On Friday the U.S. economy received some good(i.e. less bad) news regarding the jobs picture. Keep in mind the overall picture is still lousy, the unemployment rate surged by a much stronger than expected pace to 9.4%. That report followed the news that the unemployment rate in the Euro area hit 9.2%.
On the other hand, the change in non-farm payrolls in the U.S. fell by only 345,000. The consensus was for a drop in excess of 500,000. Therefore, we will concede that report was indeed less bad. In this vein, we expected to see a massive surge in oil through the $70 critical point of reference. And, that is exactly what we got… for a couple of minutes.
In this regard, the bulls failed to parlay the jobs report. Given this markets technical momentum, we find that odd. In this regard, Friday’s price path could be described as good news (or at least, less bad news), bad action.
The bulls received good news, i.e. a much smaller than expected decline in job losses. Given WTI’s rapid ascent of the last seven weeks, it would not have been unreasonable to expect this news to perpetuate the bullish trend. Instead, in the wake of the 8:30 am release of the jobs report, the market faded a brief spike above $70 and then traded at the offer for most of the open outcry session… that’s bad action… and it is a potential telltale that the current run in oil is running out of gas, as it were.
Nevertheless, the rally in oil, regardless of it origins, has to be respected. That’s our view, but some would rather fight the tape. Testifying in front of the Senate Agriculture Committee last week, hedge fund manager Michael Masters once again blasted the oil markets as being in the control of “… trading desks of Wall Street firms”. According to an article on Reuters, as managing member of Masters Capital Management LLC, Masters last May gave widely publicized testimony to Congress in which he blamed institutional investors for the commodity “demand shock.”
Masters’ testimony to Congress and another report in September that blamed massive speculation by institutions for the rapid run-up in oil prices received wide play in the financial media. Some players blasted his views as off base, and some said rising oil prices hurt Masters’ investments.
We have no way of knowing Master’s motives, but he does have a point. As we discuss in today’s issue of , Wall Street loves crude oil. Per the latest filings for the first quarter, the top ten holders in the United States Oil Fund (USO) and the U.S. Natural gas Fund (UNG) were investment management companies.
While we think Master’s has a point… so what? Again, quoting the Reuters article,“Nothing was actually done by Congress to put an end to the problem of excessive speculation,” [emphasis ours] said Masters, referring to the jump in oil prices last year. “As a result, there is nothing to prevent another bubble in oil prices in 2009. In fact, signs of another possible bubble are already beginning to appear.”
We agree with him, we think the current run up in WTI is the telltale of another bubble. So what? It is what it is. Instead of kvetching to Congress about greedy speculators,if you think oil is a bubble then just position yourself accordingly.
Speculation is what makes this market go around. Reduce the role of the speculator and you reduce price transparency and liquidity, i.e. you reduce the mechanism to transfer risk. Without that mechanism, future investment in up/downstream infrastructure, which is already a dicey proposition, becomes nearly impossible. Besides, who is going to determine exactly what “excessive” is when it comes to speculating… Congress? Anyway, we will say it again; we think the current run-up in oil is a bubble. Therefore, it will correct. The only trick is, will it pop at $75, $147 or $200?
Stephen Schork is the Editor of, and has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.