Crude Oil Prices: A Billionaire Insider Just Made a Bold Bet

There was a very dramatic development in the oil market last week. It involved a well-known insider and a bullish bet on crude oil prices.

Harold Hamm, the CEO of Continental Resources Inc. (NYSE: CLR), announced that his company - a major producer in the Bakken and other U.S. unconventional oil basins - had unwound its hedge positions.

crude oil prices
Continental Resources CEO Harold Hamm

So why is that so important?

Hedges like the ones unwound by Hamm are used to compensate for the possibility of future oil price declines. In a single bold move, Hamm had made one of the biggest bets ever on rising oil prices.

So while the TV pundits are still wringing their hands over the decline in crude oil prices, a deep market insider was preparing for crude to go in the opposite direction...

Up.

Here's why I think Hamm and Continental have it right...

What Really Drives Crude Oil Prices

First, a number of analysts have been pointing out something over the last few days that I have been saying for weeks now. The decline in oil prices does not reflect the overall rise in demand.

You see, despite our penchant to view oil only through the lenses of the trading benchmarks in New York (West Texas Intermediate, or WTI) and London (Brent), the demand that drives today's prices is not American or European.

The real drive is coming from developing countries. And this is not simply the known giants such as China and India. Rather, it involves the greater (and exploding) Asian market, along with the resurgence developing in Latin America and Africa.

It is true that the emergence of shale and tight oil in the United States has prompted revisions in demand expansion by both OPEC and the International Energy Agency (IEA).

But the results still point to the following:

(1) An overall demand increase by at least 1.2% year on year.

(2) A sustained Brent price of about $95 a barrel, and a WTI peg of closer to $88.

Recall as well that the net impact of American shale oil on global pricing is tempered by the current (and more than four decades long) prohibition against exporting U.S. production.

This impact is limited to reducing imports into the United States - a situation that has been in place for some time now and is hardly a justification for the curious read of declining demand internationally.

So, let's look elsewhere to explain this disconnect.

A second possibility might be indications that gross domestic product (GDP) is declining, translating into an expected forward concern over sluggish or recessionary market projections.

But that's just simply not the reality either. GDPs are still climbing ­- not falling.

Yes, there have been some concerns expressed over Chinese growth prospects. But those have dissipated considerably as the performance in China continues to go higher. Of course, India has its own set of problems, but even there the prognosis is up.

In the absence of marked downward signals, the BRICS (Brazil, Russia, India, China, South Africa) - the five developing countries now driving primary global interest - are just not giving us any reason to suspect that a cut in the global economic forecast  is warranted.

Expansion may come below some lofty (and unrealistic) predictions, but the aggregate picture hardly justifies the view that a GDP contraction is on the horizon.

A Short Story About Falling Oil Prices

That leaves us with a third reason driving this disconnect. And it turns out to be the 800-pound gorilla in the room.

For some time now, significant money has gone into "riding" the price of oil futures down. This is, in short, a story about shorts period.

Now, shorting a stock or a commodity is hardly new. Investors do it all the time if the prospects look promising that the price will be moving south. Of course, heavy short positions may upon occasion dictate such movement, at least in the near term.

That's especially true if the guys moving the heavy short positions are the same "experts" predicting the fall. In this way, it becomes a self-fulfilling prophecy.

Ultimately, the market will eventually correct for this overemphasis on the down side. When that correction occurs, shorts need to be covered and that always sends the price up even more than the underlying market indicators would seem to warrant.

After all, a recipe for disaster for the shorts is to go into the market to buy the contracts needed to cover rising prices. Even though this would seem to be handing these guys just what they deserve.

This would seem to be the primary reason why both WTI and Brent are priced at levels some $8 to $10 per barrel below where they would trade in a normal market.

Take Monday's price action for instance. Following several days of a (slowly) recovering price, augmented by two major banks indicating the crude oil pricing fall is over and the major move by Hamm, the price nonetheless began to retreat again.

So then why did oil prices fall Monday?

Simply this: "Analysts" began sending out mid-morning prognostications that OPEC was not likely to cut production in its upcoming meeting. What they didn't tell you was that with the Saudis already opposed, it would be difficult for the cartel to approve the cut anyway.

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What it did do, however, was prompt long oil positions to be closed, creating another wave of shorts to replace them. That's all.

Let me make this perfectly clear: A stable trading range between $85 and $90 a barrel does not require any cuts from OPEC.

It only requires a trading environment in which the commodity, rather than the artificial moves orchestrated by the "flash boys," determines the price.

That day is coming in short order. For those taking a position beyond the end of their own nose, Hamm and Continental have gotten it right.

More from Dr. Kent Moors: While everyone is focused on crude oil prices, natural gas prices are headed in a very different direction. And that's providing investors with some really nice short-term opportunities...

About the Author

Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle.

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