Wednesday, October 26, 2016

Pssst! -- the best trade in the world; an insider's track

First off the title is a bit of a lie (ok one huge lie).

Yesterday the oil market was at a flutter because draws against reserve where higher than anticipated.  Guess what happened today, oil prices crashed right back down to the $48.99 level -- when they had been as high as $50 yesterday.

You ask:  What's going on?
The answer:  No body knows!

The oil markets are nearly fungible; there is a bit of a spread between Brent and WTI but the difference in price is more cause by technical issues (when the spread is substantive) than anything else.  In fact, as reserves rise the cost of adding to reserves rises exponentially, hence the prices of crude drops (its a zero sum game).

Now look at the price of oil -- yesterday there was a panic because the draw from reserves was about 2MM bbl higher than anticipated.  Today, well today the market took stock and realized that it meant nothing.  Because it was the same issue that I mentioned above about Brent Vs. WTI -- oil was at the wrong place; it was a location blip that cause the market to overreact.

Some would say that this overreaction is how brokers make money, but in fact its not how brokers make money, because you cannot time or analyze these movements, you may be lucky as you may be unlucky.  The draw occurred because although there TOTAL amount of reserves is unchanged, the location of these reserves gave a false signal -- that took traders and analysts a few hours to figure out.

So there you go, a bit more market mystery revealed.  Because of the elections and the possible move by the Feds to raise interest rates the market is somewhat jittery and looking for reason to "go the other way"  yesterday's announcements that specific reserves were below a certain level that would show renewed economic activity (beyond what was expected) led to yesterday's price spike.

Now you know a 4% price movement in the WTI was caused by incorrect information!

No position in Brent, WTI or S&P500


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