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Forget Libor-gate, Oil Market Manipulation Is Far Worse

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By EconMatters

Since the Global Community all the sudden seems to be preoccupied with Market manipulation even though the authorities knew it was a problem for over 5 years with Libor Rate Fixing. It is high time authorities look at the Crude Oil market which has been manipulated for the last decade and all the sophisticated participants know it is rigged or artificially higher than the fundamentals of the economy dictate. Consumers are paying an easy $35 dollars per barrel over what they would otherwise dole out for a barrel of oil if fund managers didn`t use the benchmark futures contracts as their own personal ATMs. 

 

Just a month ago Crude Oil WTI was $78 a barrel and today it is $93. Do you think the fundamentals changed one bit to merit this price swing? Nope! Supply levels are all at record highs around the world. Is it Iran? Please!! It is all about the money flows, nobody takes delivery anymore. Assets have become one big correlated risk trade. Risk On, Risk Off. If the Dow is up a hundred, you can bet crude is up at least a dollar! It has nothing to do with fundamentals, inventory levels, supply disruptions, etc. It is all about fund flows.

 

 

Chart Source: FT.com, July 19, 2012

 

 

 So how this affects the average Joe is that if Wall Street is having a good day, i.e., fund flows are going in, then Average Joe is having a bad day and paying more for Gas. Yes, it is that simple. A good day for Wall Street is a bad day for consumers at the pump these days as Capital flows into one big Asset Trade: Risk On!

 

It should be separate in that equities respond to stock valuations, and energy responds to the market conditions of supply and demand. But that isn`t the case in the investing world today, it is all about Capital Flows in and out of Assets. The economy could be doing really poorly, Oil inventories can be extremely high, the economic data very bleak but Oil will go up and consumers will pay more at the pump just because some Fund Manager pours capital into a futures contract.The Fund Managers goals are in direct opposition to the consumerswho actually uses the product. Funds flows and not supply and demand ultimately carry the day in the energy markets, and that needs to change!

 

The key is equities, crude oil (both Brent and WTI) are essentially equities for Fund Managers to trade in and out of and they make a fortune in these instruments. When I refer to Fund Managers this includes Hedge Funds, Oil Majors, Pension Funds, Investment Banks etc. This is part of the reason that the price of oil can be so varied in value within a 3 month span. WTI can literally be $110 one month and $80 the next because of pure funds going in or coming out of the futures contracts.

 

The volatility really is where they make their money, they have deep pockets and they make a fortune moving crude oil around like a puppet on a string. If you think in terms of each dollar price move in the commodity being equal to $1,000 and the size that these players employ on a monthly and quarterly basis you start to see the value of buying thousands and thousands of futures contracts and capitalizing on these huge moves in the commodity.

 

Start out a quarter at $80 a barrel , buy a bunch of futures contracts and put them in the portfolio along with your other holdings like Apple, IBM, and Johnson and Johnson and run them up just like any other asset class in the first quarter to hit your numbers. Use the media to hype Iran or any other potential supply disruption scenario and Voila you end the quarter at $110 and you have made far more gains in your Crude Oil asset class than lowly Apple by comparison. It’s the biggest game on Wall Street!

 

Notice how European equities are at 11 week highs and look at the Spike in the Brent contract. Fund managers pump money into these asset classes and once earnings are over, they will pull their money out so they are not left holding the bag when the damage to the economy ensues as consumers and the economy slows due to the burden of artificially high Oil prices on discretionary income.

 

The economic downturn has a lot of negative effects, and consumers should be benefitting from lower fuel costs as a result of slower economic conditions. However, Fund Managers will not let the Fundamental Oil Price take hold in the market place, their gain is consumer`s loss. Right now Oil prices should be at least $75 a barrel based on current supply levels, and the facts regarding near recessionary levels of unemployment, weak manufacturing, and constrained housing production taking place in the economic landscape. Gas prices are not matching the GDP numbers or the capacity utilization rate of business activity in the economy.

