Liquidity Expansion Hits Commodities

Over the past several weeks, we've seen crude oil prices move up from around $65 a barrel to somewhere closer to $75. I've scratched my head over this move because as far as I can tell, it has happened for absolutely no apparent reason.

Sure, you'll hear people talking about a Nigerian conflict that really hasn't changed much at all in intensity in the past year, but they're pulling at straws. Stockpiles are at record highs, demand hasn't increased all that much, we've had little change in the Middle East supply situation recently -- heck, we haven't even had a bad heat wave or threat of a major storm. So what's going on here?

I'm going to posit a new idea that hasn't been discussed anywhere else that I've seen. I'll also continue to harp on it for the next few months, because I believe it has been entirely overlooked and could be the key to a new view on trading the commodity markets for the next several years.

I believe that the liquidity expansion that has been driving the stock market higher is now starting to bleed into commodity prices. Let's examine the factors that might have begun to cause this sea change in commodity pricing to see if we can legitimize the idea.

Access

The first major change in the commodity space has been growing access to the markets. We've all seen the consolidation taking place among the commodity exchanges. This has certainly helped to drive liquidity, as traders can access many more markets from a single exchange point.

But certainly the largest catalyst for increasing access in the commodity markets has been the advent of electronic trading. Futures orders are no longer forced into congested floor nexuses, where volume is limited by human speed. Now, orders are instantly filled by computers on light-speed networks whose possible volume is virtually unlimited. Traders can be anywhere in the world and get instantaneous responses for quotes and order execution in all the major markets. This type of access was unthinkable just a few years ago.

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At the time of publication, Dicker had no positions in any stocks mentioned in this column, but positions can change at any time.

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.