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The Brent Oil Contract is a Sham!

EconMatters's picture




 

By EconMatters  

 

 

Oil Benchmark 

 

It is a sad state of affairs that the entire world of energy, and consumer energy prices are all based upon a fraud of an energy contract masquerading as the Industry`s Benchmark, setting the price for all other grades. 

 

Monthly Rollover Ramp

 

Here is an idea of how manipulated the Brent Oil contract that trades mainly on the ICE exchange is we are at rollover time once again in the Brent oil contract and sure enough as day, the contract is moved up substantially right before expiration. 

 

This happens almost every rollover, and is impossible to do in a non-deliverable market without precise market manipulation. 

 

Always Positive Rollover Carry

 

The other common feature of the Brent contract is the expiring month is always higher by a dollar, dollar and a half, than the contract for the next month without fail. Again this happens every single rollover without fail, and again very hard to “naturally occur”. 

 

It might be reasonable in the old days, or in a market that was partly physical deliverable that you would have times that exhibit Contango features that would account for this price differential. 

 

No Physical Delivery 

 

But this happens every time, and the old rules of Contango and Backwardation don`t apply to purely paper markets as there is no need from one month versus the next for “stronger demand” as nobody ever takes delivery of a Brent contract of oil. There is no demand for near term oil contracts due to supply shortages in the oil market.

 

The only reason for this price differential which always occurs and is heavily manipulated is to ensure for a positive rollover effect for the big players in the market.

 

 

No Rollover Risk equals much easier to invest capital in the market

 

Why lose money if in basically an unregulated space you can just move up the front month at expiration so that when you sell to close out the position on the front month at a higher price, and buy the next month to reestablish a position at a lower price you have a positive built in rollover. 

 

Makes the risk of investing in oil with an always positive carry much less. It is a scam of major proportions when you factor in how many years this has been going on in the ICE market.

 

Not fully credentialed to be a Benchmark for anything

 

However, that isn`t the only thing that doesn`t pass the smell test with the Brent contract. The main problem is the Brent contract is illegitimate and should not serve as a founding basis for any price discovery.

 

It trades on essentially an unregulated market with little or no accountability in regards to transparency. And this contract is setting the price of oil for the entire oil supply chain.

 

Represents what Storage Facilities?

 

First of all the Brent contract needs to be tied to actual oil inventories in Europe so that supplies can actually be tracked and evaluated on a historical basis. 

 

For example, WTI is based upon oil inventories at Cushing Oklahoma, which can actually be tracked in a weekly report, and reported by an independent government agency in the EIA, for Brent to become a legitimate Oil contract it needs to do the same. 

 

Needs to be actually Regulated

 

Or frankly regulators need to force the ICE exchange to do so or discontinue the futures contract, as it has become far too important at setting world oil prices to remain in this non-transparency illegitimate status. 

 

Independent Governmental Agency Reporting of Supply Data

 

So once actual inventories of oil supplies are attached to the Brent Contract, there needs to be an independent government agency like the EIA in the US which collects data on an independent basis and provides weekly, quarterly, and annual reports on oil stockpiles.

 

We live in the Information Age

 

We do live in the modern age of increased technology, data collection, and transparency with unprecedented access to all types of information. 

 

ICE exchange has no incentive to change status quo without Regulatory Pressure

 

It is about time that the ICE exchange is forced by regulators to come into this century, especially given the important role that Brent has become as a benchmark for setting price in the oil markets, and thus derivatively gasoline and heating oil markets, by being forced to comply with these aforementioned instrumental changes, or be forced out of the market. 

 

Brent is so much easier to Rig than WTI: This attracts Fund Flows

 

You want to know the real reason that the Brent market has traded at so high a premium to WTI, and became so popular by the major players in the oil trading and investment community? 

 

It is because the contract is based on “nothingness” has no supervision by regulatory authorities, completely non deliverable, represents no actual storage facilities, no data tracking, has no independent weekly status reports, a forever positive carry, no transparency, and very easy to manipulate. 

Fund Inflows Set Price not the Fundamentals Anymore

 

Moreover, since oil prices are not set by the fundamentals of supply and demand, price is solely determined by fund flows, i.e., investment capital goes into a commodity it goes up, investment capital goes out of a commodity it goes down.

 

“Asset Class” Investing has a built-in Long Bias

 

I know theoretically capital inflows could come into a market and price could go down, i.e., they could all go short, but for various reasons these shorting periods are relatively few and far between in the modern era of oil trading. 

