How Latest Big Oil News Could Reward Small Investors A couple quick thoughts on the big oil news – the IEA releasing 60 million barrels from strategic reserves around the world to help lower global oil prices – before I get into who will benefit.
In terms of fundamentals, this really is a cry for help. Sixty million barrels equals about 18 hours of global production – hours, not days or weeks. It's inconsequential. The world is already well supplied with oil – there is no shortage of oil anywhere on earth that I can see. North America in particular is overflowing with oil. And oil doesn't trade on its fundamentals, or it would be $60-70 a barrel right now. In terms of market psychology however, the IEA may be smarter than the pundits think. Oil, like all markets, trades on fear. And there is now so much liquidity in the world that often (if not usually) the tail wags the dog in commodity markets. What I mean is that the financial derivatives surrounding oil – ETFs, futures contracts, etc. – help determine the price of commodities as much as the underlying demand. So managing the fear and greed of investors in those products is a bigger job than ever before. With this new reality that has developed over the last decade -- but especially since QE1 & QE2 -- I would suggest the governing elites of the world need a new way to communicate to the capital markets to really get their attention that they will pull out all the stops to obtain a semi-permanent lower oil price. But what it could do is convince many of the new entrants in the futures market to dump their "oil long" holdings. Speculators were buying oil long contracts in record amounts up until a few months ago. See this chart from Canadian brokerage firm Canaccord Genuity: [image: Oil Spec contract levels 2] The chartist in me says that after a recent round of weakness, a dive in oil prices will weed out the latent longs and cause them to give up hope. And then the liquidation of ETF holdings, of futures contracts, begins in earnest and causes a waterfall effect on oil prices. If/when that speculative liquidation happens, trend lines get exacerbated – things go up higher than fundamentals would say they should, and go lower than what fundamentals indicate. So I suggest that when oil traders and other market players say oil is going to a certain point, you can likely count on it going 10% past that. That's the tail wagging the dog, and why we have so much more volatility in the commodity markets now. So in one sense, this chart tells me the timing of the IEA announcement was perfect, if the group was targeting a large part of the market – the speculators. It's saying it will do everything it can to keep oil lower for longer than you think; this lower oil price scenario is not short term, so you will lose money on your trade. Perhaps the IEA was looking at fundamentals saying, "Hey, there is no need for this oil price as supplies are plentiful and the western world's economy is weak, so if we can just change market psychology a bit, we can get what we want -- $80 oil." READ MORE...<http://www.ellen-may.com/v2/index.php?option=com_content&view=article&id=172:how-latest-big-oil-news-could-reward-small-investors-> Regards, Ellen May www.ellen-may.com twitter : @pakarsaham
