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Could Crude Oil $100 Cause the Next Credit Crunch?

Commodities / Credit Crunch Oct 29, 2007 - 01:08 AM GMT

By: Nadeem_Walayat

Commodities Best Financial Markets Analysis ArticleThe Financial Sector is still coming to terms with the US Subprime Mortgages induced credit crunch, could again be in the line of fire of a new credit crunch caused by crude oil surging to $100, triggering a similar collapse of hedge funds and put the banking sector under renewed pressure as the crude oil credit crunch contagion spreads.


The reasoning behind this possibility is the enormous derivatives book that runs to over $300 trillions. With key players such as the Bank of International Settlements, (BIS) and JP Morgan and many smaller players such as banks and hedge funds. A collapse amongst a major hedge fund due to failure to meet the obligations against contracts on crude oil not crossing above $100 initiated some time ago could result in a cascade of financial failures as forced selling of assets occurred to meet contract obligations.

It is highly likely that the worlds central banks are very much aware of this possibility and therefore may attempt at forcing crude oil lower via market operations, it is highly likely that these transactions will not be visible to the market and may have the effect of inducing a sharp inexplicable drop in crude oil prices. It is highly likely that such operations would be conducted prior to crude oil crossing above $100. In an attempt at trying to estimate the current value of off the book contracts based on crude oil could amount to more than $4 trillions, which suggests that central banks have already been active in the crude oil market.

Central Banks Could Sell Crude Oil

However the problems faced by such intervention of crude oil, the worlds number one commodity are that the falling dollar is contributing to the rising oil prices as is the deteriorating situation in the middle east which has new wars on two additional fronts brewing i.e. Turkey against Kurdish areas of Iraq and US against Iran. On top of this we have rapidly increasing demand from emerging markets such as China, whilst new supply fails to keep pace with the increasing demand.

How many trillions will the central banks throw at crude oil to force it lower ? And will it work ?

Is the trend still your friend when it is about to be smashed by a flood of of central bank money ?

Yours waiting and watching crude oil as it passes above $92!

By Nadeem Walayat
Copyright (c) 2005-07
Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 20 years experience of analysing and trading the financial markets and is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 100 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

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