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Markets Fall on Oil Woes
The Dow fell sharply in the last hour of trading today, closing down 219 points. The price of oil also took a tumble, falling nearly $4 to $36.22, the lowest level in four years. The drop in oil prices followed the OPEC announcement yesterday that they would be instituting a record production cut. General Motors shares fell 16% after reports of a merger with Chrysler (which GM denied). Shares of General Electric also tumbled after S&P lowered its outlook to "negative", threatening its credit rating. The fact that no further progress was made on the auto bailout also contributed to market jitters, but oil was the key concern. "There's just too much oil on the market right now," said a BNP Paribas analyst. "I don't think anyone really expected the economy to go into this banner tailspin, and unfortunately, we're not done yet. The oil market is really trading on all the economic concerns more than anything else at this point."
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Where are all the pundits now that oil has fallen $110 from its highs? Where are all the calls for a windfall oil profits tax? Where are all the doomsdayers on peak oil? Where is Congress on limiting trading oil futures and oil derivatives? Where are all the people demanding mini cars, hybrids, electric cars and diesels? Where are all the people calling for more refining capacity in the US? Where are all the people calling for more drilling in ANWR and offshore? What happened to all the analysts saying oil was going to $200 in a super spike? Where is Boone Pickens pumping up his position in energy (only 12 days left for us to reach the year end target of $100/bbl)?
Of course all these "experts" have gone underground to the equivalence of the witness protection program. Why did crude rise from $50/bbl in Jan. 2007 to $147/bbl in Jun. 2008? It wasn't because there was a shortage of physical barrels of oil. The markets were able to supply the 86 million barrels of oil required to fuel the world. What the markets couldn't supply was the insatiable financial demand for financial oil. Indicies like the GSCI and AIG-Commodities indices required ten of millions of paper oil to hedge the product. ETFs like USO and DBC required millions of paper oil to hedge. Big financial players like Goldman, Morgan Stanley, Barclays, Phibro and Glencore shuffled millions of barrels per day like a deck of cards. Hedge funds like Osparie, D.E. Shaw, Citadel bought and sold millions of barrels of paper oil a day. Mutual funds like PIMCO Real Asset (PCRIX) traded paper oil. All in all upwards of 12-20 times the real oil was traded in the paper markets. So the demand of all oil (real paper) far exceeded the supply of all oil.
Now that the bubble has burst because the paper market has reversed its bias because of the world's economic woes and de-leveraging of risk positions, we can see the rise was just a feeding frenzy fueled by greed and misinformation. But that's what all Wall Street is all about.
A cautionary warning to all those who are current short oil; it can only go to around $20/bbl before major shut-ins happen. But upward moves will be sudden and violent and it will be discontinuous and there will be a blood bath.
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