Gaming the Price of Oil

Can the price of oil be gamed? As the price has bounced up and down over the last four years, perplexed analysts have tried to explain the instability in terms of supply and demand (export-affecting turmoil/peace here, production cuts/booms there, etc.).I have a different take: the price is being gamed by powerful players pursuing political ends. Do you think this is possible? My "evidence" is the suspicious drop in price from over $100/barrel to less than $30 starting in the summer of 2014 and lasting into mid-2016 and the more recent dramatic plummet from over $70/barrel to the low $50s in the last month or so. Both fluctuations synchronize with critical events in geopolitics: the first, the annexation of Crimea by Russia; the latter, the activation of sanctions against Iran. In both cases the price change coincided with American foreign policy objectives: the first, to bring Russia (and coincidentally Venezuela) to its knees; the second, to see that if we could not prevent Iran from exporting oil (i.e., granting sanctions exemptions), we could at least see that they would have to sell their oil at fire-sale prices (and, again, hurting Russia and Venezuela, too). To accomplish the first price manipulation, I believe we would have needed the cooperation of Saudi Arabia and that of the shady, secretive dealers at Vitol. Should we attribute the rise in price since 2016 to Saudi Arabia deciding it was costing them too much in lost income and refusing to continue to play the game? They aren't playing this time either, as their threatened cuts in production demonstrate. I would appreciate hearing from those more knowledgeable in how oil is bought and sold than myself as to the plausibility of my thesis.               
  

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Ken, there are so many variables in oil prices besides just supply & demand, it is overly simplistic to boil it down to just a few overriding factors.  Some factors have more weight than others.  Yes, supply and demand are key variables.  Geopolitics is another one.  Annual seasons affect demand for petrol for driving and natural gas and fuel oil for winter heating.

The military war machine uses immense amounts of jet fuel.  Spikes and drops in oil prices by oil producers colluding together to politically and financially punish "enemy" countries has happened.  The fall of the Soviet Union was caused in part by oil prices.  And look at the current U.S. sanctions on Iranian oil.  And the latest unpredictable wild card is Trump Tweets.

Traders make money on oil prices going up or down, and as posters here have previously mentioned, oil traders are apparently driven mostly by greed and fear, which are hardly quantifiable characteristics that can be plotted in an Excel spread sheet or a graph.

It would be astonishingly overly simplistic to take a few factors out of the myriad of different factors, isolate these few factors in an ivory tower of analysis, and proclaim these few factors in isolation to be the primary drivers for changes.

That would be akin to the stupidity of claiming that 'changes in CO2 levels caused by humans using hydrocarbons' is the primary driver in "climate change" while ignoring a host of other factors, along with the fact that Earth's climate naturally changes, with or without humans.

But I digress...  (and will be ducking brickbats over here in this corner...)

Anyway, much of the mainstream media tends to oversimplify complex issues and spoon feed to the public as facts what are actually their own opinion and / or agenda.

It is refreshing these days to see articles clearly labeled as "opinion" when oversimplification of complex issues is presented.  That said ... :

Bloomberg Opinion: The oil price is now controlled by just three men

OPEC has lost what control of the oil market it ever had. The actions (or tweets) of three men — Presidents Donald Trump and Vladimir Putin and Crown Prince Mohammed Bin Salman — will determine the course of oil prices in 2019 and beyond. But of course they each want different things.

While OPEC struggles to find common purpose, the U.S., Russia and Saudi Arabia dominate global supply. Together they produce more oil than the 15 members of OPEC. All three are pumping at record rates and each could raise output again next year, although they may not all choose to do so. 

... Saudi Arabia will have to risk Trump’s wrath, Putin’s indifference and a booming U.S. shale industry if it hopes to balance the oil market in 2019.

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I'm not sure whether you are saying the price of oil can be gamed or not, i.e., can be manipulated independent of changes in supply or demand. For instance, the 2014 drop was often attributed to Saudi Arabia flooding the market in order to maintain its market share in the face of increasing US shale production; but, in fact, Saudi Arabia did not increase its production the last half of 2014 (see http://www.artberman.com/wp-content/uploads/Chart_Saudi-Prod-Brent-Ap-2015.jpg).Nor did OPEC ( http://www.artberman.com/wp-content/uploads/Chart_OPEC-TOTAL-PROD.jpg). Was the overwhelming factor then geopolitics, similar to the warmists claim adding one molecule of CO2 in every 10,000 molecules of air is sufficient to raise global temperatures?

The significance of all this for me is: if the price of oil can be gamed, it goes a long way to explaining current tensions between the US and Saudi Arabia as the Saudis are no longer willing to play along and this could presage a sea change in power relationships in the Gulf. 

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(edited)

Hi Ken.  Can the price of oil be gamed?  Absolutely!  And at this stage of the game, it is really all that is happening.  This stage of the game meaning all demand is being met, completely and without a hiccup.

You mentioned how in 2014 the drop was attributed to the market being flooded with oil, and yet the market was not flooded with oil.  Well, there you go!  I always want to ask people "where exactly is this flood going?".  Our good friend @William Edwards likes to point out that you can't fit 10 gallons of oil in a 5 gallon bucket.  Translation: customers order oil based on what they need and can consume and then the producers fill that demand, nothing more, nothing less.

