Specifically, would there be any downside for an OPEC member to buy massive amounts of contracts to support prices on front month? Worst case, they take delivery on the oil and store it. In the meanwhile, spot prices for the entire market are levitated. I did some math, and assuming (hopefully correctly) the largest ultra large tankers carry 2.5m barrels, that is equivilent to 2500 CL contracts. Bought or sold at the right time, a tanker or three a day can manipulate the price of oil to the whims and desires of whoever does the manipulating. Total volume of CL front month has been averaging about 10-12k lately. In other words, 5 ULCC tankers trade hands TOTAL every day on NYMEX front month. Quite small # actually. Please debunk my theory with expertise of over the counter transactions that ignore possible nymex price manipulation.
Of course they do......this has been going on during the whole oil price run. What else should they do with their hundreds of billions that are traded through out the world in various markets. They have groups of traders based in Dubai that trade LONG and SHORT positions in oil all the time. In my opinion oil will not be able to rally much until after November..........back scratching month in play. :eek:
If you know and believe that, then you'd be crazy NOT to buy every dip on futures due to expire after our elections ...
I will be LONG oil very soon (as a swing trade)....just give it another couple of weeks. I take oil position trades on occasion but I am trading small for at least two more weeks. First you have to get everyone SHORT to then rip there throats out after the elections are over as we then head into winter.
The OTC market for crude (and all other energy products) is much larger than NYMEX. Your assumption that "spot prices for the entire market are levitated" is incorrect. Basis risk can't be ignored. If OPEC members buy massive amounts of NYMEX front month CL and take delivery where are they going to put it? Have they built/leased storage facilities in Cushing or another deliverable location that the market doesn't know about? There aren't a lot of storage facilities sitting empty waiting for OPEC to call... Last but not least, when you try and "manipulate" a market by taking on huge size it's rare that you're able to liquidate your position in an efficient manner. Google Metallgesellschaft for a good example.
There may well be evil cartels manipulating the price of crude, but they are more likely to be in New York than in Dubai or Vienna.
Crude has historically been backwardated so spot is usually expected to be higher. Why would OPEC take on increased risk of ownership in a declining market...? Besides, OPEC is a representative group of producing countries responsible for only about 30-40% of global production. It takes them ages to agree a production cut and which member countries should bear the cut, considering they're already producing at the lower end of capacity. Imagine the negotiations required to organise large scale contract purchases and which members should pay for them. Imagine the chaos of organising freight and sharing of deliveries and how the market would then squeeze them, safe in the knowledge that they now have to sell even more, considering there is pretty much no storage around these days? If they shifted deliveries they would have to eat the basis because they sure aren't going to recover it in the market at the moment.
Just a quick note that the average number of CL contracts traded between the NYMEX and ICE has been in a range of 400,000 - 750,000 contracts a day over the past few months.
I know .. should have corrected myself and debunked my own idea -- I was just browsing daily volume as displayed on IB bar charts. Far from accurate. Their chart data can be way off. With this taken into account, I can't conceive on how a market like this could be manipulated very much by trading activity.
In the long-term that market can't be manipulated, but in the short term it certainly can be manipulated. There is the "paper" which is the traders calling into the floor, and there are the "locals" or the people that have a physical presence on the floor. The locals will do whatever they can to have the market go in the direction that they want, but this can only really take place on the light volume days. This is very short term manipulation. When the paper comes in that's when the locals can get caught, and a large hedge fund can sense that at times and squeeze the locals. I've witnessed big locals (those with the real money) attempt to momentum trade. The old Livingston technique, sell 200 lots and if the market moves down hard then sell 500, 1,000, etc. Then massive paper volume comes in to buy, the local is caught, and by the time he tries to get out his bank gets broken. Three very big local nat. gas traders got caught by this in hurricane Katrina and lost everything after being a local nat. gas trader for over 10 years. At the end of the day you're exactly right, there is too much liquidity, money, and players in this market to manipulate prices.