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 12:40 AM.
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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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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 08:44 AM.
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