During "normal" political times the traders manipulate the headlines in order to get some rises and falls in the price in order to go long or go short and pick up profits along the way.  The way they do this is to, for example, place their long position bets and then manipulate the media to say that x, y, and z players are going to cut production to ease an imaginary glut and the price goes up.  The traders collect their money on their long positions, open new short positions and say the producers overcut and now there is not enough oil, so they are going to open the taps significantly, driving prices down, and they collect their profits on their shorts.  Reverse, rinse, repeat.

Major political tensions accompanied by threats of war or major disruptions to supply drive prices through the roof, relatively speaking.  A real war, as @Tom Kirkman pointed out, adds consumption well over norms.  Major politics can indeed be used against oil driven economies and isolation, whether total or even limited with threats of financial ramifications, can put major pressure on those oil dependant economies.

Bottom line: in the oil trading business, perception is bigger and more influential than reality.  In the normal oil business (the business of finding, drilling, pumping and delivering oil), reality of demand and funds available (either by market price/barrel or subsidies of any kind) to sustain and grow the business are the most influential factors.

At least that's my opinion.  I could be wrong.

Edited by Dan Warnick
Added "so they are going to open the taps significantly"
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So, the price of oil can be gamed outside of supply/demand manipulation. Is the US government doing so in pursuit of geopolitical objectives? I think this would be news to many people as I never have seen it mentioned in explanations for fluctuations in the price of oil. Seems worth investigating as, if there are telltale signs the government is doing so, there's money to be made in detecting those signs. 

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Just now, Ken Meyercord said:

So, the price of oil can be gamed outside of supply/demand manipulation. Is the US government doing so in pursuit of geopolitical objectives? I think this would be news to many people as I never have seen it mentioned in explanations for fluctuations in the price of oil. Seems worth investigating as, if there are telltale signs the government is doing so, there's money to be made in detecting those signs. 

Hi Ken.  Yes, geopolitics, oil prices, gold prices and reserves, exchange rates, central banks and interest rates and many other tools all play their roles in the international politics of world economies.  And they absolutely affect the price of oil.  There are traders who just skim the international or national headlines for disasters and make their day trades on the weaknesses of those disasters.  Take the wildfires in California that have melted the local power company's lines, and that the local power company is being accused of negligence in starting the fires in the first place:  Great short play on the local power company, especially if they have a national grid.  Just one example.

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So, do you think the US government is currently gaming the price of oil?

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1 minute ago, Ken Meyercord said:

So, do you think the US government is currently gaming the price of oil?

I think every government that can, does.  And that includes a very long list of countries.

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You didn't really answer my question, but that's alright. I think the world's only superpower is the only government capable of gaming the price of oil unilaterally, though it probably has the collaboration of other governments in the current and other instances. 

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2 minutes ago, Ken Meyercord said:

You didn't really answer my question, but that's alright. I think the world's only superpower is the only government capable of gaming the price of oil unilaterally, though it probably has the collaboration of other governments in the current and other instances. 

That's because I'm not sure what your definition of "gaming" actually is.  The U.S. government can certainly influence events and new feeds about events, which can have an impact on prices.  Sanctions are another tool, as are blockades if they feel justified in going that far.  Heck, in this day and age, one of the best immediate tools is Twitter!  A few words from President Trump and traders have a short term field day with the price of oil.  I'm sure they set their algorithms to trade based on Mr. Trump's morning Tweets.

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34 minutes ago, Ken Meyercord said:

So, the price of oil can be gamed outside of supply/demand manipulation.

Yes.

34 minutes ago, Ken Meyercord said:

Is the US government doing so in pursuit of geopolitical objectives? 

Yes.

Dan gave a good explanation above.

Anyone else want to take a crack at answering Ken's questions?   My opinions about the geopolitics intertwined with oil & gas are not exactly mainstream, so I hesitate to delve too deeply into this.

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2 minutes ago, Tom Kirkman said:

Yes.

Yes.

Dan gave a good explanation above.

Anyone else want to take a crack at answering Ken's questions?   My opinions about the geopolitics intertwined with oil & gas are not exactly mainstream, so I hesitate to delve too deeply into this.

Careful my friend.  The deep dark truth can be scary to behold.  Seriously scary in truth.

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4 minutes ago, Dan Warnick said:

Careful my friend.  The deep dark truth can be scary to behold.  Seriously scary in truth.

Yep.  Digging below the veneer can be unpleasant.  That's why I asked if somebody else besides me wants to take a crack at answering Ken's questions.

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(edited)

Yes, I believe it can be gamed, and I am sure it is.....

But there are at least three, possibly more, caveats to its effectiveness:

1) whoever is talking the market direction must have the credibility, power and resources to actually influence it

2) there has to be a broad and liquid source of speculative funds that is ready to react to it

3) there has to be actual buyers and sellers of the commodity whose effectiveness, even survival , depends on the value of the commodity

It is the action/interaction of the second and third criteria here that actually turn the words into action and into price movement.