 

The same reason investment capital for the S&P 500 has a long bias applies to oil markets as well in the modern era of asset class investing. Funds want exposure, and the modern definition of an “asset class” by investors is inherently long biased. It is just how it actually plays out, theoretically it doesn`t have to, but it just does.

 

The Dirty Little Secret of the Brent Premium to WTI

 

So given this state of affairs, and prices have no real attachment to the fundamentals of supply and demand, fund inflows into the futures market increase price, and consumers all over the world pay for end use products based upon these fund inflows, not the fundamentals. 

 

So the dirty little secret why the Brent Contract is so much higher than WTI is it attracts more fund inflows by the large players who want exposure from an investing standpoint to the commodity, thus increased fund attractiveness equals increased prices, and a much larger premium to WTI than would otherwise be the case.

 

It all has to do with fund inflows, and the deleterious effects for consumers play out in the following: Fund inflows into Brent, Finished Petroleum Products pegged to Brent Price, Consumers pay higher prices with no change in the fundamentals of supply and demand in the marketplace. 

Given the slow growth economy, consumers should be getting a break at the pump!

 

We have gone from a supply and demand market to a funds flow market and this really sucks for consumers. 

 

This is where the regulators are supposed to step in and protect consumers. After all, this is part of what governments can offer citizens for taking substantial pieces of their income via taxes.

 

But the regulators to date have been unwilling to step in and regulate the oil markets, and consumers and businesses will continue to pay more than they should for gasoline and heating oil products in the marketplace. 

 

ZERO-SUM Game in Oil Markets

 

However, what sucks for one group is often great for another constituency, and for large banks, hedge funds, and financial institutions that have been known to rig a market wherever and whenever they can, this ICE exchange traded Brent Oil contract is a dream come true for their needs.

 

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Wed, 02/13/2013 - 13:57 | 3240604 doggings
doggings's picture

talking my book? hardly. laughing at his though.

and scumbag speculator?  ..like seriously? :)

i do believe youre on the wrong website then numpty, this is probably more up your street.

Wed, 02/13/2013 - 11:49 | 3240326 doggings
doggings's picture

look for gods sake youre not still short are you?  its been one whiny bitch and moan after another from you since you announced prices were going down at the beginning of the year

I immediately went long on your word lol.

as Tyler so eloquently pointed out, the Brent Vigilantes are now true capitalism's last stand against the forces of perpetual printing darkness

and nobody cares about your uninformed whining.

 

Wed, 02/13/2013 - 12:14 | 3240381 Market Analyst
Market Analyst's picture

So you would be talking your own book scumbag speculator, nobody cares about your gloating over consumer`s pain!

Wed, 02/13/2013 - 19:41 | 3241509 LongBallsShortBrains
LongBallsShortBrains's picture

...seems he is still short. Are you going to cover? I might get out of some long heating oil if you do.

Listen man, don't take the pain. Have some tight stops, and don't take it too serious. It's just a game.

And no consumer ever gave a shit about my pain when I would get roasted in a long position in energy.

Let me know when you are going short again, so I can open some longs. Or vice versa.

Wed, 02/13/2013 - 11:43 | 3240314 Melin
Melin's picture

More Government Regulators Needed!!! 

Otherwise, the "free" market will lead to corruption. 

Got it.

Wed, 02/13/2013 - 11:33 | 3240297 Liquid Courage
Liquid Courage's picture

Brent's a Sham? ... Wow. You mean these guys have Schticky fingers? Why ... they oughta be SlapChopped.

Shlomi the way to go home.

Wed, 02/13/2013 - 11:27 | 3240280 LongBallsShortBrains
LongBallsShortBrains's picture

Let me get this straight.....

You know where the price of Brent crude will be every expiration, and instead of going long and benefitting, you complain?

This sounds like somebody got their ass handed to them being short heating oil, Brent, and rbob. And now want to blame the futures markets. And manipulation, and speculators.

It's probably Bush's fault your account blew up!!!!

Wed, 02/13/2013 - 11:23 | 3240269 moneybots
moneybots's picture

"We do live in the modern age of increased technology, data collection, and transparency with unprecedented access to all types of information."

 

Yet Goldman Sachs always has the inside information and uses it to fleece the muppets.

Wed, 02/13/2013 - 10:41 | 3240138 Jack Sheet
Jack Sheet's picture

So where is the actionable information in this post?