 

But Fund managers are laughing all the way to their Hamptons and Connecticut mansions while average “Joe Blow Consumer” has to pawn household items or charge up their credit cards to fill up their gas tanks each week. This Oil manipulation is really putting a crimp on consumers and makes it extremely difficult to get this recovery off the ground because just as the economy starts recovering fund managers slap it back down with their run up of oil prices. This leads to growth being constrained and even sputtering, consumers start reeling, and the entire supply chain is negatively affected because of these artificially high energy prices. The fund managers then dump their holdings and short the market, and the entire cycle starts over every three to six months or so. The volatility is great for them, but really hurts economic stability.

 

Also, this is one major reason why a QE3 program will neverwork because it just adds fuel to this process. And any benefits to the economy are quickly offset by even more inflated energy prices. The Fed giveth on one hand, and the Economy suffers on the other hand. A no win situation which Ben Bernanke is well aware of from the last failed attempt in QE2 which just plays right in line with the ideal Fund Manager strategy of manipulating price by creating artificial demand through paper trading of markets. The last thing they need is more paper to artificially accumulate positions and distort market prices to an even greater extent.  

 

Hopefully, Ben Bernanke and crew have learned their lesson is this regard, which it is hard to target a QE Program without artificially inflating all assets, even those that are essential to everyday living, and end up hurting the very people that you are trying to help. In this case, Fed Policy would be a contributing factor towards the same Market Price Distortion of Fund Managers that ultimately needs to be fixed. 

 

So what is the solution to all this madness? Everybody in the market knows the culprits, so why doesn`t this practice ever get addressed? The same reason Libor manipulation went on for so long, all the watchdogs are completely incompetent or lobbied to death on these financial matters. Obama tried to squash the fund managers with the SPR release, but even then word got out long before the actual lever was pulled, and it took 2 months to coordinate. Can you say too little too late? Consumers were already paying $4 gas for months before any action was carried out.

 

Day Trading isn`t even the problem here it is the buy and holders who accumulate large positions for swing trading that ultimately do the real damage and price distortion in the Oil Markets. Legitimate regulation on Fund Managers who accumulate and hold these large positions in the form of enforcing delivery obligations would clear up this malfeasance real fast. I guarantee you if it was a requirement for any Fund Participant to take delivery of any Futures contract held more than 3 days that there would be a significant re-pricing in the Oil market, as well as adding price stability as true market conditions would dictate price.

 

And based upon actual inventory levels over the last 5 years, this suggests price should have been very stable as inventories have not fluctuated much during this era. Even with all the turbulence here and there, actual supply has never been an issue with inventory levels all near the highs of the 5 year range for this period.

 

Day Traders can continue to practice their craft in the Oil markets because it can be argued that they don`t move price significantly, and actually create better pricing by adding liquidity to the market for participants if they actually did need to hedge production or set up physical delivery of the commodity. An example would be an Airline getting a fair price when they enter the market to hedge price due to an active Day Trading market.

 

So the next time you fill up your gas tank, just realize that this price is an artificially high fixed, manipulated pricedue to the Position Trading of the Fund Managers. Libor Gate pales in comparison to the actual pass through effects of price manipulation in the Oil Markets. If you think Consumers are being screwed by artificially fixed Libor Rates, and Politicians have finally stepped forward after years of abuse and neglect, then you should really be outraged by the Oil Price Manipulation.

 

Consumers have been paying on average for the last five years by conservative estimates a good 35% over fair market prices for Oil related products due to this Manipulation on behalf of Position Traders. Again, I label the group with the catch all term “Fund Managers” defined earlier in this piece, but I am not referring to just the standard definition of Fund Manger. Any Market participant who accumulates a large position and holds over time which results in the distortion of market mechanism price discovery due to not actually taking physical delivery of the commodity is inclusive of this label “Fund Manager” and part of the problem that needs to be addressed.

