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November 4, 2004
Oil Prices Begin To Drop

CNBC reports this evening that oil prices, which drove up inflation and dampened consumer confidence in the third quarter, has suddenly begun to drop significantly:

Oil futures prices plunged by more than $2 a barrel Thursday, continuing a selloff that began last week amid rising U.S. supplies of crude and expectations of a surge in heating oil production before winter arrives. ...

Light crude for December delivery fell by $2.06 to settle at $48.82 per barrel on the New York Mercantile Exchange. It was the first time prices settled below $49 a barrel since Sept. 24.

Oil prices have fallen $6.35, or 11.5 percent, since last Tuesday, when Nymex futures settled at $55.17 per barrel, matching the record settlement price first set Oct. 22.

Does anyone else see something fishy here? After crude prices skyrocketed in the summer, we heard all sorts of explanations as to why. Most of them focused on uncertainty regarding "deepening violence" in Iraq and potential instability in Southwest Asia caused by the war on terror. China's growth had some impact as well, but China has been steadily increasing its purchases, not spiking suddenly upwards in demand.

Suddenly, on the day that George Bush stood for election after getting pounded by high fuel prices as a drain on the American economy, crude prices dropped -- and oil futures have lost more than 11.5% of their value in three days of trading. How does that happen? CNBC notes one reason:

This is acting like a bear market, said Ed Silliere, vice president of risk management at Energy Merchant Corp. in New York.

Silliere said there was a large wave of selling among well-financed institutional investors, adding to the downward momentum.

Institutional investors -- people who handle large funds, making decisions for thousands of aggregated investors. Who fits that description? George Soros certainly might; so might Warren Buffett. Both men waged public campaigns to unseat Bush, and George Soros spent an approximated $29 million on advertising and interest groups that focused on electing John Kerry.

One fact is certain: a few large investors started dumping significant amounts of oil at a big loss in the commodities market when high prices could do no further damage to George Bush. The SEC needs to take a look to find out why.

UPDATE: CQ reader Adleone writes this in response:

If these guys were manipulating the oil markets, they would have been doing since the beginning of summer and they would have been long the oil futures at a substantially lower prices. If they were dumping these futures contract, they would be sitting on huge profits. But if they were manipulating the oil futures market, their actions would have shown up in the Commitment of Traders Report and we would have known it by now. it is highly doubtful they were, considering the size needed to manipulate this market (and trust me, only OPEC can manipulate these markets and they were unsuccessful this year in trying to lower oil prices earlier. That's how huge and liquid the oil markets are.).

Secondly, if there were to be an investigation, it would conducted by the Commodities Futures Trading Commission, not the Securities and Exchange Commission. The SEC regulates stocks, bonds, mutual funds, etc. while the CFTC regulates the derivative markets such as futures.

Good points, especially the second, but CNBC's own report says that someone's dumping oil in a big way, at least one "well-financed institutional investor". Who's doing it, and why?

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Posted by Ed Morrissey at November 4, 2004 10:23 PM

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» Oil Prices from RussBlog - Russell Newquist's Weblog
Captain Ed speculates that the recent plunge in oil prices is a result of partisan liberals manipulating prices to tip the election toward Kerry. Utilizing Hanlon's Razor, I think there's a far more likely explanation. I suspect the drop in oil pri... [Read More]

Tracked on November 5, 2004 11:59 AM



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