So I follow the oil and gas industry and markets. For anyone that doesn't know, commodity markets mostly operate two different markets: futures and spot. Futures contracts are an agreement to deliver (or take delivery, depending on which side you're on) a certain quantity of a standardized commodity at a given date. Futures markets tend to be a mix of speculators (who are simply betting on price movements of the underlying) and traders who produce or want the underlying. The advantage of a futures contract is it can allow someone to hedge their costs and lock-in prices. All sorts of producers and industries use them for that.
Oil futures are standardized into several standard types (9 I think, I might be off). You will hear terms like West Texas crude and Brent. This refers to two main factors: the relative mix between lighter and heavier hydrocarbons (called the API gravity) in the oil as well as the sulfur content.
One side benefit of all this is discovery. It's a way of measuring sentiment. So if future oil prices rise, it indicates market sentiment is negative about the war and they further disruption is expected. When it looks like hostilities may end, the price drops.
But there's a problem: nobody trusts the market anymore. It's being manipulated as insiders are clearly frontrunning news with massive bets, sometimes minutes before news gets released. This has been happening with other markets too, most notably SPY futures. Markets cease to function once manipulation becomes widespread.
The future price is also called the paper price and another signal that the paper price is meaningless is that the spot or physical price for oil has skyrocketed well beyond any oil prices you might see in the news. For example, a few weeks ago, physical Dubai oil was nearing $180 per barrel. West Texas crude had a future price of $110 yet the physical price was $140+.
An issue here is that the physical price isn't easily discoverable. It's hidden behind subscription services that cost thousands so you only hear about it when it's reported on. But this means talking heads are reporting on $110 oil when it's really $150.
We saw a similar mismatch with the silver market at the end of last year. That market too was clearly being manipulated but rather than insiders, many (including myself) suspect it was the refiners and others who had lost with silver's massive rally and were doing everything to pop the bubble, including changing the exchange's liquidity ratios to force sales.
In previous years, some or all of these people would get investigated and prosecuted by the SEC for insider trading. That agency has been defanged by putting a pro-deregulation loyalist in charge but the bigger problem is that some or all of these people will be buying pardons before the president leaves office. And the president can no longer be prosecuted thanks to the Supreme Court inventing presidential immunity.
One source of American power is the control over the global financial system. All of this insider trading risks dismantling that. It's not hard to find people who are sitting out because they simply don't trust anything anymore. If this spreads to financial institutions and institutional traders, that's going to be a big problem.
So-called "prediction markets" (and crypto) are even less regulated than that. Unless you have insider knowledge or you're betting on something that isn't prone to insider information (and I honestly don't know what that would be), I'd stay away.
And these prediction markets are small fry. SPY futures are a significantly larger market. So is oil and gas. And Treasuries is order of magnitudes bigger than either of those. Yet some of those markets can't be trusted and I suspect this is only going to get worse.
I don't have any hope that anyone will ever be prosecuted for any of this.
Thank you for the thoughtful analysis. I'd echo that the deregulation and corruption of these markets has two impacts:
1) less "legitimate" (non-corrupt) capital flowing to these markets which may ultimately reduce the liquidity and value of the asstrs.
2) more speculative deployment of capital, which means that capital is used for making bets rather than uses for productive purpose (such as investing in legitimate investments that are productive for the economy.
Why would a insider invest in legitimate, productive investment when they can make outsized gains in betting markets or corrupt futures markets?
And yes, long term this will massively taint the US financial power and make economies like the UK more appealing.
I find it very hard to understand why so many people and institutions are still participating in markets that are obviously full of insider trading. It's basically just giving money away to the insiders. Why do people do this?
You're a fund manager. What's the alternative? Throw your hands up and tell your customers to take all their money back, you don't want to get paid anymore?
Exactly. Barter is super insanely expensive in comparison with the most manipulated paper markets; thus, if you closed the current markets, the participants would be very highly incentivized to create a new one, which would likely be worse on all accounts.
It's their job and if they're good at it, they still win / earn money. Someone who's staying eyes glued to the price charts on 12 stacked monitors will be the first to see a trend and buy/sell immediately after the action of the insider trader.
Institutions do not stake their own money and are somewhat averse to the direction of the market. As for common people, they're generally not known to do the most rational thing.
> That agency has been defanged by putting a pro-deregulation loyalist in charge but the bigger problem is that some or all of these people will be buying pardons before the president leaves office. And the president can no longer be prosecuted thanks to the Supreme Court inventing presidential immunity.