 

So how long will it take politicians and the CFTC to address this manipulative practice that is a decade in the making in the Oil Markets?  My guess is it will just continue as usual because regulators and politicians are either corrupt or incompetent to address the issue and consumers are too busy working their ass off to even have the time or energy to revolt against this practice.

 

There isn`t a “Gotcha” moment like Libor Gate, rather just a slow steady business practice that drains consumers of their resources like just another societal Tax on their consumption.  A repugnant tax I am calling attention to: the “Gotcha Bells” should start resonating in policy holders’ ears, and they should finally start addressing this seedy Oil Market and its blatant Market Manipulation of Price.

 

 

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Fri, 07/20/2012 - 12:26 | 2635535 steve from virginia
steve from virginia's picture

 

 

 

This is from the, "Hammer -- nail" department.

Middleman trading in crude is not that important because the middlemen cannot hold more than the smallest fraction of daily output (from well head). World crude production per day = 75 million barrels per day.

What traders can do is earn a volatility premium by being virtual swing producers. They can only do this when there is a great deal of spare capacity (and well-head producers are not paying attention). Right now, spare cap is vanishing into the gas tanks of the producers' themselves. Once that is gone the volatility will increase.

The manipulation is subsidies for use of the fuel, both in the US/EU as well as in producer countries.

Manipulations such as cheap credit, free/cut-rate gas (Venezuela, Nigeria, Iran), free highways, mortgage guarantees/tax advantages, zoning, free police/ambulance service, mandatory insurance, depletion allowances and write-offs, capital-loss provisions and direct bailouts (GM, Chrysler) and indirect bailouts (Ford, Fiat, BMW, Daimler, Honda, etc.) opening of commons to discount leasing/price collusion, military overreach, credit embargoes (PIIGS, France, Germany, China, Japan), invasion threats, irregular warfare, labor arbitrage, etc.

Yr barrel of oil really costs $300: payment has been smeared into other categories.

The intent of the establishment has always been to flood markets with cheap crude (UK selling its North Sea crude for -$20/bbl) to lever auto, house, office tower, highway construction, finance and other related industries. This is manipulation that has taken place since John D. Rockefeller created the modern integrated energy company and built the world's largest fortune for himself -- by forcing prices lower. This took place in the 19th century, which is why analysts ignore it.

Rockefeller was as important to the auto industry as Henry Ford. Standard Oil guaranteed fuel for pennies ...

The author of this article does not know what he's writing about. Zero Hedge should not have published this article it is factually incorrect (like much else that is published on ZH).

 

Thanks and have a nice day.

Fri, 07/20/2012 - 08:47 | 2635428 Widowmaker
Widowmaker's picture

Widowmaker has tracked oil for decades (since the pumps were $.73 USD/gallon).

The entire fucking market is fraud.  EVERY GALLON AND EVERY NATION.

It's just like the war on terror, "the business may be dirty but the money is always clean."

Sun, 07/22/2012 - 06:16 | 2639924 falak pema
falak pema's picture

+1 

Oil from ME/Africa at current prices COSTS 20 USD/bbl. Imagine the rip off since 1975...and NONE (in sub saharan Africa) , or very little, in MENA, of that went to local economy. It was all recycled to west. 
It made the west, and its oil oligarchs rich. And the scam was multiplied by two since the GWB years when financialised derivatives gave the TBTF a part share of the hyped, fake profit margin; in 2003-2008 period and now since 2010 again. 

Fri, 07/20/2012 - 13:54 | 2635213 Quinvarius
Quinvarius's picture

This guy is going to be really pissed when oil is $300 a barrel.  Oil prices rise, despite the government's continually smashing of oil prices, because we printed too much money and it is looking for home.  It is the hyperinflation, which is so handily denied every time there is a downtick in prices anywhere, driving prices.  Oil is going higher.  Gold is going higher.  Food is going higher.  They will keep going higher. 

Bernanke doesn't do QE to goose the markets.  He talks about QE to goose the markets.  QE is done to rescue banks.  It never stopped.  It started long before 2008.  To make up some reason why or why not Bernanke will rescue the banks based on what you think the price of something should be is a path to destruction.

