FMX | Connect – www.fmxconnect.com - (Reported 5/14/2010)
After reading a Zero Hedge article on crude oil futures earlier today I was motivated to write something on the topic. I have been railing against the securitization of the oil futures market for some time. It’s nice to see someone else sharing those sentiments. Below are some notes I jotted down after reading the article.
I do have to agree that for 14-15 months, almost without interruption now, and since August, 2007, more generally, that the Nymex crude oil contract has too often been used as a surrogate for the economy, the DJIA or currencies, most notably the euro. However, last week’s sharp decline may have severed the relationships, at least temporarily.
This misbegotten adventure as a surrogate started a decade ago, when a little-known scholarly piece, 15 or 20 years old by then, came into vogue with at least one large investment bank on Wall Street. This piece had been suggesting a 10% commodities exposure as part of any balanced portfolio. For years, this recommendation had been a professorial urging and little more. But, by the late summer of 2007, not only had this investment bank embraced the philosophy, it had won over converts among union pension funds, sovereign wealth agglomerations and – this one should not surprise anyone – university foundations. When Ben Bernanke spoke of his “new transparency” in August, 2007, and then telegraphed lenient (or artificially low) interest rates for the foreseeable future, crude oil prices burst over a potential double top at $78.40 (July, 2006) and $78.77 (August, 2007) and started on its record run to $147 a barrel over the next 11 months.
Prior to this new “10%” philosophy, large moneyed interests had purchased shares of integrated oil refiners with oil in the ground rather than oil futures, or ADM or Cargill instead of grain futures. By buying the outright commodities, these customers of the large investment bank pushed up the prices on basic food and fuel commodities, which ultimately forced consumers to choose between getting to work and eating or paying mortgages on time. The end result was the existing recession. The large investment bank had effectively tried to make money on mortgages and on higher commodities prices. It was like trying to sheer the sheep it had eaten the night before as mutton. The government ended up needing to bail out this same bank.
Between the big collapse in oil prices over the second half of 2008 and again last week, the early results suggest that investors may have finally figured out what a poor investment oil really is. The investors who got out of oil last week were not getting back in this week. They seem to have bought back equities, but they seem to have decided that gold is the real play from here. With any luck, they will buy shares of integrated oil companies and leave oil futures alone. It will end up better for everyone.
Curiously enough, the recent blow-out in the contango may actually be making WTI, or Light Sweet crude relevant again. We may need a wide contango to help us get the crude oil contract back as the vibrant, dynamic hedge instrument it was for nearly a quarter of a century before being taken on as an “investment.” I agree that it has not been that since March, 2009 and possibly back to August, 2007. Nonetheless, I remember its best days, when refiners and producers used it regularly, in the days when it really was a hedge. If we can just get the “demon” out of it, exorcized, there is no reason to throw out the baby with the bath water. Position limits will help, but time itself seems to be working in its favor. Crude oil futures were designed as a hedge and not as an investment. Last week seems to have hammered that point home to investors now buying gold, instead.
-By Peter Beutel, Cameron Hanover pbeutel@cameronhanover.com
“We're not actually sure anymore.
The contract itself entertains a much lower percentage of market participants who care about anything like physical delivery, has become more of a mandate on economic recovery sentiment (or lack thereof) and only seems useful lately as a track for equity markets, rather than a good metric for the commodity itself. One can probably add to this now a sort of risk asset for traders who call their base currency the Euro, and find their demand for the contract suspiciously flaccid this month.”
To read the original story click the above link.
Crude Oil 60 minute Chart
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