Sam's Exchange: Crude News! Be Careful Not to Get Flashed

© Photo : Source: Sam BardenSam Barden
Sam Barden - Sputnik International
No, my column has not been moved to page 3 next to a topless model (despite my best efforts). When I say “crude news,” I mean crude oil news. And when I say “getting flashed,” I mean a flash crash in the oil price.

No, my column has not been moved to page 3 next to a topless model (despite my best efforts). When I say “crude news,” I mean crude oil news. And when I say “getting flashed,” I mean a flash crash in the oil price.


A rapid crash in the oil price and I mean over days not months, could very well be the next “event” in financial markets. The effects could be devastating, not so much for all the hedge funds that are long oil, or Prime Brokers who clear Exchange traded futures on hedge funds, or the swaps dealers in the OTC (over-the-counter) market, or even the clearing houses like CME (Chicago Mercantile Exchange), Nymex (New York Mercantile Exchange) or ICE (Intercontinental Exchange) all of whom will have to make, cover or clear margin calls.

A flash crash could be devastating for the oil market mechanism itself, with consumers and producers losing total faith in the market's ability to secure price and stability, providing all the more reason to move to a 21st century market model, which is peer to peer, networked and de-centralized.

There is a precedent for a flash crash, or price collapse, and it was in 1985 in the Tin market. Prices in Tin dropped by 50% overnight, from $8,000 to $4,000. Not only did it wipe out the Tin market, but also demonstrated that a price collapse - from an upper band to a lower band - can occur overnight.

If the oil price upper band is $147 and the lower band $35, and Brent is currently around the $125 mark, then it is not too far off its high. Back in 2008, when Brent Crude Oil reached $147 a barrel, it was largely due to increasing tensions between the west and Iran. In fact, this story from 2008 could very well be dusted off and re-run today.

Then, as now, U.S. and Israel have not ruled out a strike on Iran, and Iran was testing missiles capable of reaching Israel. The point is that we are nearing the upper price band and with a little encouragement, like more threats from Israel or the U.S., we might just get there.

The problem is, there is nothing holding the oil price up. In fact what we see is a market in paper oil. This is not a market in paper oil via derivatives but rather an Enron-style mirage extending to the entire oil market. My colleague, Chris Cook, has written an insightful and technical piece on exactly why the oil market is unsupported and is ready for an Enron-style crash.

Rather than repeat a perfect synopsis about oil and Enron, as Chris has written, I can offer two more indicators as to why there is no real demand for oil. The first one is a leading economic indicator, and it is the Baltic Dry Index (BDI). This is a shipping Index which essentially measures the cost of moving raw materials around the world, and is considered a window on future economic activity, because it is considered a measure of supply and demand.

On May 20th 2008, the BDI reached its all-time high of 11,793 points, and by the 5th of December the same year, the BD had dropped 94% to 663 points. This is an almost perfect correlation with the drop in oil from $147 to $35 from July to December of 2008. The Baltic Dry Index has again fallen off a cliff, and is down more than 60% since October. 

The second indicator is my email traffic. As a registered commodities trader at the DMCC, I am like others, the target for internet oil brokers. Whilst they are mostly harmless but massively time wasting, they do provide an alternative view of the oil market. They operate on herd mentality, are always last to market, and they create exotic stories to differentiate themselves from their fellow internet brokers.

So when they come looking for crude oil, you know the price is going to rise. However, when they offer you cargoes, as they are currently doing, you know there is a glut of oil and the oil price will drop. A recent example was one from a broker, who has a special relationship, and “only he has it, with a Nigerian Prince and the oil is coming directly from his private fields. Do I have a buyer?” Uh, let me get back to you!

Of course, consumers like the U.S. and Europe would love oil prices to be lower, while producers like Russia, Iran and Venezuela would hate this. However, what none of them want is an oil market mechanism that no longer works, and that is exactly where we are heading with a Flash Crash.

I hope they have a plan B: we do........and it's Gas. Watch this space.

The views expressed in this article are the author's and do not necessarily represent those of RIA Novosti.

Current markets are anything but global or integrated.  What if we had a paradigm shift in the way we think and transact when doing business with each other?  Balanced global trade can only occur if we have transparent, accessible and efficient markets.  We are on the cusp of achieving this, although most people cannot see it.  Sam’s Exchange aims to give its readers a clearer view and a platform for discussion.  Markets, trade and economics are in fact nothing more than the result of our thoughts and actions expressed in numbers, not the reverse.

Sam Barden is founding Partner of SBI Markets DMCC, a Dubai-registered commodities trading and advisory company.  Barden has worked in the global financial markets for more than 17 years in Europe, Russia and the Middle East.  He has advised and executed strategic transactions for both the government and private sector, in particular in energy and commodity markets, advising various energy producing nations on their strategic market developments and interaction.  He holds a degree in economics and finance from Victoria University, Melbourne, Australia.

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