Fri, 07/20/2012 - 06:48 | 2635157 negative rates
negative rates's picture

That's assuming the data is reliable and you trust it. Saudi's shut in their wells under $92/bbl and wait for the price to rise above it, so they can afford to provide services their people without a debt based financial structure. If your premise is wrong you just spent the whole day crowin about nothing.

Fri, 07/20/2012 - 09:02 | 2635502 Widowmaker
Widowmaker's picture

Speaking of fraud-Saud, you're full of shit, too

How can one family clear $95M PER FUCKING DAY and you say it's about "financial structure," or providing services?

Yeah, I thought so.

Fri, 07/20/2012 - 06:11 | 2635121 MeelionDollerBogus
MeelionDollerBogus's picture

What? I can't believe it, the oil market, manipulated?

Clearly some libertarians and a lot of silly uber-freemarketers are forgetting the benefits of centrally efficient security offered by governments and closely co-operating conglomerates - so poorly labeled as a "cartel".

If you can keep putting gas in your tank it must be good news.

:D <mdb mode off>

You may now vomit.

Fri, 07/20/2012 - 05:44 | 2635090 Downtoolong
Downtoolong's picture

One thing this article doesn’t touch on is how much of the price dynamic (volatility) in these oil index markets is driven by squeezes, similar to what happened to Bruno Iskill in a very big way at JPM. Huge distortions can exist and persist for months in futures market prices when one player has a position so large that it can no longer be managed. They can’t get out or roll their position forward without causing a huge move in the market price. Insiders (mostly other big financial players) spot the squeeze taking place and start amplifying it with their trades (or absence of trades). In some cases everyone backs away from the market so far that liquidity becomes extinct. That’s a flaw in the system too, which is what the whole argument over position limits is supposed to be about. I’ll give you one guess who argues against them (Blythe). There’s a whole history of squeeze catastrophes of this ilk in the oil futures market which someone should write a book about one day. The story rivals any John Grisham novel I ever read.

Fri, 07/20/2012 - 06:19 | 2635132 MeelionDollerBogus
MeelionDollerBogus's picture

oil prices look just like DOW prices to me. There's some deviation, some new trend directions on a scatterplot but for the most part it's all the same.

Check this out, http://scharts.co/MNTfHS WTI vs Brent, and this DOW vs WTI at http://scharts.co/MNTm6m - we'd have to be blind not to see the nearly identical chart both times.

You can see some re-scaling start in June, this meaning on a scatterplot of WTI oil as x-axis and DOW as y-axis that suddenly the positive DOW slope would increase but still be merely a trend "bent upward"

Essential understanding for today's rigged markets is correlation in markets.

Ah... Scythe Masters ... http://flic.kr/p/bxySU9

Fri, 07/20/2012 - 05:20 | 2635074 supermaxedout
supermaxedout's picture

It is all about the money flows, nobody takes delivery anymore. Assets have become one big correlated risk trade. Risk On, Risk Off. If the Dow is up a hundred, you can bet crude is up at least a dollar! It has nothing to do with fundamentals, inventory levels, supply disruptions, etc. It is all about fund flows.

Yes, Yes, Yes.

And therefore hard assets are going to explode once the bulk of the private money is getting the idea that paper money is finaly reaching the end of the road.

The can can not be kicked further down the road, because the road has ended in the nowhere. In the dry, hot, waterless, sandy, itchy, hellish desert! The sandflies are going to bite us.

There is  simply an inflation going on, inflating the paper money, more and more, and more and not long anymore one can wallpaper his rooms with dollar notes. Maybe also with Euros but thats not yet decidied. But the Dollar is future wallpaper, simply for the fact, that its not practical to use  Dollar banknotes as toilet paper.

Fri, 07/20/2012 - 05:20 | 2635073 Theosebes Goodfellow
Theosebes Goodfellow's picture

~" if it was a requirement for any Fund Participant to take delivery of any Futures contract held more than 3 days that there would be a significant re-pricing in the Oil market..."~

I agree, but have you seen Congress lately?