Wed, 02/13/2013 - 10:40 | 3240133 steve from virginia
steve from virginia's picture

 

 

 

@EconMatters:

 

"The other common feature of the Brent contract is the expiring month is always higher by a dollar, dollar and a half, than the contract for the next month without fail. Again this happens every single rollover without fail, and again very hard to “naturally occur”.

 

This is called 'date rape' and the end is to screw holders of ETF shares. It's been around for awhile, a reason to stay away from ETFs.

 

The premise that funds (money) 'flow' to these funds (ETFs) is faulty. Commercials and hedgers buy/sell the contracts when needed. Only widows/orphans buy ETFs.

 

The hedgers are refiners and drillers. They balance the market because drillers must borrow (a lot) in order to drill while refiners have to sell the drillers' product to broke customers. The squeeze has resulted in a long-term bear market for refiners.

 

The real squeeze is in the oil fields where 'replacement' petroleum becomes more costly to gain with incredible, new, high-technology (40 year old) drilling methods.

 

Since 2000, each incremental dollar (euro, yen or other currency) produces less crude than the dollar before. That is, today’s dollar produces less crude than yesterday’s dollar, tomorrow’s dollar will produce less crude than today’s. What is important is the relationship between the real cost of gaining fuel relative to the ability of the customers to meet this cost. This relationship is driven by the need of the driller to spend more in order to return less: this is net energy, it is currently declining, at some point net energy will become negative, that is, the use of energy will not provide returns, in the form of credit, sufficient to bring new energy supplies to the market.

 

http://www.economic-undertow.com/2013/01/23/net-energy-end-game-theory/

 

Oil prices can only decline as there is diminished returns on each energy dollar … diminished GDP, diminished credit availability, diminished ability to meet ever-higher real extraction costs. Real energy costs will increase relative to the ability to meet them … even when nominal costs decline. The result is a net-energy death spiral or ‘energy deflation’ similar to Irving Fisher’s Debt Deflation. Whatever the fuel price happens to be at any given time it is too high. The price falls to meet the market, but fuel is removed from the market because of the drop in price, the ongoing shortage reduces the ability of customers to meet the price which is still too high … etc. The ‘real’ price of petroleum becomes higher over time accelerated by inadvertent ‘conservation by other means’.

 

Better get a new paradigm Mr. EconMatters, the clock is ticking for you and your precious automobile (finger cutting throat gesture).

 

Wed, 02/13/2013 - 10:37 | 3240122 Jack Sheet
Jack Sheet's picture

Market Analyst = EconMatters?

 

Wed, 02/13/2013 - 10:41 | 3240136 EconMatters
EconMatters's picture

EconMatters = EconMatters.

Wed, 02/13/2013 - 11:18 | 3240255 Hohum
Hohum's picture

EconMatters,

Instead of another whining article, why don't you analyze the cost of putting new oil on the market and then explain why oil should be $xx.xx.

Wed, 02/13/2013 - 16:47 | 3240311 DaveyJones
DaveyJones's picture

Now why should he consider the fact that its actually taking more energy to put each new barrel to market? or the fact that the world demand (use) is rapidly rising.

Wed, 02/13/2013 - 10:27 | 3240088 hooligan2009
hooligan2009's picture

do all middle eastern oil prices use the same method of price "discovery"?

http://www.bloomberg.com/news/2013-02-13/rubber-climbs-platinum-copper-i...

Wed, 02/13/2013 - 10:03 | 3240010 BlueCheeseBandit
BlueCheeseBandit's picture

Boohoo. I'm Econ matters and I don't know how to make money in the oil markets.

Wed, 02/13/2013 - 10:31 | 3240106 otto skorzeny
otto skorzeny's picture

take delivery of a tanker- bitch -and then we'll talk

Wed, 02/13/2013 - 09:10 | 3239914 madcuban
madcuban's picture

So much of this is just wrong. So many things have either been left out or ignored (i don't know which). But to get one thing straight, you want the govt to regulate things even more? Perhaps you should send a letter to Barney Frank, he'll protect you. Are you kidding when you say you want the government to intervene? This is sad. Just sad.

Wed, 02/13/2013 - 10:31 | 3240091 otto skorzeny
otto skorzeny's picture

they already are intervenig you fuckwit- to the tune of 100s of military bases around the world that have bankrupted this country so suzy suburban cocksucker can drive her GMC Hulk around town.

