Yesterday, the crude oil rise bandwagon halted after a “surprise” increase in U.S. oil stockpiles.
The weekly American Petroleum Institute (API) survey of analysts predicted a crude oil drawdown of as much as 4.1 million barrels. Instead, the official figures from the Energy Information Administration (EIA) showed an unexpected increase of about 2.3 million.
That the two figures diverge is not important. After all, that’s been the case for more than 70% of the weekly figures since January 2015.
Instead, what’s important is when the two diverge, why…
And most importantly, who’s profiting.
Surprisingly, that includes you.
It’s Not About Supply and Demand Anymore
The numbers were quite different when it came to oil products. The API analyst-driven estimates had expected a 1.1-million-barrel rise in gasoline, while supplies of distillates (which includes diesel and low-sulfur heating oil) would fall 900,000 barrels. Yet the EIA reported declines of 1.3 and 2.42 million barrels for gasoline and distillates, respectively.
Some analysts think these oil product declines suggest the broader supply may be declining, thereby improving crude oil prices moving forward. In other words, this is just another indicator that an effective market balance in oil is forming.
From a trader’s perspective, of course, it’s not just a matter of supply and demand.
Rather, given the known excess in easily extractable reserves available, the balance has become more about holding effective demand (the kind that actually moves markets – as Adam Smith famously observed, beggars may have a demand for coaches and horses but that hardly impacts the supply of either) against the decisions of operators to produce and at what levels.
This is more properly a balance between production and intent.
And it’s here that we’re seeing, once again, a phenomenon I labeled as “phantom oil” and addressed two months back. To get a feel for how and why the oil market is manipulated, I highly recommend you read it.
The phenomenon comes down to the periodic emergence of discrepancies between the barrels of oil recorded and those actually available in trade. When that discrepancy arises, it’s more reflective of futures contract traders manipulating the genuine condition of the oil market than anything else.
This will most often emerge shortly after a significant change in the market price of oil and involves addition or subtraction of barrels from figures provided to the API or the EIA.
Remember, neither weekly estimate is based on any independent review of production. Instead, each relies upon what the companies and physical traders provide.
That allows them to be subject to influences of another sort…
This Manipulation is Unprecedented
Companies have tax incentives to discount actual production, as do traders. But the more important element here is the rising ability of major players to control both “paper” barrels (futures contracts) and “wet” barrels (physical consignments of oil in trade).
The market move is a deliberate and intentional attempt to manipulate the market for profit. And the current situation is a perfect environment for such an activity.
First, the price has experienced stimulus from the OPEC and knock on OPEC/non-OPEC agreements to cut global production. Since the “Vienna Accord” at the end of last week, WTI (West Texas Intermediate, the crude oil benchmark traded in New York) has shot up 16.1%. Brent (Dated Brent, the other major benchmark set daily in London) is up 17.6% during the same time.
Second, we are moving into a period in which the volume of physical oil trades will decline. Between now and the first week in January, fewer contracts will change hands than during any other equivalent stretch during the year.
Absent any geopolitical events and the like, this should translate into a non-volatile week and change. Perfect time to consolidate profits by playing with actual figures…
You’re About to Profit
Third, we’re seeing an unparalleled move among traders.
We now have both a higher percentage and larger absolute number of long positions in crude oil than at any other time I can recall. This means the preponderance of market manipulators expect the price to rise from here.
Locking in profits up front is a nice way to glide into 2017. That this is actually done by effectively cooking the commodity balance sheet is conveniently overlooked.
Finally, the manipulation can these days be pushed upstream (to the wellhead and the real oil coming out of the ground) in ways that were less likely previously. Traders are now coming to control percentages of actual production, making the ability to play paper and wet barrels at levels not possible in the past.
Consider just the most recent major example. In early December, Russia sold a 20% position in Rosneft (its largest state oil producer) to a consortium of Qatar’s sovereign wealth fund and Glencore.
Glencore just happens to be one of the three largest commodity trading companies in the world…
There is one bright spot in all of this. All of these machinations are gearing up to underpin a rise in crude oil prices (after the guys playing the games make their spread, apparently).
That’s fine. Because it’s going to mean that you, the investor, ends up with a far better picture as 2017 dawns.
You’ll be able to ride this rising tide to the bank. I’ll show you how.
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