Fri, 07/20/2012 - 05:18 | 2635072 Downtoolong
Downtoolong's picture

I think this article does a decent job of demonstrating the dark side of the financial index futures markets. Everything that means anything is now priced relative to these indices; oil, gold, silver, other commodities, stocks, bonds, you name it. Sure these markets provide easy hedging, liquidity, and short term trading opportunities for consumers, producers, and investors. But, they also centralize control of prices, particularly in the short to mid-term, primarily by and for the benefit of big financial institutions, who manipulate these markets to price and manage their massive unregulated derivative portfolios, which are also priced relative to these markets. And that was the plan all along.

It always goes back to finaincial power, size, and control. An like I’ve said many times before, the biggest crime of these banks is one of economic inefficiency. For every one of the millions of dollars they steal, they cost the rest of us a billion.

Fri, 07/20/2012 - 04:42 | 2635058 Jack Sheet
Jack Sheet's picture

Check out Chris Cook - tends to support this post, even if we DOLE out for gas (doll out : expulsion of a fashion model?)

http://www.nakedcapitalism.com/2012/03/chris-cook-spikes-and-speculation...–-flash-crash-part-deux.html

Fri, 07/20/2012 - 02:10 | 2634972 New American Re...
New American Revolution's picture

You have no idea.   The most clever lie is the lie of omission.  Peak oil is the biggest lie.   We'll get to it.  In the meantime, www.electanewcongress.com Serfs Up America!

Fri, 07/20/2012 - 01:53 | 2634958 surfersd
surfersd's picture

The cost for production of crude is @ $78. Under that for any length of time oil exploration stops. Volatility is definitely the name of the game, but the author is smoking some oil sands if he thinks that all the hedge funds are printing money at the NYMEX.

Get a clue and stop looking for conspiraries everywhere. My guess is those players who need to hedge the long side can't just sit around hoping nothing goes boom in the middle east. Price movement is manipulated to a point, but the fundamentals still matter.

Fri, 07/20/2012 - 01:24 | 2634927 rosario
rosario's picture

Didn't Obama say that the price of gas is so high due to speculators?  Seems like he knows and thinks somebody else needs to do something about it.  Wonder who he has in mind?  Maybe the Treasury Secretary...

 

Fri, 07/20/2012 - 01:21 | 2634925 Boxed Merlot
Boxed Merlot's picture

You'll have a hard time convincing joe average of the manipulation due to the amount of investment paying returns on zero sum/peak oil "education" of the masses, particularly the offspring of the US middle class being instructed by gov't tenured unionized "educators". 

imho.

Fri, 07/20/2012 - 01:06 | 2634913 madridisburning
madridisburning's picture

I generally agree with the author, but the phenomenon is momentum investing. Momentum investing has been the norm in commodities forever, but is also now the dominate force in the stock market. But, what I find funny about the readership here is that, if you think oil, a real commodity with a real and vital use, should be lower, then why shouldn't gold trade at $200? Because it is shiney? It is hard to see how a board that has such a hard on for gold would be "dissing" oil, a precious AND useful commodity.

Fri, 07/20/2012 - 00:45 | 2634891 Dingleberry
Dingleberry's picture

I dunno......I can't believe that there is a market that is NOT manipulated anymore.  Everything commoditized and running thru Wall Street, London or Chicago is probably fraudulent.  Collusion exists. Infinite Fed backstopping of trades exists. Naked shorting exists.  Even if the oil market cannot be directly manipulated, "coincidentally" it seems every time oil starts to go down, some bullshit happens AGAIN FOR THE MILLIONTH TIME in the mideast, which of course drives the price higher. Or Ben doing another QE or some shit.

I once heard an interview about water, and how precious and valuable it is becoming, much like oil.  The interviewee said that even the commodity markets know not to fuck with water, as  J6P will (finally) put down the remote and go postal if that would happen.

 

All markets can be rigged, especially in the near to medium term.

