Speculators, slapped

Posted by Tracy Alloway on Jun 24 10:39.

The US doesn’t like high oil prices. Neither does it like the speculators it thinks exacerbates them.

So why not take aim at both?

On Thursday the International Energy Agency announced it would release 60m barrels of oil from emergency stockpiles in response to the Libyan crisis (which, many have already noted, has already been running for about three months). So far the decision has been mooted as a warning shot for Opec to get its act together, a form of QEasing but also as a ‘secondary message’ of sorts to energy traders.

Some commentary from Deutsche Bank’s commodities team on Friday:

The IEA action could also be aimed at the odd nature of the oil markets- which often seem to hover in a technical equilibrium that is not necessarily related to supply/demand equilibrium. There is little evidence that $120/bbl for Brent is a stable short-term equilibrium given what we know about the economy. The IEA’s action might be viewed as an effort to kick the system into a lower ($100/bbl) equilibrium that might be more supported by industry costs and consumer affordability. Arguably. the IEA is trying to rebalance risk in the oil markets- adding some positive supply uncertainty into a market that appeared to favor an “I can’t lose being long” attitude on the part of speculators. Market purists do not like this government interference, but Ben Bernanke and other central bankers and most politicians (Ron Paul excepted) are not purists. The danger in this strategy is that 60 million barrels of crude and products over 30 days might not be adequate (especially since the auctions might not be fully subscribed). Expectations for medium-term supply and demand suggest relatively tight markets going forward, and thus prices could easily come back up from a temporary period of weakness.

We’ve already mentioned that the IEA’s move will have a larger impact on the Brent market, which has been the subject of some US criticism lately. Platts reports that according to Clearview analysts Kevin Book and F. Chase Hutto, the structure of the IEA’s plan “would relieve short-term middle distillates tightness — a big contributor to the Brent premium, in our view.” In other words, the IEA move “could be a strategy for dispelling near-term, non-commercial ‘calendar spreads’ that CFTC [US Commodity Futures Trading Commission] Chairman Gary Gensler” recently criticised, the analysts said.

And from Reuters’ Scotty Barber, a chart showing  net futures positioning in oil as of last week.

Bernanke loves the smell of burning oil positions in the morning.

Related links:
The SPQR – FT Alphaville
Goldman’s history lesson on oil releases – FT Alphaville
Did the US Government Short Oil Prices? – Aussie Macro Moments
Dresdner/Commerzbank blames oil speculators – FT Alphaville, 2009

This entry was posted by Tracy Alloway on Friday, June 24th, 2011 at 10:39 and is filed under Capital markets. Tagged with , , , , , , .

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