Wed, 02/13/2013 - 11:01 | 3240202 madcuban
madcuban's picture

does this mean you bought a prius and took some of Obama's tax breaks?  amusing how the ignorant (you) resort to name calling at the beginning and end of every misplaced tirade.   so you're for regulation....until your against it?   you want to have your cake and to eat it too?  you are clearly not an austrian school follower.  take a deep breath and try thinking things out all the way to a reasonable conclusion.

Wed, 02/13/2013 - 09:09 | 3239910 Downtoolong
Downtoolong's picture

All paper markets in key commodities (i.e., the ones the banks are involved in) are driven more by supply and demand for money and credit than the physical commodity itself.

The other big part of the scam is how poorly designed these futures markets are for long-term investing, even though they are constantly pushed on the Muppets as investment vehicles by financial salespeople. Think about it, would you invest in a stock of any company if you had to pay fees, commissions, and trading margins to sell and repurchase it every month to hold your position? That is precisely what every investor in paper commodities is experiencing. In most cases they don’t even realize it because it’s going on behind the scenes in their ETF or mutual fund. Oh sure, you can buy a far out-month futures contract that expires in 6-8 years in some cases. But, then you’ll be eaten alive by the illiquidity and huge bid-ask spreads on those contracts. 

Wed, 02/13/2013 - 09:01 | 3239895 Flakmeister
Flakmeister's picture

What a crap article...

Storage is provided by your tanker which then ships it whereever you want....

Wed, 02/13/2013 - 09:00 | 3239894 casey13
casey13's picture

If oil were allowed to fall below 90 dollars US shale oil would be unprofitable and the boom would shortly come to an end.

Wed, 02/13/2013 - 08:55 | 3239881 Racer
Racer's picture

I am sick and tired of the price I have to pay for energy.. petrol/electricity always going up way above inflation... means I have even less money every year to spend on other essentials let along other stuff. You can only squeeze the people so far until there comes a time when there isn't any more blood to drain off

Wed, 02/13/2013 - 10:44 | 3240145 steve from virginia
steve from virginia's picture

 

 

"I am sick and tired of the price I have to pay for energy.. petrol/electricity always going up way above inflation... means I have even less money every year to spend ..."

 

It just means you have to get rid of the stupid fucking car, that's all!

 

How hard can it be? People did without cars just fine for millions of years!

 

 

Wed, 02/13/2013 - 11:27 | 3240281 willwork4food
willwork4food's picture

No problem Steve. I'l just load up all the equipment & supplies on a trailer and let ol' Betsy pull it down the highway.

Wed, 02/13/2013 - 11:11 | 3240238 DaveyJones
DaveyJones's picture

if oil only ran cars, it would be a cakewalk

Wed, 02/13/2013 - 09:00 | 3239892 Flakmeister
Flakmeister's picture

Peak oil is a bitch eh?

Wed, 02/13/2013 - 11:10 | 3240231 DaveyJones
DaveyJones's picture

worse. female dogs don't "run" the world

well, it may go back to that

Wed, 02/13/2013 - 08:23 | 3239833 IslandMan
IslandMan's picture

EconMatters continues to show absolutely no basic knowledge of the oil markets.  The Brent WTI premium has nothing to do with rigged markets.  There's a premium because the oil from the tar sands and Bakken is "shut-in" locally and unable to reach world markets.

Wed, 02/13/2013 - 08:49 | 3239869 mike904
mike904's picture

I agree Iceman. This guy shows an almost childish understanding of oil markets. Benchmarks are CREATED by oil producers. They want to maximize profit and minimize competition. The whole idea that they're going to rely on some utopian Austrian school fantasy market where all things are fair is idiotic. They SEND the oil  there for a reason, for crying out loud. 

Furthermore, nobody is BOUND by Brendt except futures buyers. You can negotiate any delivery contract you want. In fact, most oil is priced this way. That's what Platt's does. If refiners don't like it, they can just ignore it. 

It would be be obvious to an illiterate Bengali Bus driver that the $20 premium is due to land locked US oil and collapsing US demand. 

 

 

 

 

 

 

 

 

Wed, 02/13/2013 - 11:41 | 3240309 tango
tango's picture

Quit trying to make sense.  Your explanation does not fit in with the "we're all controlled by THEM" mentality. I find it hilarious that alleged free market advocates slam the price mechanism when the laws of supply and demand take effect.  You are absoutely correct - The Brendt price is a guideline.  China, India and other countries cut separate deas for oil at an agreed upon price by producers all the time.  