Fri, 07/20/2012 - 00:31 | 2634878 q99x2
q99x2's picture

BigFoot is behind the recent run up in stock markets. I have proof.

Fri, 07/20/2012 - 00:15 | 2634865 Bicycle Repairman
Bicycle Repairman's picture

There's no need to forget Liborgate, Corngate, Oilgate, Goldgate, Silvergate, HFCGate. It's all the same guys. Just get them.

Fri, 07/20/2012 - 00:28 | 2634875 Flakmeister
Flakmeister's picture

You forgot Colgate....  they lied about the cavities...

Fri, 07/20/2012 - 06:51 | 2635159 negative rates
negative rates's picture

No, Hershey's lied about chocolate and the decaying jaw bone. We call um free doom suckers, compliments of, yes, once again, your politicians.

Fri, 07/20/2012 - 00:49 | 2634898 monad
monad's picture

mm mm. Those sodium hexaflouride halos are awesome. The brain damaged kids take some getting used to.

Fri, 07/20/2012 - 00:16 | 2634861 Yankee.go.home
Yankee.go.home's picture

It kept getting worse and worse and I stopped reading at "doll out."

Thu, 07/19/2012 - 23:44 | 2634812 Walt D.
Walt D.'s picture

The futures market is a zero some game. You can only drive the price of oil higher by buying the actual product and hording it. 

Even Paul Krugman gets this right

 http://krugman.blogs.nytimes.com/2008/06/23/speculative-nonsense-once-ag...

Fri, 07/20/2012 - 01:10 | 2634919 madridisburning
madridisburning's picture

Just another market that Krugman talks about but does not understand.

So, if the futures are $100, is the producer of oil going to sell it on the spot market for $80 just for kicks?

In fact, because of the huge leverage in the futures market, it is the futures market running the show.

Fri, 07/20/2012 - 10:51 | 2636098 Walt D.
Walt D.'s picture

What is magic about $100? If the futures market can artificiailly drive the spot market higher from the assumed market clearing price of $80, why not drive it up to $150?  Then short at $150 and drive it down to $50, then go long and drive it back to $150?

Even at $100 the amount demanded at this price is equal to the amount offered. Remember rising prices give a signal to the market participants to produce more and consume less. If the price suddenly dropped back to $80, there would be an imbalance - less would be supplied and more would be demanded.

I know it is far fetched to think that Paul Krugman is right. But bear in mind that this was written in 2008 before Obama was elected and Krugman joined the ranks of the political hacks. Read what he wrote and see if you can write a reply expaining it detail why in this particular case his argument is wrong. (You can then post it on the Krugman-in-Wonderland blog).

 

Thu, 07/19/2012 - 23:35 | 2634791 disabledvet
disabledvet's picture

the price of oil is "manipulated higher" (does anyone manipulate a price lower? obviously "ideally of course"...but still. ANYONE? throw me a bone here) because government wastes so much of it...and to create Yogi Berra-ism "they use a lot too." As long as all those government checks keep flowing then the price of oil will be off the charts high. The irony is that "the government has been looking for an alternative going on 40 years now!" Great job guy's! Great job! What has been happening is the creation of a "world safe for the gasoline powered internal combustion engine." Make that thing a collector's item! We are SO over that...and yet, for in my view PURELY political purposes "we are not." Or, at least..."we are not...until we are." I truly believe starting next year the age of gasoline powered engines "will be declined." And should something like that actually occur (we'll see if the PTB can destroy Tesla Motors or not. Another one to watch for is Bombardier which makes a beautiful three wheeled motorcycle which has all sorts of applications...but is yet another company with deep financial issues) you really are talking "a whole new world....right around the corner." hopefully we will see...and see soon.

Fri, 07/20/2012 - 07:19 | 2635180 dark pools of soros
dark pools of soros's picture

V8's till the last drop of oil!

