Why did oil breach $138?
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One key impetus certainly came from news about U.S. interest rates and the dollar. European Central Bank President Jean-Claude Trichet Thursday cautioned that the ECB may raise interest rates next month in order to contain inflation, while Friday's U.S. unemployment numbers may have put further U.S. rate cuts back on the table. The twin developments sent the dollar plunging 1.1% against the euro and the dollar price of many commodities soaring. Gold was up 2.6% and the Commodity Research Bureau Index up 3.5% (numbers from ino.com). Still, oil's 7.5% rise was clearly the Homecoming Queen.
In terms of news specific to the oil market, this story out of Saudi Arabia could be significant:
Saudi Arabia's Shura council (parliament) will hold a series of meetings over the next two weeks to discuss a controversial proposal by a key member to curb oil production to save reserves for better prices.
Also noteworthy is an increasing likelihood of military conflict involving Iran:
An Israeli deputy prime minister on Friday warned that Iran would face attack if it pursues what he said was its nuclear weapons programme.
"If Iran continues its nuclear weapons programme, we will attack it," said Shaul Mofaz, who is also transportation minister.
"Other options are disappearing. The sanctions are not effective. There will be no alternative but to attack Iran in order to stop the Iranian nuclear programme," Mofaz told the Yediot Aharonot daily.
If Saudi production has indeed peaked, or if military conflict involving Iran is indeed imminent, that would unquestionably be the kind of news that should send the price of oil soaring. But this much of a move on just the whiff of a rumor?
It seems likely that the fundamentals above warranted a big move in the price of oil, but the momentum then caught some traders short who had to scramble to buy oil to cover their positions. But who? Via Brad Setser, the Financial Times reports:
Traders who had bet on falling oil prices through short sales-- in which they sell the commodity in hopes of buying it back later at a lower level-- were forced to cover their positions, sending oil prices skyrocketing.
Wall Street banks contributed to the rally as they bought crude oil futures to cover their obligations under agreements that compensate investors and companies such as airlines if crude rises above $140 a barrel.
Hmmm.... you mean some of the big guys have been quietly raking in cash by selling far out-of-the-money options? Now where have I heard that strategy before?
I remember-- it was Capital Decimation Partners.
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