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Kaeppels Corner: True Confessions of an Evil Crude Oil Speculator

By Jay Kaeppel, Optionetics.com | Thu May 12, 2011 12:34PM PT

 

First off, in my own defense l must say that I don’t really consider myself to be all that evil.  OK, sure I yell at my kids from time to time, but that’s more like exercise than an act of pure evil.  in any event, I must confess - boy do I feel stupid.  As an independent trader I’m pretty sure I qualify as a “speculator”.  And yes, I have traded crude oil futures.  And yet – and I am almost embarrassed to admit this – I seem to have missed out completely on the purported “fact” that as a speculator I apparently possess the ability to “manipulate” the price of crude oil.  Dang, why didn’t anyone tell me! 

Stupid me, I had to read about the fact that I possess this ability - that I didn’t even know I had - in the business news.  Heck, every single time I’d put on a position in crude oil I always worried that the price would go the other way.  Come to think of it, sometimes it did and I actually lost money.  Wow, I really missed the boat on this one.  So when they say that “speculators” are “manipulating” the price of crude oil, I guess they must be talking about some other speculators.  Nevertheless, I’m willing to learn.

 While still on the topic, a couple of questions still nag at me though:

-If speculators control the price of crude oil and can drive it higher whenever they want, then why does the price ever decline?  Do speculators “let” price decline once in awhile just to “make it look good?”

 -How does it work exactly?  Do speculators have a big conference call and say “OK, let’s all buy today so we can drive the price higher?” (and if so, can someone please share a phone number and access code with me?)

 -Are the people who impugn speculators aware of the fact that in the futures market, for every single contract that a speculator wants to buy there must be someone on the other side of that transaction willing to sell exactly that many barrels of oil to them?  Likewise, when they want to sell and cash in on their (allegedly ill-gotten) gains, someone has to be willing to buy from them, otherwise they can’t sell.

 -Also, from a supply and demand standpoint I do understand how a bazillion “buy” orders at one time can cause price to rise.  But again when these buyers go to sell those bazillion of barrels of oil (you know after the conference call when they all agree to sell so that they can “make it look good” and continue to manipulate prices since they apparently can’t help themselves) wouldn’t this cause prices to go way back down?

 -If we simply banned all “speculators” would the financial markets be, a) better off, or b) worse off?  It seems to me that the markets would be “a tad” less liquid and if the suppliers who deal in a given commodity such as oil wanted to buy or sell futures to hedge inventory, who exactly would take the opposite side of those trades?

 -Hey, I know, how about a stealth tax that regulators can refer to as “transaction fees.”  Surely that would increase liquidity and help to make the markets more efficient.  Right?!

 -Now I have no doubt that those who routinely trade crude oil in large volume will do whatever they can to influence prices to move in their favored direction.  Nevertheless, no matter how big your buy order, once it actually gets filled and you now own a large position in crude oil, exactly what action can you take to coerce crude oil to go up from there?  Buy more?  OK.  But every single one of those futures contracts eventually have to be sold too (or you have to take delivery, raising the alternative question, “just how big is your front yard?”).  What if someone bigger than you decides to “manipulate prices lower” in the meantime?

 -For the record, if there are people out there who are legitimately manipulating the price of crude oil, I for one think they should be arrested and charged with a crime.  Still, if you actually took a little while to study “history” you would come to learn that over the past 30 years there have been dozens of “congressional investigations” (also known as “your tax dollars hard at work”) of oil price manipulation by traders.  So far no evidence of collusion or manipulation has been found.  But hey, maybe this time, right?

 

Crude Oil from a Seasonal Standpoint

 Last week I laid out my “seasonal calendar” for silver.  This week, let’s take a look at something similar for crude oil (but if you know any speculators, don’t tell them about it.  Of course if they already control everything anyway they probably already know about this).  Figure 1 displays my yearly “Seasonal Calendar” for crude oil.

