More to oil's wild moves than meets the eye

Oil markets have closed out a wild day.

The EIA put out its (delayed) weekly inventory levels, and to make a long story short, there was a draw-down in oil inventories, but it was much less than most expected. Gasoline inventories barely budged.

The oil market reaction? West Texas Intermediate (WTI) oil went from roughly $48 to $45, a drop of 6 percent, in two hours. It's now at its lowest level in nearly two months.

Now I understand there may have been some disappointment with the inventory levels, but there is nothing fundamental that would drive oil from $48 to $45 in 2 hours. This is clearly the work of speculators who were long oil who are now unwinding positions.

This is an old story, the role of speculators in the commodity business. Speculators are by definition not fundamental investors. They make bets on a daily basis on the direction of commodities.

Speculators usually don't care if oil — or any other commodity — goes up or down. They only want to be on the right side of the trade.

The oversized reaction clearly indicated that there were were a lot of speculative long positions. On a day with normal volumes in the overall exchange, the U.S. Oil Fund, the largest oil ETF, is seeing volume almost twice normal.

Of course, the role of speculators in commodities is an old story. Speculators have been an integral part of the oil market for 15 or 20 years. ExxonMobil CEO Rex Tillerson said in testimony to Congress in 2011 that pure speculators account for as much as 40 percent of the price of oil moves.

The energy markets have other issues besides oil speculators. U.S. refiners are having a miserable summer, with refiners like Tesoro and Valero at new lows. Why? Refiners make money by exploiting the difference between the price of oil and the price of gasoline. Ideally,that spread is narrow. But that's not happening.

As John Kilduff at Again Capital has pointed out, gasoline demand is near record highs at 9.8 million barrels, but oil refiners have been producing a lot of gasoline. That's keeping supplies plentiful and prices low. Gasoline inventories barely moved, and this has convinced speculators that there is little reason to be optimistic about a draw-down in supplies of gasoline.

So refiners have two problems: their margins are under pressure due to low prices, and now they are going to have to cut production.

Not a great scenario for them, but good news for American drivers.