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The Dumb Money Slips on the Oil Trade

Caught in the commodity's momentum, these traders were ripe for a brutal comeuppance.

I don't mean this to be offensive. But a lot of money in the oil futures market must be dumb. Let me explain.

Most energy-related trade groups acknowledge that speculators have contributed to the spike in energy-related prices. Let's stipulate that. So who are the speculators?

They're not retail.

Institutions? Could be, but they're not considered "smart" money either.

Commodity trading advisers (CTAs) do not show up as leveraged long from a service I see. So who then?

I believe it's long/short equity hedge funds looking for juice! And for the most part, these funds are technically based, momentum traders. Dumb money, they know the sound bites but not the facts. They took natural gas to $15 in December and it hit $6.98 yesterday. Enough said.

A big part of my thesis on $45 oil this spring is the same dynamic. Momentum hedgies bail on the commodity as we approach the soft season for oil demand. Fundamentals get a bit soggy short term, and the technical traders get stopped out on the way down. Dumb money.

These are not dumb people, they're simply uninformed about the fundamentals of oil. To them, it's only a price on a Bloomberg terminal.

And I risk being very wrong if a geopolitical event occurs. But just as the dumb money drove natural gas to unsustainable prices in the short run, it did the same with oil.


BRIC rescue them?

China's auto market, now the second largest in the world, is smoking, up 50%! Great sound bite.

Unfortunately, that adds only 2 million-3 million vehicles to a 760 million worldwide fleet. Chickenfeed in the grand scheme of things! Dream on, bulls.

Oil will be higher than we have had, but that does not preclude a visit to the $40s.

At the time of publication, Marcin was short oil, although positions may change at any time.

Robert Marcin is the founder of Defiance Asset Management, a private investment management firm. Client accounts managed by Defiance Asset Management often buy and sell securities that are the subject of commentary by Marcin, both before and after it is posted. Under no circumstances does this column represent a recommendation to buy or sell stocks. This column is intended to provide insight into the financial services industry and is not a solicitation of any kind. Neither Marcin nor Defiance Asset Management can provide investment advice or respond to individual requests for recommendations. However, Marcin appreciates your feedback;

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