Thu, 07/19/2012 - 23:19 | 2634768 adr
adr's picture

I found something interesting when I looked at historical futures charts. Prior to the Futures Modernization Act, or the greatest fleecing ever played, futures contracts tended to drop rather dramaticaly close to expiration. Why was that?

Well a consumer of a commodity has a vested interest in paying the least possible, not the most. Why would you want to increase your input costs? If you want to sell and you buyers are only wiling to pay a certain amount, it is pretty hard to get more out of them. In oil, outside price shocks due to war there has always been more supply than demand in recent history. No comsumer of a commodity is looking to profit off buying and selling a contract.

Once the speculators got involved, contracts tended to inrease in value at expiration, as more buyers attempted to get in on the action and roll contracts into the next month. Speculators had a vested interest in bidding the contracts up, to increase profit to them when they eventually sell.

Corporations that actually use oil are forced to compete for contracts they wish to be lower in value with speculators that outnumber them 100:1, who wish the contracts to increase.

The simple solution is to ban all futures trading, ban all ETFs. In fact just ban Wall Street. We will all be much better off.

Thu, 07/19/2012 - 23:19 | 2634766 uformula
uformula's picture

You touched on an important point, but I actually believe that the oil market isn't as bad as the uncovered corruption in LIBOR.  Note that there probably is some sort of manipulation (there's no trust anymore), but LIBOR is much worse.  

Investors see that governments are paying more and more debt with printed money.  You certainly touch on this point.   However, no where do I see mentioned (or I'm blind) the effects of a cartel (OPEC) deliberately maintaining a high price for oil products (Saudi Arabia has confirmed this). 

Another long-term trend supporting oil is boils down to classical growth theory (malthusian theory); the more and more people inhabit earth along with increasing affordability for raw materials, the more demand there is for scarce resources.  China is more than 4 times the size of the U.S. and most of the population remains underdeveloped, India is just under 4 again largely underdeveloped as well.  Printing money exacerbates this effect.  

I don't think oil markets are rigged, there are other reasons for higher oil prices in addition to a weak U.S. consumer.  Remember that markets are forward looking, not coincident indicators.  There's a real long-term problem being created here: QE3, classical growth theory, and a rigged supply-side with the existence of OPEC isn't a sustainable combination.     

Thu, 07/19/2012 - 23:05 | 2634746 Flakmeister
Flakmeister's picture

If there was any truth to this, then someone would make a killing exploting that cheap oil for obscene profits....

Show me where that is happening....

The Bakken would be a ghost town with $45 oil... And the Bakken is the only significant new source of oil since GOM become viable...

http://mazamascience.com/OilExport/output_en/Exports_BP_2012_oil_bbl_US_MZM_NONE_auto_M.pdf

The Bakken has been so wonderful that is have enabled the US to match 1942 production....

I call bullshit on the thesis....

Thu, 07/19/2012 - 23:17 | 2634751 iDealMeat
iDealMeat's picture

I didn't even bother reading it. and +5 it based on the title..

 

Light, sweet crude. = tastes as good as your own garden..

 

Thu, 07/19/2012 - 22:58 | 2634735 kito
kito's picture

you are out of your mind if you think oil is overpriced $35/bbl.........there is NO MORE CHEAP OIL!!! tell me, why has saudi arabia begun drilling for oil OFFSHORE?????? 

Fri, 07/20/2012 - 15:32 | 2637443 SelfGov
SelfGov's picture

Facts Based On 2011 Data
The world consumes 31,755,000,000 barrels of oil per year (31.7 Billion Barrels)
The US consumes 7,117,500,000 barrels of oil per year (7.1 Billion Barrels [22% of World Production])

Gulf of Mexico Reserves
Discovered: 2006
Size: 7 – 15 Billion Barrels
Could keep world economy running for: 3 to 6 months.
Could keep US economy running for: 1 to 2 years.
Largest oil resource discovered since Prudhoe Bay.

