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There are a few historical figures I greatly admire, even though I have pronounced personal problems with some of their opinions.
Winston Churchill leads the list.
On November 9, 1942, Churchill uttered these famous words at a London luncheon: "Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning."
Churchill was, of course, addressing a turn in events during World War II when at last England could have faith it would survive the initial onslaught.
Now, what's happening with the price of oil these days certainly pales in comparison.
But after the big jump in oil prices Wednesday, I could not help but recall these famous lines…
Oil Prices: The Best One-Day Performance Since 2012
After dropping Wednesday morning (once again over concerns about rising inventories), oil prices rebounded in a big way. Crude oil prices surged Wednesday afternoon, posting their best one-day performance since 2012.
West Texas Intermediate (WTI), the benchmark used for trading futures contracts in New York, closed at $48.48, notching a 5%+ gain. Brent, the London benchmark, climbed 4%. Even RBOB (for "Reformated Blendstock for Oxygenate Blending"), the gasoline futures traded in the NYMEX, jumped by almost 6.5%.
All of this occurred in a market with oversupply concerns still unresolved and a continuing host of short artists poised to pummel futures prices at any opportunity.
So, if the environment remains essentially the same, why the rise in prices?
The increase is a good example of the trading friction I have discussed on several occasions. Wednesday was the last day of a near-month futures trading period. The market (at least in New York) will now calculate the price you see every day to March 2015 futures contracts starting today.
Wednesday also marked the last day for options on the February futures. This aspect became a bit more important as oil prices began to move up.
As I've noted numerous times, short plays have added to the downward trajectory of oil. As of Friday last week, I estimated that about $6 per barrel of the price was represented by the shorts.
Put another way, short contracts represented about 35% (London) to 45% (New York) of the discount to a more genuine market price. The remainder could be attributed to the "herding" mentality among wider aspects of the market.
Based on actual market dynamics, the price per barrel ought to be closer to $62 in New York and about $65 in London.
Now there is almost always a discount to the "genuine" price. Otherwise, traders wouldn't be able to arbitrage between "wet" barrels (the oil being sold) and "paper" barrels (the futures contracts written on the real oil).
Nonetheless, the short positions are a much higher portion of the discount in the current environment than the corresponding premium caused when prices are accelerating beyond what the market fundamentals would warrant.
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.