Crowded Crude Futures Party Is Getting Out of Hand

In its entirety, all of the open interest for crude oil on the New York Mercantile Exchange represents about $175 billion of product. That's it. Heck, ExxonMobil (XOM - commentary - Cramer's Take) alone sports a market cap of more than $450 billion. I'm simplifying a bit because there are oil products, contracts on the Intercontinental Exchange and a wealth of counterparty over-the-counter products that never touch the futures markets. However, you see what I'm driving at. For the amount of appetite that's being generated for oil exposure, you've got a very delicate, very sensitive system where a relatively small amount of capital is going to affect prices in a very big way.

I've been trading oil for a long time, and over the years I've seen plenty of aggressive analyst calls, saber-rattling, even a couple of wars breaking out overnight, and none of them -- not even the Gulf conflict and its surprise start -- has had the kind of impact on pricing that you're seeing these days. In other words, what you're seeing is not about the daily news; it's about trying to fit 200 thickly bankrolled craps players around a table designed to take a maximum of 20 interested shooters.

This kind of volatility makes everyone nervous, particularly the government agencies that have been charged with keeping these markets orderly. In an election year, the call from the Commodity Futures Trading Commission, the Justice Department, and Homeland Security will grow louder to try and do something, anything, to quell this yo-yo price action. They're all on their way to this party, swinging away at imagined manipulators and shady dealers, looking for villains to garner votes and making a bad problem inevitably worse. On all of this you can confidently rely.

So, is there a profit to be made from this scenario? Perhaps, but the first profit is in recognizing how the game has changed. I will never approach the oil markets the way I did even a few years ago. While my experience still has great value, most of my methods and "tricks" that I relied upon daily for so many years have been rendered useless in this new environment. Outright trade based on fundamental numbers like Department of Energy reportage and usage can bear out as profitable in the long run, but the volatility swings in between have become far, far too rich for most independent traders. And it's getting harder and harder to be confident of traditional risk and exit strategies.

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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.