Interpreting Middle East Economic News and Analyzing Market Trends

Supply and demand fundamentals no longer move the price of oil

NASDAQ WTI 10 Year Oil Price to 28-10-2014

WTI Crude Oil price from 2004 to 2014. Source: NASDAQ

I wish the so-called experts in the oil sector would stop talking about the fundamentals affecting the price of oil and start talking about what really moves the oil market – banks and commodity trading firms.  Can an oil analyst tell you with a straight face that the trippling of the oil price from 2005 to 2008 (see chart above) was due to a record rise in consumption or a record fall in production?

What is not very well-known is that in 2005 the financialization of the oil market went mainstream.  This was the year the world saw its first oil price exchange-traded fund (ETF).  Unlike most ETFs that invest in stocks or bonds, the oil price ETF invested in oil price futures contracts, the same contracts banks, traders and oil producers use.  From this point, any person could participate in the rise (or fall) of the price of oil regardless whether or not they had a direct interest in taking possession of oil. 

CHART - Oil ETFs Launched

The number of oil price ETFs launched from 2005 to 2012. Source: Failaka and ETF Encyclopedia.

Oil ETFs instantly became a hot product on Wall Street.  The number of oil ETF rose in line with the price of oil.  In 2008 alone, there were 14 oil ETFs launched marking the top of the market as well as the top of the oil price.  Since the price collapse in late 2008 and 2009, the number of oil ETFs has steadily increased albeit at a slower pace.  Today, there are 42 oil price ETFs alone not to mention a host of other commodity ETFs including natural gas, gold, silver, copper… etc.

What does this have to do with today’s oil price movement?

There is a reason for downward trend in oil prices.  The reason is not due to fundamentals, such as slowing demand from China and Europe, although this seems to support the trend.  The real reason is because those in control of the oil price (hint: it’s not OPEC) are deliberately dropping the price to hurt Russia.

  

Why is Russia the target?

    

There are two reasons, but I’m sure if you talk to a Western politician you will hear no less than a dozen reasons why Russia needs to be punished.  The two reasons are Ukraine and the petrodollar.  The West, mainly the US, has been frustrated at Russia for blocking it’s plans to install their puppet in power in Ukraine and bring the country into their sphere of influence.  Sanctions have not worked as planned so oil will surely hit Russia where it hurts most.  As for the second reason, Russia, along with other BRICS countries, has been calling for a move away from US dollars and into other currencies.  Russia has been the most active so far along with China of dropping the dollar in favor of their own currencies when transacting among themselves or using the Euro.  Countries, especially oil producers, who choose to sell their oil in a currency other than the dollar, have ran into some serious trouble.  Look at Iran, Libya and Venezuela as recent examples.

  

As such, the trend in the oil price will remain to the downside until the objectives are achieved.  If you are still unsure of how price manipulation can occur in such a large global market, look no further than:

  

Brent Crude Traders Claim Proof BFOE Boys Rigged Market  – Bloomberg

  

Oil is not alone in being financialized and rigged.  Let’s not forget these stories:

  

So stop listening to people talking about fundamentals when trying to justify the oil price or the price of any commodity for that matter.  They are all financial instruments available for trading and speculation or in oil’s case, used as a financial weapon.