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Monday, May 9, 2011

Oil Price Drop???

I've mentioned that I'm working on a post about the recent drop in gold and silver prices.  Still in process - sorry.  I'm trying to deconstruct what happened last week so that I can fortify my "tool box" of indicators regarding market price fluctuations.

One of the "flags" that could be an indicator of a sudden price drop has been hoisted.... for crude oil.

This flag is when the COMEX (Commodities Exchange) increases the amount of money that speculators must have on account (margin accounts) when they buy commodity futures.

Before silver prices dropped, the COMEX increased margin requirements 4 times in 8 days.... by a total of 84%.  The oil margins look to have been raised around 25%.  There are 33 pages of different kinds of oil futures you can buy, and I didn't take the time to do the math on all of them, but 25% seems to be the average increase.

These new margins go into effect after the close of business on Tuesday, May 10th (tomorrow).

Now, from what I understand, the holders of these margin accounts can either come up with the cash to meet the new margin requirements, or they can sell their contracts.  This latter option results in the market being flooded with contracts, causing the prices to drop.

I'd expect there to be at least some "panic" selling tomorrow.  If, like silver, the COMEX publishes additional margin account requirements in the days to come, we may see some serious drops in crude oil prices (and hopefully at the pump).

We'll see how this shakes out...

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suek said...

Same topic. Maybe some clarification?? Maybe not. I can't say I understand the topic, but I understand that if the big dogs think they're going to lose money, they'll take steps to insure that they don't. I think that's what Market Ticker is saying. The "silver dogs" don't have big bank accounts. The "oil dogs" do.

I think.

Chief Instructor said...

I don't know that I accept his explanation on silver's drop. He's saying that the longs were speculators and the shorts had the cash they needed.

Hmm. Let's say I was a short investor, and I was leveraged. I'm making the assumption that the price of silver has been artificially rising due to speculation. My short position reflects this. I wouldn't have made this bet if I thought the market was climbing due to "natural" reasons.

When the margin increases were announced, I am going to do everything in my power - I'll sell whatever other assets I have - to pay for the increased margins, because I believe I'll soon be in the money when the price drops.

His conclusion that everyone that was shorting the market had unleveraged accounts is simply a wild assumption.

He's taking this assumption and applying it to oil. He's saying that there wasn't a drop in prices (yet) because the oil longs have fully funded accounts and don't need to panic sell.

Perhaps, but if speculation isn't what pushed oil prices higher, what has? There's been no decline in the supply of oil, and at least what's in the public news, nothing seems to be saying supplies will be stopped or significantly curtailed.

Yes, there's all the crap going on in the Middle East, but it's speculation that this will cause a supply shortage.

Why is it speculation in silver but not in oil when there appears to be ample supplies of both?

As I noted in the post, I'm using this to see if watching margin increases (and decreases) is a way of gauging price fluctuations. It will be interesting to see if oil margins are increased by 84% in 8 days and it makes no difference in the market price of the commodity...

suek said...

What if Soros (Petrobas) and the Oil Cartels are bidding prices up? They more or less control the production - I wouldn't say it was so much speculation as control of the market.

Here's my simplistic comparison: I put a product on ebay. There are several bids. Under a different name, I submit a bid just above the highest buyer. Bidders being what they are, I'm over bid. I over bid once again. Now granted that if there are many others on the table, I'm going to soon reach a limit - but maybe that's a bit of a goal as well...finding out what the limit is.

I've seen a couple of odd things on ebay - a set of cds that were apparently identical, offered by the same seller, but at completely different "buy it now" prices. Also I just bought a "black hole gopher trap" (a topic for another discussion!!) for $15. The same seller had the same trap offered at $39. I can't explain it. Maybe the $39 dollar offer is to increase sales at $15?? I don't know. But if your production costs are the same, it might make sense to push the market a bit.

Soros made his fortune manipulating the currency markets. I don't think it's beyond his capability to do the same in the oil market - and he's probably not the only one in the world with those skills!