Submitted by Jeffrey Snider – Alhambra Investment Partners
WTI is trading below $64 this afternoon and the long end of the UST curve is being bid rather starkly, the 30-year has dropped below 2.90%, there is an important element to consider about such “price discovery.” As my colleague Doug Terry points out, a 40% drop in oil prices is no longer strictly a matter of finance. In other words, the leveraged long players and even the one-way momentum “traders” have long since been vanquished. Speculation is no longer driving oil prices lower (acknowledging that aggressive shorts are certainly in this market now).
Crude oil is unlike stocks, for example, in that there is at some point an actual level of supply and demand for physical quantities. Futures trading sure cloud this distinction, but in the end physical demand and supply will take over against any aggressive move. If financial “traders” push the price down enough, shippers and storage facilities operators will bid because tankers are needed to flow somewhere (either today or, far more importantly, tomorrow, i.e., near future). That is why, as Doug points out, the price of oil may be highly volatile but typically courts a relatively stable range even in this age of currency free-for-alls. Continue reading
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