We've seen the wildest swings in the oil markets over the last several days, with a range on Friday of more than $11. Even for someone with almost 25 years experience trading oil like me, these swings are daunting -- no, insane. This type of volatility is a sure indication not only of rampant speculation, but of the inability of the futures markets to cope with this level of financial interest. Let's discuss this idea and try to come up with some ideas on how to profit from it.
Over the last two trading days last week, oil rose from a low of just above $121 to touch a high on Friday of just over $139. While oil had taken a step back from its highs over the previous week or so -- inspiring premature CNBC graphics of "the bursting oil bubble" -- and was in a position to rebound again to the upside, this move of nearly $20 in two days represents one of the most violent swings in oil, or any commodity for that matter, that I've ever seen in my career. Something very different is clearly happening here.
What can we point to? On Thursday morning, Israel Prime Minister Ehud Ohlmert warned of a preemptive strike on Iran if nuclear programs were not curtailed. While inflammatory, it hardly represented a policy shift or a new posture. The dollar took another nosedive, again creating ideas of oil being a surrogate "currency trade." I've yet to understand how a 0.5% move in the dollar inspires a 5% move in crude oil, but I'll leave that to the continuing advocates of that theory. No, the single most interesting piece of news that inspired this incredible run was the report from Morgan Stanley oil analyst Ole Slorer, who predicted a spike to $150 in the price of oil by July 4. While Slorer gave interesting fundamental reasoning for the spike theory, I imagine that I was one of a handful of oil traders who actually bothered to read the report. No, more important than the reasoning for Slorer's call was the call itself -- predicting a $30 upward move in the price of crude oil in three weeks. That seemed to snap it -- the market was off to the races. Surely some funds and others were caught in the updraft and added gas to the fire, but by the end of the day, oil had closed nearly $11 higher.
These markets can't take this. Whether you profess to believe that oil price dynamics are fundamentally or speculatively related, you've got to agree that the mechanism of futures trading was never intended to see this kind of huge financial interest. We are witnessing that mechanism buckle and teeter. And the results so far haven't been good.
Dan Dicker has been a floor trader at the New York Mercantile Exchange with more than 20 years' experience. He is a licensed commodities trade adviser. Dan's recognized energy market expertise includes active trading in crude oil, natural gas, unleaded gasoline and heating oil futures contracts; fundamental analysis including supply and demand statistics (DOE, EIA), CFTC trade reportage, volume and open interest; technical analysis including trend analysis, stochastics, Bollinger Bands, Elliot Wave theory, bar and tick charting and Japanese candlesticks; and trading expertise in outright, intermarket and intramarket spreads and cracks.
Dan also designed and supervised the introduction of the new Nymex PJM electricity futures contract, launched in April 2003, which cleared more than 600,000 contracts last year alone. Its launch has been the basis of Nymex's resurgence in the clearing of power market contracts over the last three years.
Dan Dicker has appeared as an energy analyst since 2002 with all the major financial news networks. He has lent his expertise in hundreds of live radio and television broadcasts as an analyst of the oil markets on CNBC, Bloomberg US and UK and CNNfn. Dan is the author of many energy articles published in Nymex and other trade journals.
Dan obtained a bachelor of arts degrees from the State University of New York at Stony Brook in 1982.
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