 

Start Month

Trading Day

of Month

 

End Month

Trading Day

of Month

 

Bias

January

19

February

11

(Unfavorable)

February

12

February

19

Neutral

February

20

March

5

Favorable

March

6

March

7

Neutral

March

8

April

15

Favorable

April

16

April

19

Neutral

April

20

May

4

(Unfavorable)

May

5

May

16

Neutral

May

17

June

6

(Unfavorable)

June

7

June

14

Neutral

June

15

July

1

Favorable

July

2

July

5

Neutral

July

6

July

10

Favorable

July

11

July

11

Neutral

July

12

July

15

(Unfavorable)

July

16

August

5

Favorable

August

6

September

11

Neutral

September

12

September

21

Favorable

September

22

September

23

Neutral

September

23

October

4

(Unfavorable)

October

5

October

11

Neutral

October

12

October

17

(Unfavorable)

October

18

November

7

Neutral

November

8

December

8

(Unfavorable)

December

9

January

4

Favorable

January

5

January

19

Neutral

Figure 1- Crude Oil Seasonal Calendar

Now let’s assume that since 1983:

-Trader A has held a long position in crude oil futures ($1,000 per point) only during all favorable periods each year.

-Trader B has held a long position in crude oil futures only during all neutral periods each year.

-Trader C has held a long position in crude oil futures only during all unfavorable periods each year.

Who do you suppose would come out ahead?  The answer apepars in Figure 2

  

Figure 2 – Profit/Loss from long crude oil futures position during favorable / neutral/ unfavorable seasonal periods since 1983

As you can see in Figure 2 there were times during “favorable” periods when crude oil declined.  Likewise there were times during “unfavorable” periods when crude oil advanced.  And as one might expect, the action of crude during “neutral” periods has been overall, well, fairly neutral.  Nevertheless, the bottom line is that since 4/5/1983:

a) During “favorable” periods a long position in crude oil futures gained over $198,000 and showed a profit in 24 of the last 28 years.

b) During “neutral” periods a long position in crude oil futures gained just over $3,000 and showed a profit in 15 of the last 28 years.

c) During “unfavorable” periods a long position in crude oil futures lost over $133,000 and showed a profit in 4 of the last 28 years.

So where are we now?  Well, technically we are in a “neutral” period until the close of trading on the 16th trading day of May (Monday, May 23rd).  We will then enter a seasonally “unfavorable” period until the close of the 6th trading day of June (June 8th).

 

Summary

So is there really an evil band of people out there who secretly manipulate and make every effort to control the price of oil for their own benefit?  (Wow, the cynic in me is having a really hard time fighting the urge to blurt out, “Yes, OPEC!!”).  Well, anything is possible I suppose.  Still, anyone who has ever held a long position in crude oil futures knows that once you get filled and have entered a long position there doesn’t seem to be a whole heck of a lot you personally can do to force the price higher from there.

If anyone can prove otherwise, by all means PLEASE let me know how.

Like I said, I’m willing to learn.   

Jay Kaeppel
Staff Writer and Author of “Seasonal Stock Market Trends”

Optionetics.com ~ You’re Options Education Site 

 

NOTES:

Interested in covered call writing? Log onto www.MoneySteps.com for a free trial.  Course videos by Tom Gentile and Monday/Wednesday/Thursday Case Study updates by Jay Kaeppel.

 Jay’s latest book “Seasonal Stock Market Trends: The Definitive Guide to Calendar-Based Stock Market Investing”, was ranked among the Top 10 Investment Books for 2009 by the venerable “The Stock Trader’s Almanac 2010”.  For more info visit

http://www.amazon.com/Seasonal-Stock-Market-Trends-Calendar-Based/dp/0470270438/ref=sr_1_1?ie=UTF8&s=books&qid=1276601217&sr=8-1


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July 02, 2013  -  Kaeppel's Corner: Of Gold Stocks, Falling Safes, and Moths to Flames
June 24, 2013  -  Kaeppel's Corner: How To Enjoy Market Summer Boredom


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