The real reason we have witnessed a retreat in crude pricing

Derivative Manipulation Hits the Oil Market | Oil and Energy Investor

The real reason we have witnessed a retreat in crude pricing has little to do with the condition of the market or the actual demand for product. It is the result of a classic yo-yo short in anticipation of a major advance in the price. In other words, some very large traders in oil futures contracts – the so-called "paper-barrel" speculators of future actual consignments of oil (or "wet barrels") – are manipulating a short-term cut in price after establishing a position that will profit with the price going down. This amounts to a "put" clone resulting in an exaggerated decline in the crude pricing level, usually orchestrated on a five-day pricing spread introduced by a sequenced derivative move on the futures contract itself. The trader profits when the price goes down by exercising the "put" to sell options on the futures contract at a higher strike price than that provided by the market by redeeming the derivative. Of course, when that happens, the market price will increase. The trader then profits again by having derivatives on the increasing price already in place. The price is manipulated just like a yo-yo moving up and down. Now the maneuver is only doable during periods of lower-than-average futures contract volume and a narrow period in which the price is not likely to spike because of outside developments (for example, natural disasters, a rapid escalation in hostilities, blockage of transit, collapse in production, and so on). It becomes less useful when the market indicators themselves are decidedly moving up. The approach succeeds by wider market perceptions, not fact. It ends when the actual pricing dynamics take over. In between, a few traders make some bucks by manipulating the margins. There will be little opportunity for this device to operate again as we move into the summer volatility.

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