Best of the Week
Most Popular
1. Ray Dalio: This Debt Cycle Will End Soon - John_Mauldin
2.Stock Market Dow Plunge Following Fake US - China Trade War Truce - Nadeem_Walayat
3.UK House Prices 2019 No Deal BrExit 30% Crash Warning! - Nadeem_Walayat
4.What the Oil Short-sellers and OPEC Don’t Know about Peak Shale - Andrew_Butter
5.Stock Market Crashed While the Yield Curve Inverted - Troy_Bombardia
6.More Late-cycle Signs for the Stock Market and What’s Next - Troy_Bombardia
7.US Economy Will Deteriorate Over Next Half Year. What this Means for Stocks - Troy_Bombardia
8.TICK TOCK, Counting Down to the Next Recession - James_Quinn
9.How Theresa May Put Britain on the Path Towards BrExit Civil War - Nadeem_Walayat
10.This Is the End of Trump’s Economic Sugar High - Patrick_Watson
Last 7 days
The stock market fails to rally each day. What’s next for stocks - 14th Dec 18
How Low Could the S&P 500 Go? - 14th Dec 18
An Industrial to Stock Trade: Is Boeing a BUY Here? - 14th Dec 18
Will the Arrest of Huawei Executive Derail Trade War Truce? - 14th Dec 18
Trump vs the Fed: Who Wins? - 13th Dec 18
Expect Gold & Silver to Pullback Before the Next Move Higher - 13th Dec 18
Dollar Index Trends, USDJPY Setting Up - 13th Dec 18
While The Stocks Bulls Fiddle With The 'Fundamentals,' Rome Burns - 13th Dec 18
The Historic Role of Silver - 13th Dec 18
Natural Gas Price Setup for a Big Move Lower - 13th Dec 18
How to Get 20% Off Morrisons Weekly Supermarket Shopping - 13th Dec 18
Gold Price Analysis: Closer To A Significant Monetary Event - 13th Dec 18
Where is the Stock Market Santa Claus Rally? - 12th Dec 18
Politics and Economics in Times of Crisis - 12th Dec 18
Owning Precious Metals in an IRA - 12th Dec 18
Ways to Improve the Value of Your Home - 12th Dec 18
Theresa May No Confidence Vote, Next Tory Leader Betting Market Analysis and Forecasts - 12th Dec 18
Gold & Global Financial Crisis Redux - 12th Dec 18
Wow Your Neighbours With the Best Christmas Projector Lights for Holidays 2018! - 12th Dec 18
Stock Market Topping Formation as Risks Rise Around the World - 11th Dec 18
The Amazing Story of Gold to Gold Stocks Ratios - 11th Dec 18
Stock Market Medium term Bullish, But Long Term Risk:Reward is Bearish - 11th Dec 18
Is a Deleveraging Event about to Unfold in the Stock Market? - 11th Dec 18
Making Money through Property Investment - 11th Dec 18
Brexit: What Will it Mean for Exchange Rates? - 11th Dec 18
United States Facing Climate Change Severe Water Stress - 10th Dec 18
Waiting for Gold Price to Erupt - 10th Dec 18
Stock Market Key Support Being Re-Tested - 10th Dec 18
May BrExit Deal Tory MP Votes Forecast, Betting Market Analysis - 10th Dec 18
Listen to What Gold is Telling You - 10th Dec 18
The Stock Market’s Long Term Outlook is Changing - 10th Dec 18
Palladium Shortages Expose Broken Futures Markets for Precious Metals - 9th Dec 18
Is an Inverted Yield Curve Bullish for Gold? - 9th Dec 18
Rising US Home Prices and Falling Sales - 8th Dec 18
Choosing Who the Autonomous Car Should Kill - 8th Dec 18
Stocks Selloff Boosting Gold - 8th Dec 18

Market Oracle FREE Newsletter

How You Could Make £2,850 Per Month

Oil Prices: A True Black Swan or the Work of Vultures?

Commodities / Crude Oil Dec 19, 2014 - 06:42 AM GMT

By: Money_Morning

Commodities

Dr. Kent Moors writes: Oil prices are struggling to stabilize in the wake of what some are calling a “black swan” event.

It refers to a theory popularized by Nassim Nicholas Taleb, a well-known risk analyst and statistician.

