Oil Benchmark
It is a sad state of affairs that the entire world of
energy, and consumer energy prices are all based upon a fraud of an energy
contract masquerading as the Industry`s Benchmark, setting the price for all
other grades.
Monthly Rollover Ramp
Here is an idea of how manipulated the Brent Oil contract
that trades mainly on the ICE exchange is we are at rollover time once again in
the Brent oil contract and sure enough as day, the contract is moved up
substantially right before expiration.
This happens almost every rollover, and is impossible to do
in a non-deliverable market without precise market manipulation.
Always Positive Rollover Carry
The other common feature of the Brent contract is the
expiring month is always higher by a dollar, dollar and a half, than the
contract for the next month without fail. Again this happens every single
rollover without fail, and again very hard to “naturally occur”.
It might be reasonable in the old days, or in a market that
was partly physical deliverable that you would have times that exhibit Contango
features that would account for this price differential.
No Physical Delivery
But this happens every time, and the old rules of Contango
and Backwardation don`t apply to purely paper markets as there is no need from
one month versus the next for “stronger demand” as nobody ever takes delivery
of a Brent contract of oil. There is no demand for near term oil contracts due
to supply shortages in the oil market.
The only reason for this price differential which always
occurs and is heavily manipulated is to ensure for a positive rollover effect
for the big players in the market.
No Rollover Risk equals much easier
to invest capital in the market
Why lose money if in basically an unregulated space you can
just move up the front month at expiration so that when you sell to close out
the position on the front month at a higher price, and buy the next month to reestablish
a position at a lower price you have a positive built in rollover.
Makes the risk of investing in oil with an always positive
carry much less. It is a scam of major proportions when you factor in how many
years this has been going on in the ICE market.
Not fully credentialed to be a
Benchmark for anything
However, that isn`t the only thing that doesn`t pass the
smell test with the Brent contract. The main problem is the Brent contract is
illegitimate and should not serve as a founding basis for any price discovery.
It trades on essentially an unregulated market with little
or no accountability in regards to transparency. And this contract is setting
the price of oil for the entire oil supply chain.
Represents what Storage Facilities?
First of all the Brent contract needs to be tied to actual
oil inventories in Europe so that supplies can actually be tracked and
evaluated on a historical basis.
For example, WTI is based upon oil inventories at Cushing
Oklahoma, which can actually be tracked in a weekly report, and reported by an
independent government agency in the EIA, for Brent to become a legitimate Oil contract
it needs to do the same.
Needs to be actually Regulated
Or frankly regulators need to force the ICE exchange to do
so or discontinue the futures contract, as it has become far too important at
setting world oil prices to remain in this non-transparency illegitimate
status.
Independent Governmental Agency
Reporting of Supply Data
So once actual inventories of oil supplies are attached to
the Brent Contract, there needs to be an independent government agency like the
EIA in the US which collects data on an independent basis and provides weekly,
quarterly, and annual reports on oil stockpiles.
We live in the Information Age
We do live in the modern age of increased technology, data
collection, and transparency with unprecedented access to all types of
information.
ICE exchange has no incentive to
change status quo without Regulatory Pressure
It is about time that the ICE exchange is forced by
regulators to come into this century, especially given the important role that
Brent has become as a benchmark for setting price in the oil markets, and thus derivatively
gasoline and heating oil markets, by being forced to comply with these aforementioned
instrumental changes, or be forced out of the market.
Brent is so much easier to Rig than
WTI: This attracts Fund Flows
You want to know the real reason that the Brent market has
traded at so high a premium to WTI, and became so popular by the major players in
the oil trading and investment community?
It is because the contract is based on “nothingness” has no
supervision by regulatory authorities, completely non deliverable, represents
no actual storage facilities, no data tracking, has no independent weekly
status reports, a forever positive carry, no transparency, and very easy to
manipulate.
Fund Inflows Set Price not the
Fundamentals Anymore
Moreover, since oil prices are not set by the fundamentals
of supply and demand, price is solely determined by fund flows, i.e.,
investment capital goes into a commodity it goes up, investment capital goes
out of a commodity it goes down.
“Asset Class” Investing has a
built-in Long Bias
I know theoretically capital inflows could come into a
market and price could go down, i.e., they could all go short, but for various reasons
these shorting periods are relatively few and far between in the modern era of
oil trading.
The same reason investment capital for the S&P 500 has a
long bias applies to oil markets as well in the modern era of asset class
investing. Funds want exposure, and the modern definition of an “asset class”
by investors is inherently long biased. It is just how it actually plays out,
theoretically it doesn`t have to, but it just does.
The Dirty Little Secret of the Brent
Premium to WTI
So given this state of affairs, and prices have no real
attachment to the fundamentals of supply and demand, fund inflows into the
futures market increase price, and consumers all over the world pay for end use
products based upon these fund inflows, not the fundamentals.
So the dirty little secret why the Brent Contract is so much
higher than WTI is it attracts more fund inflows by the large players who want
exposure from an investing standpoint to the commodity, thus increased fund
attractiveness equals increased prices, and a much larger premium to WTI than
would otherwise be the case.
It all has to do with fund inflows, and the deleterious
effects for consumers play out in the following: Fund inflows into Brent, Finished
Petroleum Products pegged to Brent Price, Consumers pay higher prices with no
change in the fundamentals of supply and demand in the marketplace.
Given the slow growth economy,
consumers should be getting a break at the pump!
We have gone from a supply and demand market to a funds flow
market and this really sucks for consumers.
This is where the regulators are supposed to step in and
protect consumers. After all, this is part of what governments can offer
citizens for taking substantial pieces of their income via taxes.
But the regulators to date have been unwilling to step in
and regulate the oil markets, and consumers and businesses will continue to pay
more than they should for gasoline and heating oil products in the marketplace.
ZERO-SUM Game in Oil Markets
However, what sucks for one group is often great for another
constituency, and for large banks, hedge funds, and financial institutions that
have been known to rig a market wherever and whenever they can, this ICE
exchange traded Brent Oil contract is a dream come true for their needs.
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