This is not a "bigger problem".
> the president can no longer be prosecuted thanks to the Supreme Court inventing presidential immunity
In 2015, there were a hundred things you could've inserted into "The US cannot ___" or "The POTUS cannot ___", that have happened since. Things "can't" until they can.
> I don't have any hope that anyone will ever be prosecuted for any of this.
Agreed, but this is _solely and entirely_ due to a lack of will to do so, not because of any laws.
Imagining that hurricane prediction cone they put on maps, Twitter encompasses the entire cone and then some. Someone on Twitter is gonna be right, but rarely the same person consistently.
I think you misunderstand. His comment about futures markets is equivalent to your comment about twitter. Neither of you are getting your news from NYT.
You are correct: the CFTC has primary authority over commodities and futures. I'm glad you pointed this out because in looking up who it was I learned that the cFTC (not the SEC) has regulatory authority over prediction markets too. That was new information.
This made me curious: who regulates sports betting? And the answer seems to be... nobody. Well, the states. I guess I should've known that because I know some states ban sports betting.
But that's interesting compared to prediction marekts. Since they're federally regulated, states don't have as much control. And I see that the current CFTC commissioner is suing states to block prediction markets. And prediction markets can and do allow sports betting.
Come to think of it, what insider trading in oil even is…? Oil isn’t a company and doesn’t have any capacity for material non-public information. The biggest players are all insiders on this market anyway. Why should Barron be prosecuted and Trafigura not…?
What is a typical price difference between the paper and spot prices? 1% or 10%+ is common? In the past 24 hours, the futures price dropped a huge amount. Is the spot market dynamic enough that prices can get reflected so quickly? Where does it stand in the past few days?
It is also interesting to think about the game theory on how you respond to markets during volatility. If you are a producer or have excessive storage capacity - when do you sell? From my armchair position, it seems like conditions are only going to get worse. Do you hold back some reserves, hoping to cash in on a higher pay day in the future? Then you have to wonder how many might be doing the same.
This is hard to say because physical delivery prices aren't easily discoverable (as mentioned).
Here's one way it matters though. Futures markets are typically in a state of backwardation or contango. Backwardation simply means the spot (or physical) price is higher than the paper or future price. Contango is the opposite. Whichever one it is, says something about the current market and the expectations for the future.
So the silver market was in backwardation where the paper price was $75+/oz but the physical price might've been $100+ but nobody was buying. People with silver delivery obligations were simply borrowing silver from those who had it rather than buying it on the spot market. There's a whole separate market for borrowing commodities and the premiums soared. But people who had shorted silver simply couldn't afford to buy on the spot market without going broke so they didn't. They kicked the can down the street, borrowed and then lobbied for the exchange to pop the bubble (which they did).
The best example of a contango market was in March-April 2020 with the oil market. This was the beginning of the pandemic and oil demand fell off a cliff. So people who already had oil couldn't move the oil they had and thus had no room to take delivery of oil they'd already bought (via futures). Producers only have so much storage room before they have to shut off production. Side note: Gulf producers have had to do this in the last month.
But the net effect was there was all this oil and nowhere for it to go so for a brief period the price went negative. That's right. Producers were paying you to take oil. That was an extreme contango market.
So in the last month I've heard data points like Dubai crude was $120-130 paper and $178 physical. That's a huge margin. I don't know what the normal range is really. In a healthy market you'd expect physical prices to be pretty near to short-term future prices.
In any bullish market, you'll get hoarders. There are limits to what you can store though and those are very real because if you shut off production, you might still be accuring a lot of costs and it can take days to restart production. As such I think you'll find producers generally just want to sell.
But a lot of hedging goes on too. This can make price spikes worse, actually. Now it's pretty common for US oil producers to not drill a well until they've already sold part or most of the oil it's expected to produce on the futures market, for risk purposes. But in times like now, nobody's going to drill a well to sell at a future price of $70 (which the 1 year price might still be) and because there's a lead time on oil production, this can create future shortages.
> or example, a few weeks ago, physical Dubai oil was nearing $180 per barrel. West Texas crude had a future price of $110 yet the physical price was $140+.
Surely if this were true, gas prices would have risen more than they did.
Part of the reason I follow all this is because the whole system is gloriously complex. I have no real reason to follow it and I'm by no means a subject matter expert but I do know enough to see a lot of reporting on all this is just objectively wrong.