The essence of Austrian economics is value determination and the mechanism used is markets.  The less maniputlated markets are the "fairer" prices will be ( or so goes the story).  But then there's governments and all manner of social contracts along with dishonest folks making for a less than perfect world. 

Wed, 02/13/2013 - 09:11 | 3239891 Market Analyst
Market Analyst's picture

You cannot even get his name right, what a moron!

 

Ok, then just take physical delivery. Then we will see what the true price of oil is, what is the problem with taking physical delivery, put your money where you mouth is, and speculate all you want, but take physical delivery.

 

I work at an Oil company, and I can tell you it is all bullshit. Why do you think my pay is so damn high, our perks are so damn glorified, and our margins, not the publicly stated margins, but the actual margins are so damn fat - I will give you a clue, it is because our costs are much lower than we publicize! The author is dead on!

Wed, 02/13/2013 - 10:30 | 3240103 otto skorzeny
otto skorzeny's picture

anything over $2 and the House of Saud is making a profit

Wed, 02/13/2013 - 11:31 | 3240291 Hohum
Hohum's picture

otto skorzeny,

the increae in Saudi rigs and exploring in the Red Sea suggests you have your head up your ass.

Wed, 02/13/2013 - 08:41 | 3239856 Market Analyst
Market Analyst's picture

Actually, that is the point EconMatters is an insider, and knows "too much" about the oil markets, Talks about truths everyone benefiting from maintaining the status quo want kept quiet!

As US Gasoline Prices Soar, Hedge Fund Oil Bets Near Record

http://www.cnbc.com/id/100455642

 

Wed, 02/13/2013 - 08:22 | 3239831 EL INDIO
EL INDIO's picture

Brent contract might be manipulated by is more realistic than WTI. In fact WTI is the one that has nothing to do with reality.
Check for yourself on this ZH article the cost of production:
http://www.zerohedge.com/news/who-wants-highest-crude-oil-price-presenti...

As you can see it’s more than $100 for most and that is assuming the Golf Sheikhs are not lying about their costs.

Wed, 02/13/2013 - 08:18 | 3239823 NoDebt
NoDebt's picture

I'm not a commodities guy, but I had no idea there were such differences in trading between WTI and Brent.

Remember when Brent used to trade below WTI?  Oh, those were the days, my friend.

Wed, 02/13/2013 - 08:16 | 3239820 DavidC
DavidC's picture

Same with Gold.
Same with VIX.

Tail wagging the dog.

DavidC

Wed, 02/13/2013 - 07:39 | 3239789 new game
new game's picture

this sums up WHY i am out of the markets of everything paper!

nothing is real in terms of pricing-thanks for zero rates-ya messed it up bigtime shalm.

place to live, paid for

tools (not the political brainwash shit), like for garden and defense

ordinate

and work and sweat to produce something

back to basics, fuck the state of this nation of pigs fenced into reliance...

Wed, 02/13/2013 - 08:51 | 3239873 negative rates
negative rates's picture

WTI is priced in Cushing, but the refinery capacity is less than the pipeline storage capacity so the price at the pump is reflected in the ability to refine and deliver the fuel, which is where you should base your premise, not the storage capacity.

Wed, 02/13/2013 - 09:35 | 3239951 Bicycle Repairman
Bicycle Repairman's picture

There are no longer any meaningful markets.  And the truth about energy is too important to be shared with plebs.

Wed, 02/13/2013 - 11:05 | 3240208 DaveyJones
DaveyJones's picture

Did u say that out loud?

You bring up a good point. Because it's so goddamned important, oil has been "rigged" for a long time one way or another. Usually by political and violent means. But for the very same reason, a few criminal finance men will not be able to hold back the world and the price will meet demand 

Wed, 02/13/2013 - 11:29 | 3240285 tango
tango's picture

Why do we hear this ONLY when oil rises in price?  If oil markets are so maniputlated why does the price ever drop?  LOL  Why do prices seem to follow supply & demand?  I view this with the same skeptism as the Illuminati/Rothschild/Vatican world takeover.  If such forces are so powerful (and apparently every poster knows the intimate details) why don't they simply assume full control and stop playing around?  Why all this Dick and Jane behind the scenes crap? 

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