3 Feb 20 @ 10:06am by Matt Smith in Crude Oil, Economy, Global Energy, Natural Gas, Random

Someone Is Always Making Money Somewhere

Regardless of whether a market is moving up or down, there is always someone making money somewhere. There are various examples every day – be it a billionaire selling a stock short (i.e., Herbalife) or a company selling a meal short on ingredients (i.e., horsemeat economics). Some methods are legitimate, and some are not. But one thing is for sure…energy markets are by no means immune to such collusion. 

The natural gas market is coming under increased scrutiny, as price movement ahead of the main event of the week – the weekly storage report – appears to be being manipulated by high-frequency trading (HFT). The below illustration from last weekend’s Wall Street Journal highlights how this is done, causing regulators now to conduct ‘more than just the routine oversight and surveillance’.

High-frequency trading is nothing new to financial markets, but it is new to the natural gas market. It has also spawned some wonderfully inventive names to describe the pre-storage report shenanigans. The best term by far has to be ‘banging the beehive’, which is where a flood of orders is sent to trigger a huge price swing immediately before the data is released.

Other strategies include ‘spoofing’ and the ‘Boston zapper’. Regardless of how comical these names are, however, this creation of ‘synthetic momentum’ is market manipulation and is being investigated accordingly.

Next up, we take a look at gasoline prices, which have now risen for a wallet-whooping 34 consecutive days, according to the AAA. There are a number of reasons to explain why gasoline prices are now at a record for the time of year, with the omission of the one which makes most logical sense…higher demand.

The rise is due to an amalgam of reasons, including elevated oil prices, refinery repairs, seasonal maintenance, and the impending switch to the more expensive summer blend. There is further bad news ahead, as prices will likely continue to show seasonal strength to peak in the coming months, ahead of higher demand from the impending arrival of driving season in May:

So who is making money here?  The breakdown for the price of gasoline is something like this: 10% for refining costs, 14% in federal and state taxes, 8% for distribution and marketing, with the rest made up by the price of crude oil (68%). Gas stations earn less than $0.05 per gallon.

Meanwhile, higher energy costs continue to increasingly impact consumer spending. Gasoline last year equated to a record $2,900 of spending per US household, or just under 4% of income before taxes. Rising global demand for oil may be the ultimate culprit for higher gasoline prices, and given that the US is the largest global consumer, leaves the US consumer as the ultimate victim.

But in the midst of all of this talk of money-making, herein lies the counter-punch. I featured an old friend – an artist called Pete Root – in burrito bites about a year and a half ago. He replicated New York City with staples; it was really cool.

Tragically he died last week, you may well have seen the story in the news. Pete and his partner were the antithesis of money-making, cycling around the world and making memories instead. Their story (hark, this video short is amazing), or how their story has gone viral, encapsulates their spirit, far outweighing any amount of money or profits from a trade. Something to consider when we sweat the small stuff.

3 Comments on this post:

  1. Rob says:

    Speaking of “unusual” things affecting the market, check out this link, Matt.
    http://www.marketwatch.com/story/oil-sees-choppy-trade-ahead-of-inventory-data-2013-02-20

    Note the 5th and 6th paragraphs. What’s really going on with crude prices?

  2. Matt Smith says:

    Hey Rob – always good to hear from you. The below link shows how a market participant suddenly dumped a large position this morning, causing the market to tumble lower. Whether a forced sale or a strategic unwinding of a position, it has certainly reversed recent bullish sentiment:

    http://www.nanex.net/aqck2/4118.html

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