Oil Prices Always Reflect The Fundamentals

I quit writing the Saturday Oil Report because oil prices make no sense. Why should I waste my time reacting to artificial demand created out of thin air by oil traders? And to add insult to injury, these traders often work for the world's largest banks, which make billions of dollars each year buying and selling crude oil.

God didn't put me on Earth to be jerked around by a bunch of greedy assholes, or at least I'd like to believe that, because it seems to me now, as I look back, that I spent most of my life being jerked around—directly or indirectly—by a bunch of greedy assholes. I only caught onto that game when I started paying attention to it.

But now a 2010 story has re-surfaced (and here, and here) which reminds us that oil prices always reflect the fundamentals—supply and demand—just as economists insist they do.  But supply and demand of what?

On June 30, 2009 oil mysteriously jumped by more than $1.50 a barrel during the night, to reach its highest price in eight months, the kind of swing that is caused by a major geopolitical event.

The amazing, true cause of this price spike has now been released by a Financial Services Authority investigation (FSA).

Although not authorised to invest company cash in trades, Steve Perkins, a long standing, senior broker at PVM Oil Futures, had managed to spend $520 million on oil futures contracts throughout the night.

On the morning of the 30th an admin clerk called Mr Perkins to ask why he had bought 7 million barrels of crude during the night. Mr Perkins had no recollection of the transactions, and it turned out that he had made the trades during a “drunken blackout.”

By the time PVM had realised the transactions had not been authorised by a client, they had incurred losses of $9,763,252.

Between the hours of 1:22 am and 3:41 am, Mr Perkins gradually bought [a large share] of the global market, whilst driving prices up from $71.40 to $73.05, by bidding higher each time.

At 6: 30 am, presumably sobering up and realising what he’d done, he sent a message to his managing director claiming an unwell relative meant he would not be able to make it into work.

Following an official investigation Mr Perkins admitted to having a drinking problem, had his trading license revoked for five years, and was given a fine of £72,000.

The FSA have said that they will re-approve his license after the five year period, if he has recovered from his drink problem, although they warned that "Mr Perkins poses an extreme risk to the market when drunk."

   

Comments

[Brian M]

Friends don't let friends hedge drunk.

[Nat]

Oil prices make no sense, equity prices make no sense, GDP figures make no sense, official unemployment figures make no sense, bank stress tests make no sense, Krugman makes no sense, what we've come to call "the economy" makes no sense just as the notion of perpetual growth makes no sense.

[John Theodorou]

@ Nat,

It makes sense because we're actually living inside an elaborate alien hologram. Like "The Sims" but on steroids! LOL