Lots of amazing things have happened in US capitalism in the last ten days. Monday's oil price spike has been lost in the noise. But it looks to have told you something about how hedge funds and oil companies behave.
Global oil consumption is about 87 million barrels per day. US oil consumption is just shy of 21 million barrels per day. At $100 oil that is an 8.7 billion or 2.1 billion dollar per day market.
It would be pretty hard to squeeze the oil market because of its sheer size.
Yet - on contract expiration - the oil price spiked from 100 to 125 dollars - and settled up $20. The forward price was not quite as strongly affected.
Somebody was short. Big time. And they needed to buy back. I have no idea how many contracts changed hands - but to push a 2.1 billion dollar per day market up 25% it had to be an awful lot.
I haven't seen the news that so-and-so-hedge-fund-I-have-never-heard-of has been roasted - but someone looks to have been roasted. And it has slipped without comment.
Now here is something to give you less confidence in the Paulson plan.
There was a US organisation with enough oil to meet the price spike and to buy back oil in the one-month forward contract and hence make a LARGE arbitrage profit. That organisation is ... the US Government and the strategic oil reserve.
They only had to sell now, offset by purchased in one month. My guess is that once done the oil wouldn't even need to be moved - you just meet with the liquidator of said hedge fund and settle up.
Ah well - the US government was never much good at trading.
But then we wouldn't normally want them to buy financial assets - and we wouldn't expect them to be able to determine fair value...
Would we now.
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