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A Hydra Is Haunting MiddleEast

Nov 2013 crudenow :It is ironical to see the prices of crude Oil on the international market reacting very little to the ISIS operations in the Middle East; in fact it is falling. Few years earlier a threat of such a scale would have called for at least SPR withdrawal and sent the crude oil prices through the roof.Is there any reason why the crude oil market is motionless towards the Hydra?

Granted, still Saudi Arabian production is not affected; on the contrary, Saudi has consolidated it�s position and is the most reliable residual supplier now ,while Iraq, considered to be an alternative future swing supplier, is now the most unreliable supplier, and will remain so for a long time to come, returning regularly to the production drawing board.

The answer to the main question lays in examining the changes in the pricing structure of the oil industry.The Oil industry went through three distinct periods of price control mechanism:

1- The first period extended up to the middle of 1980s, characterized by direct and brutal price control of a fixed benchmark of Arabian Light, leaving crude production level to the Market demand.

2- The second period started end of 1980s, characterized by voluntary fixed level of OPEC production ceiling, leaving the crude oil prices to move within pre-determined band assessed by private reporting agencies. Although, we hear now and then of price manipulation by these agencies.

3- Now we are witnessing the third period for price mechanism.The power over crude oil pricing is moving very fast from private agencies into the Futures market, with the OPEC production more flexible to calm the Market bulls.

However, one would think, that it is a dangerous course for the price of such an important item to move into the hands of the speculators, and they cite many examples of fronting and manipulations. That is not correct, the whole world is controlled by these exchanges, and oil is just one of many commodities. Today only the market fundamentals play the pivotal role. Sentiment has been replaced by Software Algorithms. They are not based on expectations alone, but they expect what others would expect and go ahead (in front) of their expectations that is why you can see the market calm , with presence of ISIS , in fact it is stunned

.

Of course, the market also learnt alot from the past media drum beating.Additionally, the governments in the major consuming countries have now more options to meet any supply interruptions.Still, the most important factor that remains in the determination of the crude oil price is the reported market fundaments.

The futures market today, has its inner mechanism, to move within a narrower band better than the spot market. The market has its ceiling price ( resistance price ) and floor (support price), stop-start buy sell limits, fully computerised with computer software, specially HFT(high frequency Trading), has eliminated or at least reduced the human sentiment from the market decisions , which once was the driving force for the futures market. It is true that many large oil companies and investment houses, banks can go in front of other investors by their sheer power, and manipulate the prices, but the governments can also introduce rules and regulations, to stop and interfering much the same way it interferes to implement its fiscal and monetary policies. ,

Today, the point is clear; the market is much more bearish at time of crisis under the regime of the futures ,while themarket is more volatile under all the previous price regimes.Had such a hydra appeared on the scene few years earlier, the US government would have been forced to withdraw from SPR and OPEC would have gone from one meeting into another extra-ordinary meetings. At least the gap been spot prices and the official prices would have been too large In the 1990s, such a hydra would have led to a wave of crude hoarding on ships and on lands and a spike in the spot market and a withdrawal from the SPR, as was the case during Desert Storm. Today, the crude oil fundamentals, thanks to the influx of terabytes of information,are more important than the lonely sentimental investor.

It is what we have been saying all the way.. .. the threat of the hydra is Camouflaging the market weakness... the market is awash with crudes....

But now relax: the hydra will not dent the crude oil prices and the reason is more profound than the scale of the threat.

It is true that many large oil companies and investment houses, banks can go in front of other investors by their sheer power, and manipulate the prices,but , the governments can also introduce rules and regulations, to stop it or by interfering much the same way it interferes to implement its fiscal and monetary policies Today, the point is clear; the market is much more bearish at time of crisis under the regime of the futures while the market is more volatile under all the previous price regimes.

Nov:2013 Jabbar al-Jaf former OPEC Econometrician Analyst