-intuitive, but $40.00 oil is not really good for America. Oil at that price will come from the Mid-East, or somewhere, but not from new wells on the North American continent. Drilling of new producing wells has come to almost a complete stop, from the levels when oil was $100.00 or more per barrel. Forty dollar oil will be the end of oil independance for years to come.

    And of course, $40 oil will kill most of the incentive to switch to renewable energy sources.

    • Charles II said

      Agreed, Doran. I’ve been cheering higher prices, even though they mean a slower recovery, because they also help to support green energy. Oil has to be above ca. $60 before green energy makes sense financially.

      • Doran said

        Ok, so we definitely DO NOT want any Congressional or Justice Department investigations of this matter. And, we should give oil speculators a free-er hand, relax government as well as market oversight and regulations, and wish them good luck.

        Works for me……Keep up the good work, guys.

      • Charles II said

        ::chuckle::

        Let’s just say that we need the sheriff not to catch too many outlaws, Doran.

        But, yes, unregulated markets tend to blow themselves up faster rather than slower.

  5. […] why it’s very good news that the one-man speculative bubble that sent oil prices spiking in the last few months has been popped. This won’t kill off the renewable-energy industry, as has been feared, but it will keep the […]

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