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Egypt's Morsi and Crude Oil price
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Egypt's Morsi and Crude Oil price

  #21 (permalink)
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Fat Tails View Post
Crude oil is a deliverable contract. This limits speculation. A potential closure of the Suez Canal which is controlled by Egypt could affect supplies to Europe and has an impact on spot prices.

There is no such thing called "smart money" and there is no secret manipulation.

If you want to manipulate market prices you need to hold a huge percentage of open interest and also be a physical actor on the market. This is not possible with crude oil. OPEC has tried to control market prices and basically failed. The failure can be explained by basic game theory.

There have been traders trying to game the silver market and natural gas market in the past which had considerable repercussions. In the end this has led to new rules limiting the amount of contracts that can be held by a single large trader.

Maybe a little bit off topic but worth to reflect:

I agree with you in how hard it can be to manipulate the markets, as there are a lot of big forces in play and most attempts of manipulation ended up in great failures, and this has been happening since memorial times, even Central Banks got busted, but sometimes some players have found ways to outsmart the market in some specific products, like at the end of the 90's Arc Dan M did, the way they can be smart is being basically the holders of the stocks/existences and being Big physical dealers that also act as Merchants. That kind of cases are hard to find in the news wires.


Coming back to the topic, I agree a with you that Oil is one of those hard to manipulate markets as big and multiple forces are in place and they can do a lot better relying in traders for help them determine the fair pricing and giving them liquidity for their hedges, than wasting their money in trying to manipulate the market.


Last edited by Nikopol; August 3rd, 2013 at 01:40 AM.
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  #22 (permalink)
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afranco562 View Post
When not if Oil reaches the 120 mark will start taking out my Visa to start shorting it, the higher it goes the more it goes on my Visa, if need be will use my Master Card!

Yeah? Well I've got an Amex card and Im buying!


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  #23 (permalink)
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bob7123 View Post
I'm not so sure Egypt is all that strategic for world oil reserves, in fact, I found this graphic on Wikipedia.

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Actually, once I saw where the US fit it, I couldn't resist posting.

Also, I heard that the Brent/WTI spread was due to transportation problems within the US. Necessity being the mother of invention, I betcha they get that sorted. In fact, in typical team A fashion, we may well overdo it. When I googled "OPEC" this was hit #4:

U.S. oil boom helps thwart OPEC - Jun. 19, 2013

I think a footnote should be "and China says thanks" but that is another story.

Looking at Brent as a more accurate judge of value, I'm seeing it flat. I can't see a push higher, unless there is more unrest and it spreads. [Keeping in mind from a Machiavellian perspective, a little bit of trouble is good for business.]

Finally, I see the long dated contracts are trading lover, so tossing a slightly weighted coin, I say 90.

Boy, I hope someone who actually knows something about oil posts here.

-Bob

Maybe - but it does own the Suez Canal - which happens to be THE gateway for oil container ships from the middle east - read supply issues.

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Fat Tails View Post

If you want to manipulate market prices you need to hold a huge percentage of open interest and also be a physical actor on the market. This is not possible with crude oil.

Tell that to BP, Total, Shell, Exxon, Glencore, Vitoil, etc etc.

ALL markets are manipulated. Even FX (in fact thats why FX markets exist so they can be manipulated by central banks to reach fiscal objectives). Every market has 4-6 controlling players who 'own' the market whether we like it or not. It's a statistical fact that is unavoidable from an economic perspective in all capitalist systems.

Besides, the volumes traded in listed futures are dwarfed by those traded OTC and cash. Again, not just in oil, but every market.

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  #25 (permalink)
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Thats what makes a market


TheDude View Post
Yeah? Well I've got an Amex card and Im buying!



Your buying and I am selling! That's what makes a market.

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  #26 (permalink)
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TheDude View Post
Tell that to BP, Total, Shell, Exxon, Glencore, Vitoil, etc etc.

ALL markets are manipulated. Even FX (in fact thats why FX markets exist so they can be manipulated by central banks to reach fiscal objectives). Every market has 4-6 controlling players who 'own' the market whether we like it or not. It's a statistical fact that is unavoidable from an economic perspective in all capitalist systems.

Statements like "Every market has 4-6 controlling players who 'own' the market" are good for the regular's table but not for a serious discussion. Term markets behave in a different fashion, depending on the number of participants and the structure of the underlying market.

If you tell me that the market for gasoline can be cornered or manipulated, then I would agree. There is only a limited number refineries capable of exporting gasoline to the US (Europe has a surplus of gasoline, the US has a deficit). Gasoline is sold via formular pricing, and the formula pricing depends on spot prices communicated by refineries. Works similar to the LIBOR procedure.


TheDude View Post
Tell that to BP, Total, Shell, Exxon, Glencore, Vitoil, etc etc.

Besides, the volumes traded in listed futures are dwarfed by those traded OTC and cash. Again, not just in oil, but every market.

False. World crude production is about 75 million barrels per day. Only a small share of this production is sold spot. The majority of physically traded oil is sold via term supply contracts which use formula pricing. There are only a limited number of traders participating in the spot game from their trading rooms in New York, London, Singapore, Geneva or Connecticut. I would guess that the spot market is below 20 million barrels per day.

The daily volume traded for the front month at CME and IPE is about 500 million barrels per day. This shows us that the futures market is more than 25 times larger than the spot market.

Your statement would only be correct for FOREX, but does not apply to crude oil.

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  #27 (permalink)
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Size of Spot Market and Cash Markets

I tried to find an indication of the size of the cash market for crude oil. there is a paper published by The Oxford Institute for Energy Studies, which includes a few estimations:

Light Crude Oil Futures Contract: 475 million b/d
Spot market for 11 US domestic grades: 1.8 million b/d
21-day dated Brent market: 0.5 million b/d
Dubai-Oman market: 0.9 million b/d

It seems that the spot market might be even smaller than I had suspected.

