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Blame It On Bertha

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Blame It On Bertha

With the oil futures at $137.50 at 10:30 and averaging about 20 contracts of volume per minute, somebody dropped a 1500 contract bombshell on the market at 10:35 this morning. The resulting $6 drop was the only volatility for the entire day. Anyone looking at this activity from the sidelines would think something major had happened in the energy markets.

The news causing the big drop was a +3.0 million barrel rise in crude inventories in the weekly report. Considering inventory levels had fallen over 31 million barrels in the last eight weeks a +3 mb gain was negligible. It was even more inconsequential when everyone knew what caused it ahead of time.

Tropical storm Bertha was born off the coast of Africa two weeks ago and drifted westward into the shipping lanes as it headed for the United States. Tankers coming from Africa and the Persian Gulf put their engines in idle and let the storm blow through before continuing their trip. For the prior two weeks imports were down sharply and I discussed in these pages that Bertha was clogging up the shipping lanes.

I still think there was something fishy in the futures today. The full size CL contract represents 1,000 barrels of oil for delivery in August. Those contracts have a margin cost of about $9000 each and represent  $137,000 of oil. The 1,500 contracts that traded in about one tick on a 2 min chart had a street value of a little over $205 million. Volume went from 20 contracts per minute to 1500 contracts in 2 min and then back to 20 contracts a minute all in the space of 5 minutes. Granted you would expect some volatility around the 10:35 inventory announcement but this seems extreme given the price of oil and the roughly $9 drop on Tuesday. Maybe I am just paranoid but I trade oil futures every day and this was extreme. High volume is not unusual. The big contract trades about 750 contracts per 2-minute bar in the mornings and 300 contracts per bar in the afternoons.

I also thought the price reaction was extreme given the prior day's drop from $146 to $136. You would have thought anyone who wanted out would have bailed or been stopped out during that drop. Also, the lack of buyers rushing in to buy the dip today was disturbing if you had a bullish bias. Support is still intact but every prior dip to this level has been bought.

The last piece to this puzzle and probably the one that matters the most is futures expiration. The current August crude contract closes for trading on Tuesday July-22nd only three trading days from now.  Futures are not like options and there is not a big penalty or premium for rolling forward. However, for people who are planning on closing positions their time is running short. Options on the August futures contract closed this week and that could have been part of Tuesday's volatility.

The anti-Iranian card was played again today. The U.S. said it was sending an envoy to participate this weekend in talks between Iran and the major powers involved in trying to work out a deal on their nuclear enrichment. I said anti-Iranian because it helped lower the price of oil on a perceived cooling of tensions. Yesterday Iran denied there were any talks so as to not weaken oil prices. Somebody is not telling the truth and I will let you decide who. I was surprised there was no Iranian attack talk from Iran today to push oil prices higher. Maybe they are going to wait until next week so they can claim the meeting as a sham and shout, "We will never give up our nuclear heritage" for the TV cameras.

Jim Brown

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