And now for a contrarian view on the fate of crude, and the Obama administration, from Oil Price: "The nation has about eight months of supply of crude oil saved in salt domes, in what is called the Strategic Petroleum Reserve. There is more oil available in the Naval Petroleum Reserve, a set-aside of oil in the ground. Obama needs to say that we are going to start using this oil as soon as it can reach the refineries. He has to go the whole hog – to set the machinery of using our special reserves in motion. That will counter-spook the market and humble the traders." Alas, any article that discusses the price of oil and ignores the possibility of another trillion or so in free liquidity courtesy of the Fed, which will immediately make its way to crude and the entire commodity complex, is woefully inadequate in our view.
From Oil Price: "It's Time for Obama to Spook the Oil Markets"
The fate of the Obama presidency hangs not on a birth certificate or
the red ink on the federal budget but by the hose nozzle of your local
Electoral discontent is measured by the price of a gallon of
gasoline. Heading past $4 toward $5, that is a lethal trajectory for
President Barack Obama.
Enter the demagogues, especially the clown-in-a-business-suit, Donald
Trump. Unfettered by the gravity that goes with facts, Trump says that
he would fix the oil price – now around $110 a barrel – by facing down
the producers, particularly the Organization of the Petroleum Exporting
Countries (OPEC). He told an interviewer on television that he would
call OPEC and tell them to pump more or face the consequences. The
latter, he did not specify. War? Against whom?
In a compelling book by Leah McGrath Goodman, “The Asylum: The
Renegades Who Highjacked the World's Oil Market,” the author lays out
the ugly fact that often – in fact, as often as not – the price of oil
is set not in Vienna at the headquarters of OPEC, but in downtown
Manhattan at the New York Mercantile Exchange (NYMEX).
Tens of thousands of future contracts are traded in nanoseconds at
the NYMEX, and the price of oil is set. This price affects not only the
price which will be paid when these contracts expire and delivery takes
place, but also, according to Goodman, the all-important
over-the-counter market, where sellers trade more directly with buyers
without government oversight.
Goodman contends that there is little oversight of the NYMEX because
the agency charged with the role is the weak and ineffectual Commodities
Futures Trading Commission (CFTC), where many staff and commissioners
are busy burnishing their resumes so they can cash in later as market
The over-the-counter market is not regulated at all because of a
pernicious interference from Congress known as the “Enron Loophole.” How
did it get into law? It is one of those pieces of special-interest
protection that owes its existence to legislative immaculate conception.
It was not in the committee version of the bill; it slipped in along
the way without parenthood, but is largely believed to be the work of
former Sen. Phil Graham (R-Texas) whose wife, Wendy, was chair of the
In classic theory, a market is where a willing buyer and a willing
seller strike a price. In the world of traders, it is something else: It
is where volatility is rewarded and myths hold sway.
Today there is no actual shortage of crude oil. Supply and demand,
according to those who monitor these things, is in balance. But fear
stalks the trading floors because fear is good for traders; and fear is a
critical part of the oil price.
Wars and rumors of wars are relished in trading pits. They raise the
specter of coming shortage and introduce the instability the traders
love. During the electricity shortage in California in 2001, traders,
particularly at Enron, sought not only to capitalize on fears of
shortage, but also to guarantee shortage by taking generating equipment
Of course, reality must eventually catch up with speculation. The
production of oil must meet demand and the price will briefly reach real
world equilibrium. This happened in 1986, when the price collapsed
because Saudi Arabia opened its spigots after the volatility of the
1970s. Many traders were wiped out and speculative billions were lost.
Some oil industry observers believe that the market is trading on a
“fear premium” of about $1 per gallon of gasoline, spooked by the
uncertainty in the Middle East and traders exploiting that fear.
Good for Obama. Time for the president to engage in a little market spookery of his own.
The nation has about eight months of supply of crude oil saved in
salt domes, in what is called the Strategic Petroleum Reserve. There is
more oil available in the Naval Petroleum Reserve, a set-aside of oil in
the ground. Obama needs to say that we are going to start using this
oil as soon as it can reach the refineries.
He has to go the whole hog – to set the machinery of using our
special reserves in motion. That will counter-spook the market and
humble the traders.
However, any new wars in the Middle East, and all bets are off. Poltergeists would stalk lower Manhattan.