Last week crude oil had one of the worst weeks on record. However over the week-end the negative oil headlines did not let up one bit. As reported by Bloomberg:
OPEC won’t immediately change its Nov. 27 decision to keep the group’s collective output target unchanged at 30 million barrels a day, Suhail Al-Mazrouei said. Venezuela supports an OPEC meeting given the price slide, though the country hasn’t officially requested one, an official at Venezuela’s foreign ministry said Dec. 12. The group is due to meet again on June 5.
“We are not going to change our minds because the prices went to $60 or to $40,” Mazrouei told Bloomberg at a conference in Dubai. “We’re not targeting a price; the market will stabilize itself.” He said current conditions don’t justify an extraordinary OPEC meeting. “We need to wait for at least a quarter” to consider an urgent session, he said.
The fact that this influential OPEC member mentioned that the cartel would be willing to let it slide all the way down to $40 spooked a lot of market players. The market had already tumbled a long way over the past three weeks, but the week-end news caused a gap down into new lows for the move.
Late last week I dipped my toe into the long crude oil trade, and although it has so far not worked at all, I increased my position Sunday night.
I believe that at this point these sorts of comments are designed to push crude oil as low as possible. Ask yourself what is the point of making such a bearish comment? The OPEC minister could have easily straddled the fence and said something non committal. But instead he came out with this comment that he knew would be interpreted as market negative. He knew exactly how this would affect the market – so why do it unless he wanted it lower.
As I reflect about the crude oil market, I am becoming more convinced that OPEC is specifically holding their foot to the throat of the offside North American market in an attempt to cause as much pain as possible.
Although I think there has been a massive bubble in North American shale energy development, the reaction in the underlying commodity has long since collapsed through the equilibrium price. We are immersed in the George Soros reflexive period where selling begets more selling. The lower price does not create more demand, but instead increases supply.
I blame the easy Fed policies of the past half dozen years. When you price money too cheaply, stupid stuff happens. Like this fixed income security that BNP Paribas issued that was linked to the price of crude oil.
ZeroHedge quite aptly highlighted the most offending part with a fitting comment. Think about the payoff profile of this security for a moment. If crude oil settled above $100, the security paid 12.50%. It didn’t matter if it went to $101 or $250, the most the security holder could make was 12.50%. If the price of crude oil closed between $85 and $90, the security return would be 0%. But if crude oil went lower than that, the security payoff would head deeply negative. In essence BNP facilitated the buying of a fixed income note with a massive crude oil put write attached. What the hell were they thinking selling this sort of piece of garbage? I have no problem with someone betting on the price of crude oil heading higher. But there is whole exchange with a myriad of different ways to execute that trade. There is no need to hide that speculation within a fixed income note that is obviously priced with huge fees attached. But this is what happens when the Fed puts rates to zero for 6 years – investors imprudently move out the risk curve and Wall Street is only too happy to oblidge.
Whether it is outright hidden speculation on the price of crude oil or the over development of the shale energy boom, North American investors are hugely offside. That is why the collapse in the price of crude oil has been so violent. They are panicking. The OPEC nations recognize this and are now trying to push it even lower.
If you are bearish on crude oil down here ask yourself who is selling with you. Do you think that the smart Middle Eastern players are making negative comments for the sake of creating a fair price for consumers? No, they are purposely driving it down to shake out the weak players. If you are getting negative on crude oil at this point you are selling with all the BNP dumb naive clients that are puking out their positions before the December 31st reporting period.
I know that right now it seems bleak. The price of crude oil seems to have no bottom. But my suspicion is that we are in the process of making a low going into year end.
I bought more crude oil last night, and if we go lower in the days to come, I am only going to add to it.
One of my twitter guys had this great line that made me laugh that seems appropriate to end on:
Flattening the short stock and long Yen calls (CME terms) positions
I have been positioned for a short term stock market sell off and a let up in the Japanese Yen weakness. Proving that even a blind squirrel finds a nut every now and then, I have managed to get these two trades a little bit right.
Although I am a long term skeptic of the sustainability of the stock market rise, almost every indicator is pointing to this decline being oversold. I know one of these days we are going to get oversold, and stay that way for a long time. But I am headed on Christmas vacation later this week, and I just want to wind down both of these positions.
Between this week’s FOMC meeting and the fact that we are approaching year end, I am worried that the market is going to become even more zany than usual. I am going to ring the register and watch from the sidelines.