Market Reflections

Thoughts, ideas and musings on current state and evolution of financial markets

OPEC Increasing Production Even as Demand Remains Weak

May 28: As expected, OPEC members, who account for 40% of global oil production decided to leave production targets unchanged from those agreed to in December 2008 and upheld in March 2009. The next meeting will be held on September 9, 2009. Compliance with set targets has fallen from 80% in Feb to below 70% in April.
OPEC: Production decisions, aimed at redressing the supply/demand balance, have reduced the overhang to some degree, but crude volumes entering the market are still in excess of actual demand and crude stocks remain high (April-end 2009 OECD commercial oil inventories are close to the record high witnessed in February 1998). Despite recent positive economic indicators pointing towards the possibility of the recession bottoming-out before year-end, the world is nevertheless still faced with weak industrial production, shrinking world trade and high unemployment which will keep oil demand low for many months to come.
Last trading day in May crude oil for July delivery ended up $1.23 at $66.31 a barrel on the New York Mercantile Exchange. It’s the highest settlement price for a front-month contract since Nov. 4 2008. In May, oil futures soared 30%, the biggest monthly gain since March 1999. Here’s how the current supply/demand situation looks like.
There is no indication on any consumable energy categories that the demand would be picking up, is there?
Why would the crude oil price jump like that?
Only rational explanation is the same as it was a year ago. The world largest investment banks JP Morgan and Goldman Sachs also happen to be the world largest oil companies (by trading volume on New York Mercantile Exchange). One of them has a subsidiary of an oil pipeline and the other owns an oil storage tank. Strangely enough, laws enacted by Congress give these investment banks and all their brokerage clients the capability to circumvent speculative position limits on the energy commodity markets. With the trillions of dollars of their pension, index fund, endowment clients these “oil companies” can corner any energy market of their choice.
Golden rule for trading oil is to know what Goldman and JP Morgan are up to. If you don’t you are screwed, if you do you will be a filthy rich and this is not illegal insider trading either. Only alternative is … a very short term trading.
If you don’t want to pay $4 plus at the pump again soon call your senators and representatives. Ask why he/she hasn’t done anything about it for a year now. From the feverous hearings conducted last May and June they know exactly who pushed up energy prices last summer, yet they did nothing about it. As it seems Goldman and Morgan are at it again and are bound to do same again.

About The Author

Raymond has been active on financial markets since 1989 mostly trading commodity and currency futures and options. Trading systems and strategies, statistical and empirical modeling of markets have been his focus almost two decades now. Few projects are listed on his website. Raymond believes that every person could and should take responsibility and protect his/her finances. At least to be able to identify scams and fraud before giving life savings to a crook. It is not enough to rely on government because way too often officials (elected or other) are part of the scam themselves. Whether their reasons are campaign contributions, cushy job or lack of knowledge to understand the consequences of their actions none will help the victim. Recent succession of governments each trying to bankrupt the country faster than the previous it may very well happen that the world largest Ponzi schemes Social Security and Medicare will go down with the country. Without prudent financial decisions now one may sorely miss every penny of his/her savings lost to scam artists and “professionals”. To help out Raymond is sharing with users his analysis and views on variety of economic, financial market and trading issues.


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