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Monster Short Squeeze!

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The dollar was crushed and oil spiked over $25 intraday as the November contract expired for trading at the close on Monday. After the smoke cleared oil closed up +$16 at $121 and the biggest one day ever.

This was clearly an expiration problem since the November contract only rose +$6 to $108. Somebody got caught on the wrong side of a thin market in the expiring October contract and paid an awful price for waiting too late to close their positions. The Nymex halted trading when the $10 limit was reached but when trade reopened the buying continued unabated touching $130 intraday.

There was no specific news moving oil prices although the fall in the dollar provided some added momentum. The dollar fell sharply on expectations the U.S. treasury would have to sell as much as a trillion dollars in treasuries to fund the mortgage bailout. The $700 billion headline number is expected to grow as new problems arise.

Acting CFTC Chairman Walter Lukken said the agency's surveillance and enforcement staff was analyzing the price spike "to insure that no one is taking advantage of the current market stress for financial gain."

Crude has gained +$30 since hitting a low of $90.55 on Sept-16th. That is the biggest two-day gain ever. If the dollar remains under pressure we can expect crude to continue to rise but Monday's spike could see some selling pressure early Tuesday as expiration forces equalize.

On Tuesday the November contract will become the current month contract and it is trading just under $109 at 4:AM Tuesday morning.

Crude inventories are expected to show another sharp decline in the Wednesday report but that was not the reason for Monday's gain.

Jim Brown

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