The Easy Manipulation of Oil Prices

The oil futures market is the wild west. The law of nature prevails and might makes right. Traders have to be prepared for anything. They survive with steel nerves, whiskey and instincts. It’s a dangerous game, but the lure of the mountains and solitude is hard to resist.

Information is what people use to determine what oil is going to be worth. EIA inventory data and Baker Hughes rig counts signal changes in supply. The price of oil reacts in predictable fashion to this news. When the traders over-react, the sages guide the price back to its appropriate value.

In the short term, the market is highly vulnerable to manipulation through media information. Traders will move the price out of an impulsive reaction to fresh news and commentary.

The big example was obvious with the drama that unfolded during the lead up to the November 30th OPEC meeting in Vienna. In the days before, OPEC delegates “leaked” information about how the talks were going. “Iraq is on board” . . “Iraq is holding out” . . “a deal is highly likely” . . “the Saudis have walked out” . . . Each announcement had the power to change the price of oil significantly.

The statements by OPEC insiders led to rafts of commentary by analysts at banks and in the financial media. The assumptions and opinions swung back and forth accross the spectrum of possible outcomes: “The promises that came out of the Algiers meeting in September were lies” . .“This time, it’s going to happen” . . “Right now, traders are pricing in a 70% chance OPEC will fail to make an agreement.”

The price of oil swung right along with the news flow.

Analysts said beforehand that an agreement on output cuts would push the price of oil above US$50 and a no deal outcome would push oil to $40. That opinion became the reality. Since the meeting concluded with a positive outcome, the price of oil dutifully moved up to the $50 — $52 range. As of Friday Dec. 2nd, the price was $51.69 and it has not gotten lower than 50.36 — much to the dismay of anyone who has an unhedged short position before the meeting.

Disclaimer: I have an unhedged short position in DWTI which will expire on December 8th.

My only hope: somehow, early flow data indicates rampant cheating, and traders jump on this news as a sign that OPEC members and non members are not carrying out production cuts that would resolve the supply glut. If this happens, the price of oil could fall down and I can get my chance to exit the position before sober minds go on TV to remind us that it takes at least 2–3 months to assess the impact of OPEC’s deal on actual inventory, and some level of cheating was already priced in. These comments will stifle the rumors and stop the sell-off. What happens after that is anyone’s guess.

December 03, 2016