There are a lot of components that go into gas prices and it's driven by sevearl supply-demand curves such as the price of crude, the demand for refined petroleum products (also called the "crack spread") and just the demand for gas in general.
But it gets more complicated because even though oil is a global commodity it's not entirely global. There are regional differences where some oil and gas can only go to some areas due to limited pipelines and limited pipeline capacity. So you can still end up with wildly varying regional crude prices.
Plus you have California that really has no pieplines so is largely disconnected from the national oil supply. As such ~75% of California's oil comes from foreign imports. And guess what? ~20% of those come from Iraq and, as such, California is impacted by the closing of the Strait of Hormuz when really no other lower 48 state is.
So we, as a country, both import oil and export oil, which makes a lot of conversations about "energy independence" just wrong.
Anyway, back to gas. Crude is only one component. There are a bunch of additives to create different gas blends used in the US. These are typically divided into winter and summer blends. The additives basically change how much gas (as in, the state of matter, not short for gasoline here) is in your gas tank. Why? Because more gas (state of matter) equals more smog so more additives are added to increase the boiling point in summer.
And on top of that some states, most notably California, have their own blends, which come from Californian refneries, which get their oil from the Gulf (in part).
There are a lot of seemingly unintended consequences in all of this too. So, for example, we're selling a bunch more LNG to Europe because of Ukraine but that's really raising domestic natural gas prices and that's having a huge impact on utility prices. And only going to get worse.
Oh and let's not forget that included in the price of gas are also taxes. Those typically don't scale with price (in the US at least).
I don't see how any of that disproves my reasoning. It just claims that things are complicated, while not establishing that the complicated system can produce the results you claim (you also haven't cited the physical prices in question).
Also: I'm in Toronto, Canada. Please don't say "we, as a country" etc. here. Gas price rises here were also congruent with oil price spikes being not quite as bad as in 2022.
And during 2022 I was paying close attention to both the pumps and the quoted oil prices on the tickers. I also made note of where the pump prices were in April 2020 when the oil futures went negative, and watched the recovery. I therefore have a mental model that accounts for taxes.
Oil futures are standardized into several standard types (9 I think, I might be off). You will hear terms like West Texas crude and Brent. This refers to two main factors: the relative mix between lighter and heavier hydrocarbons (called the API gravity) in the oil as well as the sulfur content.
One side benefit of all this is discovery. It's a way of measuring sentiment. So if future oil prices rise, it indicates market sentiment is negative about the war and they further disruption is expected. When it looks like hostilities may end, the price drops.
But there's a problem: nobody trusts the market anymore. It's being manipulated as insiders are clearly frontrunning news with massive bets, sometimes minutes before news gets released. This has been happening with other markets too, most notably SPY futures. Markets cease to function once manipulation becomes widespread.
The future price is also called the paper price and another signal that the paper price is meaningless is that the spot or physical price for oil has skyrocketed well beyond any oil prices you might see in the news. For example, a few weeks ago, physical Dubai oil was nearing $180 per barrel. West Texas crude had a future price of $110 yet the physical price was $140+.
An issue here is that the physical price isn't easily discoverable. It's hidden behind subscription services that cost thousands so you only hear about it when it's reported on. But this means talking heads are reporting on $110 oil when it's really $150.
We saw a similar mismatch with the silver market at the end of last year. That market too was clearly being manipulated but rather than insiders, many (including myself) suspect it was the refiners and others who had lost with silver's massive rally and were doing everything to pop the bubble, including changing the exchange's liquidity ratios to force sales.
In previous years, some or all of these people would get investigated and prosecuted by the SEC for insider trading. That agency has been defanged by putting a pro-deregulation loyalist in charge but the bigger problem is that some or all of these people will be buying pardons before the president leaves office. And the president can no longer be prosecuted thanks to the Supreme Court inventing presidential immunity.
One source of American power is the control over the global financial system. All of this insider trading risks dismantling that. It's not hard to find people who are sitting out because they simply don't trust anything anymore. If this spreads to financial institutions and institutional traders, that's going to be a big problem.
So-called "prediction markets" (and crypto) are even less regulated than that. Unless you have insider knowledge or you're betting on something that isn't prone to insider information (and I honestly don't know what that would be), I'd stay away.
And these prediction markets are small fry. SPY futures are a significantly larger market. So is oil and gas. And Treasuries is order of magnitudes bigger than either of those. Yet some of those markets can't be trusted and I suspect this is only going to get worse.
I don't have any hope that anyone will ever be prosecuted for any of this.