Afterall, the driving force behind speculation is a belief that price/value is somewhere higher or lower than where it is right now. Similarly, the profitability of producers and consumers is greatly affected by price - and nowadays the means exist for locking in price levels, which turns these producers and consumers into another kind of speculator.

Perhaps three interesting additions into the middle of the basic supply/ demand equation in the energy markets are storage - transportation - refining - transportation - again storage. These provide plenty of rubber band type elasticity between supply and end-usage in addition to the geopolitical interests, risks and threats…………... 

Edited by Streamer
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I'm talking about direct, governmental manipulation of the market, by getting Saudi Arabia to accept a lower price for their oil than they could get, pressuring Vitol to pull the sort of shenanigans you all seem to agree traders are capable of, etc. to cause a drop in the price of oil (Here's where I'm hoping those better informed than me can explain what strings would need to be pulled).

There are a lot of people out there staking their reputation, their own money and the money of others on correctly forecasting where the price of oil will be in the near future. If they aren't considering, or even cognizant of, the machinations of the biggest player in the game, they aren't being very professional and likely to lose not just their own money but those of their clients as well. Along this line, another thing to think about is how those in the halls of power who are cognizant of what's going on can make a killing, if they betray the trust placed in them and succumb to the temptation to enrich themselves.

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I don't expect or encourage anyone with inside, i.e., classified, information to answer my questions, but the rest of us are free to share information and speculate, so far as I know.

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11 minutes ago, Ken Meyercord said:

There are a lot of people out there staking their reputation, their own money and the money of others on correctly forecasting where the price of oil will be in the near future. If they aren't considering, or even cognizant of, the machinations of the biggest player in the game, they aren't being very professional and likely to lose not just their own money but those of their clients as well. Along this line, another thing to think about is how those in the halls of power who are cognizant of what's going on can make a killing, if they betray the trust placed in them and succumb to the temptation to enrich themselves.

Yes, and they had better be good at reading all of these indicators and more if they want to consistently make make money for themselves and others.  The biggest players play with the largest amount of investor's money, and they do get it wrong, all the time, but, like we just said, it is other people's money.  The smaller advisors had better play it a bit more conservatively or they will lose their all important reputations and fees/subscriptions.

As far as corrupt government officials, well, we all can theoreticize now can't we?  There is more than one way to define "make a killing": power comes to mind, literal killing comes to mind as does the obvious monetary gain as in the attempts of dictators and their short lived plans for the perfect socialist society.  There are no shortage of examples or theories in these areas.  If and when proven these folks tend to fall.  But there must be a few that simply keep their heads low and succeed, wouldn't you agree?

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The biggest player doesn't play with investor's money or even any money of its own.

There may be some self-aggrandizers, but--perhaps naively--I assume stringent controls restrict them to very few. 

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2 minutes ago, Ken Meyercord said:

The biggest player doesn't play with investor's money or even any money of its own.

There may be some self-aggrandizers, but--perhaps naively--I assume stringent controls restrict them to very few. 

I'm having trouble following you, Ken.  Have you heard of hedge funds, retirement funds, state worker's funds, etc.?  Brokerages, banks?  Anything?

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Have you heard of the US Government?

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1 minute ago, Ken Meyercord said:

Have you heard of the US Government?

And I think we've finally narrowed this down to what you are hoping someone can confirm for you, Ken?

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As I asked I my first post, I just want to know if it's possible. If it is, then if it's happening presently is an interesting but secondary question on which we are all free to speculate and on which maybe some have some concrete information to offer.   

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15 minutes ago, Ken Meyercord said:

As I asked I my first post, I just want to know if it's possible. If it is, then if it's happening presently is an interesting but secondary question on which we are all free to speculate and on which maybe some have some concrete information to offer.   

Then I will have to leave it to others and wish you good luck.  I simply don't know.

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1 minute ago, Dan Warnick said:
18 minutes ago, Ken Meyercord said:

As I asked I my first post, I just want to know if it's possible. If it is, then if it's happening presently is an interesting but secondary question on which we are all free to speculate and on which maybe some have some concrete information to offer.   

Then I will have to leave it to others and wish you good luck.  I simply don't know.

Yes the U.S.gov't, KSA, Russia, all are big players, so they have have advantages, but the market is still an open auction everyday, and with the variable of all the buyers, sellers, and the variables of their information ,,,well still more variables than anyone one player can control.  So all they can do is try. 

Control, nope, influence, yes definitely.

The creation of OPEC was an attempt to do this.  The market has changed, OPEC is not effective as a group any more,,,hence the cooperation with Russia now.  Also the market itself is "tighter" than it was traditionally in the past.  The speed/rate of info and change is a lot faster, and will continue to get faster. 

I for one like your logic in trying to figure out what the relationship between U.S. and KSA is really.

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Has futures trading changed the way prices are 'set' by the market? Was the futures market opened up to speculators somewhere along the way?

A lot of people probably think that the 'powers that be' just dreamed up a way (futures speculation) to make more easy money... that the big money people have always controlled things and always will... the dollar (money, not necessarily USD) rules.

Is the futures market reliant on having a never-ending supply of speculators where x-amount are going to lose so that x-amount can win?

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