Prudhoe Bay
Discovered: 1968
Size: 10 – 25 Billion Barrels
Actual Production To Date: 11 Billion Barrels
Remaining Reserves: 2 Billion Barrels

Alaska National
Wildlife Reserve (ANWR)

Latest Estimates: 1998
Size: 5.7 – 16 Billion Barrels
Could keep world economy running for: 2 to 7 months.
Could keep US economy running for: 1 to 2 years.

North Dakota Tight Oil (Bakken)
The average tight oil well, over its lifetime, produces roughly 150 barrels of oil per day.
The average tight oil well will only produce 550,000 barrels of oil in its lifetime.

The lifetime oil production from a single tight oil well can keep the world running for: 9 minutes.
The lifetime oil production from a single tight oil well can keep the US running for: 40 minutes.
The Deepwater Horizon could have produced that much in 100 days if it hadn’t exploded.

Thu, 07/19/2012 - 23:27 | 2634778 adr
adr's picture

Oil was drilled offshore profitably at $20 a barrel. Even with less accessible oil, it doesn't cost three times as much to pull out of the ground.

In 2005 Exxon engineers said anything over $40 for a barrel of oil was insane. It would be profitable to drill anywhere on earth at that price. Nobody in the oil industry expected oil to go past $100 in their wildest dreams.

Or have we forgotten everything that was said prior to 2008?

If oil would have peaked at $60 and settled back down to $45. The shale guys would be saying $35 would be the break even for them. Instead because of the Wall Street speculative bullshit sending oil to $147 a barrel, oil that was drilled profitably at $20 all of sudden can't be pumped for less than $60.

Fri, 07/20/2012 - 08:44 | 2635423 kito
kito's picture

.........markets can be manipulated short term, but long term movements are still an accurate means to gauging a price.....exxon is moving into the arctic, there is nothing easy left....and whatever is still easy to find is owned by nationalized countries.....nationalization has also suffocated the market driving oil prices higher.......

Sun, 07/22/2012 - 14:08 | 2634874 Flakmeister
Flakmeister's picture

Then explain how Exxon has not replaced its pumped reserves over the past 10 years and how it is changing into an NG company...

Unless you think Bitumen is the same as light sweet and even then they are still not back to par...

Hint: Google Exxon Reserve Replacement Ratio

Here is a typical link,  one from that leftwing rag Forbes....

http://www.forbes.com/sites/greatspeculations/2012/02/27/tar-sands-takes-exxon-reserves-higher/

Reserves addition

Over the past ten years, Exxon has managed to post a reserve replacement ration of 99% for liquids and a 150% replacement ratio of gas. In 2011, the Kearl oil sands project helped the company 166% replacement ratio of liquids. The oil sands project will start producing blended bitumen by the end of 2012. [2] The gas replacement ratio for Exxon dropped to 49% in 2011. At present production levels, the company’s reserves can last for 15 years.

Thu, 07/19/2012 - 23:09 | 2634749 otto skorzeny
otto skorzeny's picture

a few trillion in liquidity added in the last few years sloshing around looking for someplace to roost wouldn't have anything to do with it-right fellas? no Bernank-maybe $50 a gallon right now (think 80s with the stong dollar and oil @ $35 a gallon helping the economy stabilize-we never got that thanks to ZIRP 4EVER-commodities were down for what -8 months in early 2009?)

Thu, 07/19/2012 - 23:00 | 2634741 worbsid
worbsid's picture

Agreed, he is wacko.

Thu, 07/19/2012 - 22:58 | 2634734 worbsid
worbsid's picture

For every future 'long' there is a future 'short'.  True, volitility can take out a nearby short or long stop trade but the rest is ballanced depending only on the disposition (latest rumor) of the traders. Half are long and half are short. And unless you want a lot of oil in your driveway or you have a producing well, you must be out ahead of the settle time about every month.   

Thu, 07/19/2012 - 22:05 | 2634619 shuckster
shuckster's picture

It's a monopoly. Chevron, Exxon, Conoco - they all belong to the same people. That's why they can manipulate the price and the public with it. There is no competition. Consumers must buy oil from the same suppliers no matter the price. Quite simple

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