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Crude Oil Is Not Silver

NEW YORK (TheStreet) -- The strategy for raising margin requirements for crude oil ought to work for a while, chasing out some retail money and steadying crude's price. But it also sets the market up for a big spike upwards after this round of margin increases are over and therefore creates a decent opportunity for targeting oil stocks in the interim.

After having had such a significant effect in silver last week, Chicago Mercantile Exchange officials decided to avoid the pressures that are sure to come from Washington and try to apply the same margin increases to oil in the hope of moderating the retail speculation and perhaps the price.

The strategy ought to work for a while, chasing out some retail money and steadying crude's price. But it also sets the market up for a big spike upwards after this round of margin increases are over and therefore creates a decent opportunity for targeting oil stocks in the interim.

The bottom line is that crude oil is not silver, and the amount of retail money -- the "doctors of Dubuque" -- that is such a significant part of the silver trade is not such a significant part of oil and not as sensitive to margin requirements.

That doesn't mean that no retail customers are engaged in oil trade and that a margin increase, or a series of them, won't have an effect and stabiliize prices for a while. But the biggest players in oil, the algorithmic traders, the hedge funds and proprietary bank desks have access to close to zero interest rate money and will be mostly unaffected by any margin increases that the exchange will apply. You can look for the increases in margins to decrease speculation in oil prices in only the most limited way.

But let's not get ahead of ourselves. The margin increase announced today by the CME will take the cost for holding a contract of crude oil futures to $8,438 from $6,750, an increase of 25%. We should not expect this to be the last increase either: Silver's margin increases came over the course of a week and dropped the leverage in the contract from about 17 to 1 to around 8 to 1.

With crude oil leverage before today hovering around 15 to 1, the equivalent increase to get leverage to where silver is today would put the per contract margin at closer to $12,500. We should expect a series of margin increases on oil until we reach something closer to this number.

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