Time to Speculate on a Decline in Crude Oil?

Although there are likely a myriad of reasons the price of crude oil (USO-NYSE) has declined over the past week, it should be noted the sell-off began in earnest when the CFTC announced their investigation.

The CFTC has been a perennial short, but with their very survival at stake, they are rattling cages, starting in the agricultural pits:

The top U.S. commodity regulator will tighten rules for investors and index funds, including increased disclosure about holdings in agricultural markets, after farmers and lawmakers alleged speculators had inflated food prices.

The Commodity Futures Trading Commission, in an e-mailed statement, today called for more information from index traders and swaps dealers in the futures markets. The CFTC will curb exemptions on limits to speculative positions related to agricultural index trading, and plans to provide more detail on trading holdings starting next month. Bloomberg

Perhaps the move provides some clues of what is to come in the energy markets as well; Wall Street's rumor mill continues to point toward the physical storage and transportation logistics infrastructure as being of interest to regulators. And what in the world in going on with the oil inventory report?

The "bubble" word has been bandied about, but finding any one to go on the record predicting a correction is not easy; there is a lot of hedging going on, but most of it concerns rhetoric, not the actual hedging of the commodity:

Crude Oil looking a little dicey (USO-AMEX)

“Oil prices have been rising for almost a year on good news, bad news, or no news, a clear sign, in our opinion, of a bubble which we believe will burst eventually,” said Fadel Gheit, an analyst at Oppenheimer & Co., in New York, in a recent research note.

The rout might have begun, and while there could be many reasons why, the lack of bears might mean the fall could be particularly nasty.

If I am not mistaken Dennis Gartman will be on CNBC’s Fast Money tonight, apparently he is one of the few folks calling for a nasty correction in Texas Tea, and we will know more in a few hours if the influential analyst makes an appearance.

Although it sounds conspiratorial, but I continue to believe the ongoing probes are much more than mere CFTC investigations, and that the involvement of the Justice Department and FBI could shake up the commodity complex. It is early in the process, stay tuned. Perhaps I have been right for the wrong reasons, since Thursday, but the other potential probes have not gotten much traction yet, at least in the main stream media, besides a few quotes that Bloomberg was able to come up with:

“The U.S. Commodity Futures Commission, the watchdog over the nation’s commodities markets, said its investigation of oil trading will include looking at how the flow of crude may have been used to manipulate prices.”

“We’re particularly looking at storage and shipping and the ability that that might have in any attempted manipulation or manipulation scheme,” Commissioner Bart Chilton said today in a telephone interview. “That’s not all we’re looking at.”--Bloomberg, May 30th
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Update:

Dennis Gartman was indeed on Fast Money, and it added some color to the ongoing CFTC investigation.  Large traders who are not commercial participants are supposed to report their positions, which are then tallied and reported.  Traders have are apparently fudging the numbers, and speculative positions have never increased as you would expect during a runup, which always attracts hot money. They will reclassify how they account for hedgers, which has been a big charade. The recent decline in speculative open interest is relatively meaningless, the data was not correct to begin with. The head of both the NYMEX and ICE are trying to reassure regulators that hedgers are increasing as a percent of open interest, but clearly someone is liquidating fast and furious.

Gartman thinks oil could quickly decline $30 a barrel, and explains it all below:

June 3rd

Hank Paulson is also weighing in as well, but given his background at Goldman, perhaps the biggest energy trader on Wall Street, you might want at least question his stance, Treasury Secretary or not. T. Boone Pickens is calling the probes BS as well, but he is not exactly an uninterested party.

Finally, testimony today by Michael Greenberger in front of the Senate likely echoed his words from last week, where he claimed:

“The agency is likely to find that some investment banks, hedge funds and wealthy individuals manipulated futures prices. Traders may face prosecution if they reported false prices or made offsetting trades designed to manipulate the market.”

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Commodity Regulator to Boost Disclosure on Agriculture Markets
Bloomberg

Oil slides after Bernanke comments shore up dollar
AP

Commodity Trading Probes Target Wall Street, Organized Crime
1440 Wall Street

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The content contained in this blog represents the opinions of 1440 Wall Street. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author. No Position

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