A black swan is an outlier, a development that fails to follow any normal pattern.


According to Taleb, a black swan event has three characteristics:

1. It is a surprise. Nothing in the past can convincingly point to its possibility.
2. It has a major impact.
3. People contend that they expected the event to take place (in hindsight).

To put this theory into perspective, Taleb considered World War I, the breakup of the Soviet Union, and 9/11 as examples of black swan events, so these are hardly everyday occurrences.

Almost 15 years ago, Taleb applied this approach to the stock market and has been a regular on financial TV ever since, especially when things seem to be taking a turn for the worse.

As a consequence, this has led to the black swan being used as an “explanation” for all kinds of things. It’s the obverse of the mantra “this time is different.”
And that leads us back to the true nature of the 40% drop in oil prices…

Oil Prices: A Fall that’s Hardly “Out of the Blue”

Over the past couple of days, I have seen three separate prognosticators claim that the stunning fall of crude is a black swan event.

It isn’t.  But calling it one may be a good way of clouding up what really is happening.

First off, there were always indications on both the supply and demand side that matters were softening. Second, the OPEC non-decision on Thanksgiving to keep production levels unchanged was both predictable (from the Saudi perspective) and telegraphed in advance. Then, the orchestration of the talking heads commentary on the tube made the whole move “legitimate.”

This is hardly something that emerged out of the blue. It’s also not the stuff of a true black swan.

Unless, of course, there is another motive at work and the black swan becomes a convenient cover.  Instead, this is what is really happening when it comes to oil prices.

Yes, there are traditional pressures driving down the price of crude. Rapidly increasing supplies and slower demand would have created a correction in oil prices in any event.

But dropping over $40 a barrel has required something else entirely.

Let me explain.

When it comes to oil we are in a new age of massive short plays and swaps. The coordination of these moves is staggering, creating an impact that is immediate. Especially if there is a segue to important policy makers.

For instance, a Kuwaiti official tells the world oil can fall to $60 and… presto, within 48 hours, that’s where oil lands.

Of course, the targets of all of this are well known and have been discussed here at length: Russia, recalcitrant members of OPEC, and U.S. shale producers.

But the vehicle for turning some oil minister’s pronouncement into the “reality” of a futures contract price is found elsewhere.

Working Both Sides of the Pricing Curve

It involves an element I have had my eye on for a while, and was something I was tracking during my recent string of foreign meetings.  It’s the positioning of sovereign wealth funds (SWFs).

These funds have been designed to invest the proceeds from national revenues. Usually, the better a country’s balance of payments, the stronger the SWF. This is always a result of a trade surplus – as more is exported out of a country (being paid for by somebody else) than is being imported (requiring payment).

China, for example, is in this category.

But most of the SWFs of consequence involve investing the proceeds of oil sales. In the case of oil producers, that has usually meant the success of an SWF was perceived as dependent on the price of crude.  The higher the price, the greater the leverage for an SWF.

Now these funds are almost always conservative, preferring guaranteed or long-term gains over a higher but riskier return. That explains SWF investments in Rockefeller Plaza and hotels on the one hand, or dull but secure 1.5% annualized return from somebody else’s sovereign low-interest bond on the other.

There is also the problem of limiting the financial downside from introducing the proceeds directly into a domestic economy. Given that oil revenues are in U.S. dollars, a direct flow into the economy ends up inflating the local currency rather quickly.

So the proceeds from export sales are largely segregated from domestic trade, kept outside the country, with the profits from investing introduced in ways to minimize the inflationary impact.

All of which has triggered a new development. SWFs have now become a player in the market, shorting the very product responsible for the funds to begin with.  In other words, some OPEC members are making money on both sides of the crude pricing curve.

Transacting the deals outside their own borders via SWFs, these countries are hedging the product in both directions. That means they are currently pushing the lower cost of crude forward by pairing shorts to actual oil consignments.

Plain and simple: This is manipulating the market. It’s equivalent to being a poker dealer who is able to read everybody’s hand while taking a seat at the table.

But there is one thing it certainly isn’t. This is no black swan event.

It looks more like vultures to me.

Source : http://oilandenergyinvestor.com/2014/12/oil-prices-true-black-swan-work-vultures/

Money Morning/The Money Map Report

©2014 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules