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Commodity Dump

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Once Gustav passed without any major damage to gulf oil facilities the price of oil imploded to a low of $105.46 before recovering at the close to $110. Overnight oil has gone into free fall again with the price at $107.45 at 4:30 ET. Crude wasn't the only commodity that was crushed and that suggests the drop was not specifically hurricane related.

After the bell we heard that the Ospraie Fund Ltd., which had $2.8 billion in assets as of August 1st and one of the largest commodity hedge funds in the world would close. The fund was down -38.59% so far this year, mainly because of the drop in commodities over the last six weeks.

The fund was one of the most influential in the commodities markets but once assets fell by more than 30% investors were no longer locked into the fund. They were free to take their funds out at any time rather than wait for an exit period. Ospraie said redemptions were soaring as investors pulled their money out. For this reason Ospraie said they halted redemptions and would close the fund. They plan to return 40% by the end of September and another 40% by year-end. The rest will be distributed as soon as the investments can be liquefied. This is the biggest ever closing of a commodities hedge fund.

Lehman reportedly had a 20% stake in the fund. Professional traders said that names Ospraie owned were getting hammered the instant the market opened on Tuesday. Because many of the positions of the fund were known the instant the news broke the street was heavily shorting those names and commodities knowing a $2.8 billion sell cycle was going to seriously pressure prices.

An SEC filing showed the fund owned Alcoa (AA) and Arch Coal (ACI) among other names. Alcoa lost -5% and Arch Coal was crushed for a 15% drop. Arch Coal has only 20% of the market cap of Alcoa making the selling of a large position much more visible. Gold was off sharply as was copper, natural gas, etc. When traders don't know exactly all the positions Ospraie held they sold anything resembling a commodity.

Hurricanes Headed our Way

For oil the crush of the 200-day average at $109 sets up a test of the next support level at $100. With the OPEC meeting on Sept-9th now almost a sure bet for a production cut I would be a buyer of oil under $105. There are three more tropical storms headed for the Caribbean and the first one, Hanna, could break into the gulf over the next couple days. The original track had been up the eastern seaboard but the real time map shows her moving toward Cuba and westward not north. Ike should be here this weekend and Josephine should arrive early next week. The oil installations may have dodged the Gustav bullet but with three more headed our way I would not be celebrating just yet.

Jim Brown

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