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Fat Tails View Post
Statements like "Every market has 4-6 controlling players who 'own' the market" are good for the regular's table but not for a serious discussion. Term markets behave in a different fashion, depending on the number of participants and the structure of the underlying market.

If you tell me that the market for gasoline can be cornered or manipulated, then I would agree. There is only a limited number refineries capable of exporting gasoline to the US (Europe has a surplus of gasoline, the US has a deficit). Gasoline is sold via formular pricing, and the formula pricing depends on spot prices communicated by refineries. Works similar to the LIBOR procedure.



False. World crude production is about 75 million barrels per day. Only a small share of this production is sold spot. The majority of physically traded oil is sold via term supply contracts which use formula pricing. There are only a limited number of traders participating in the spot game from their trading rooms in New York, London, Singapore, Geneva or Connecticut. I would guess that the spot market is below 20 million barrels per day.

The daily volume traded for the front month at CME and IPE is about 500 million barrels per day. This shows us that the futures market is more than 25 times larger than the spot market.

Your statement would only be correct for FOREX, but does not apply to crude oil.

Thanks for the info. You make a good point in reference to the cash market. The cash market therefore would be easier to manipulate than the futures then; correct? Both futures and OTC pricing are based off the cash price. Nevertheless, it's interesting to see how much bigger speculation is than daily/instant demand. Given the speculative market (eg on NYMEX/IPE) artificially trades more than actually exists, that excess has to find a way out somehow right? Most of that will be either rolling out onto other months and covering, OR it can be transferred into an OTC through the EFR mechanism at the exchange - similar to basis trading against the cash.

With respect however, I think you make the mistake of looking at traded volumes for futures. I think we should be looking at open interest - which for NYMEX is ~340,000 for Sep. The Avg Days Volume is ~230,000, suggesting most contracts are traded in and out (by you and I) with no intent - or perhaps real interest in the real market (day trading). How many of those contracts are adding to OI? Very few. In other words, looking at daily volume is really looking at a game of 'pass the parcel'. OI shows potential intent - even then a large proportion will be rolled over and will NEVER be taken to delivery as the cash market is.

I still maintain OTC market will dwarf contracts traded on NYMEX or IPE.

We need to remember of course the difference in nature between the contracts. Where as listed contracts are traded and often rolled over by speculators, OTC contracts are not. Generally they are traded, then held to expiry. The notional value of OTC will dwarf the futures, but the traded volume of futures can be misleading to day trading and rolling. OI of OTC isnt as well reported either of course due to the bi-lateral nature. Larger speculators AND physical producers/consumers generally prefer OTC contracts as they as more capital efficient, cheaper to trade, and can be built to more specific specifications than the one size fits all that the exchange provides.


Last edited by TheDude; August 4th, 2013 at 09:44 AM.
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TheDude View Post
Thanks for the info. You make a good point in reference to the cash market. The cash market therefore would be easier to manipulate than the futures then; correct? Both futures and OTC pricing are based off the cash price. Nevertheless, it's interesting to see how much bigger speculation is than daily/instant demand. Given the speculative market (eg on NYMEX/IPE) artificially trades more than actually exists, that excess has to find a way out somehow right? Most of that will be either rolling out onto other months and covering, OR it can be transferred into an OTC through the EFR mechanism at the exchange - similar to basis trading against the cash.

With respect however, I think you make the mistake of looking at traded volumes for futures. I think we should be looking at open interest - which for NYMEX is ~340,000 for Sep. The Avg Days Volume is ~230,000, suggesting most contracts are traded in and out (by you and I) with no intent - or perhaps real interest in the real market (day trading). How many of those contracts are adding to OI? Very few. In other words, looking at daily volume is really looking at a game of 'pass the parcel'. OI shows potential intent - even then a large proportion will be rolled over and will NEVER be taken to delivery as the cash market is.

I still maintain OTC market will dwarf contracts traded on NYMEX or IPE.

We need to remember of course the difference in nature between the contracts. Where as listed contracts are traded and often rolled over by speculators, OTC contracts are not. Generally they are traded, then held to expiry. The notional value of OTC will dwarf the futures, but the traded volume of futures can be misleading to day trading and rolling. OI of OTC isnt as well reported either of course due to the bi-lateral nature. Larger speculators AND physical producers/consumers generally prefer OTC contracts as they as more capital efficient, cheaper to trade, and can be built to more specific specifications than the one size fits all that the exchange provides.


The physical spot market is pretty small compared to the futures market, even if you measure it by open interest.
Open interest for crude oil stand currently at

- 1.8 million contracts for NYMEX
- 1.6 million contracts for IPE

This totals 3.4 million contracts or 3.4 billion b/d.

If you talk about OTC contracts, you talk about derivatives. Those do not contribute to price discovery, price discovery mainly takes place on the two futures exchanges.

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Fat Tails View Post
If you talk about OTC contracts, you talk about derivatives. Those do not contribute to price discovery, price discovery mainly takes place on the two futures exchanges.

How come?

If I want to buy 1mil barrels and the market is at today's high, my OTC dealer will quote me above todays high. How is that not price discovery? He may well then hedge his short OTC position by buying futures - making further new highs.

Fact is, they are all derivatives. And all priced off of (as you rightly say) a more thinly traded cash market

There are about 5-6 trade reporting depositories for OTC oil contracts and many CCP's. I guess we'd need Bloomberg or Platts to suggest how many barrels are traded OTC

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