The Great Oil Scam: You are paying $100 a barrel for oil despite record high inventories

It is shenanigans like this which makes rational observers want to jump off buildings. The EIA today reported that oil inventories increased last week to a 21 year high for the month of May. Crude inventories now stand at 373.8 million barrels and are 10.78 million barrels higher than last year. This must be a negative for crude right, after all supply/demand fundamentals would suggest as much. Silly rabbit, we no longer have a real functioning market, but instead a HFT captive market fueled with unlimited liquidity courtesy of the Federal Reserve. The only person who gets stiffed with the bill is the American consumer.

But don't worry--money itself is not lost or made, it is simply transferred from perception to another as Gordon Gekko reminded us. Every dollar stolen from American consumers flows directly to a Wall Street trading desk. JP Morgan, according to sources is having a record year in their commodities division and on track to achieve their internal target of $1.2 billion, up from under $500 million last year. Just another back door bailout for the banks to help them pay record bonuses to their "top talent." Ironically, this irreplaceable top talent almost destroyed the US financial system in 2008, but then again everyone makes mistakes. However, when Wall Street makes a mistake, they get to tap the American taxpayers never ending wallet.

When discussing oil manipulation, one can not forgot the role played by the Federal Reserve, who acts as part enabler/part accessory to the crime. By reducing interest rates to 0%, the Fed acts as the crack dealer to Wall Street addicts, desperate for more free money. When real interest rates are negative adjusted for inflation, it gives the banks and speculators the incentive to bid up the price of hard assets. If you earn zero interest, why would you keep money in a bank account? Instead, you are practically forced to speculate in either the equity markets or in commodities.

To further the great oil manipulation, speculators need a good narrative in order to justify oil at $100, despite abundant oil supplies and a clear slowdown in the global economy. This is where Wall Street research comes in handy. Hundreds of analysts produce 1000's of research reports, which engineer bogus reasons for high oil prices. Furthermore, these research reports have to give readers a catalyst for even higher prices, regardless of true fundamentals. Here is an excerpt from Scotia which represents the typical Wall Street line to fuel more oil manipulation:
The price of crude oil is likely to remain elevated this year, and potentially next as well, in the $100-105/bbl range, a reflection of the continuing underlying strength of demand in the emerging market economies, in addition to the seemingly never-ending geopolitical tensions in the Middle East and North Africa.We estimate that this large and probably sustained cost increase has lowered global growth by about half a percentage point this year and next, though substitution effects and competitive pressures will limit the extent of the weakness in discretionary spending. Nevertheless, the risk lies on the side of even slower growth, and more so if a larger-than-expected inflationary pass-through triggers earlier and more central bank tightening than anticipated.
You see how this analysis makes absolutely no logical sense. One one hand prices should remain high or go slightly higher based on increased demand, while on the other hand global growth (e.g. China) is slowing. But logic is not necessary in order to continue the great oil price scam. All that is needed is a good narrative, which can be easily parroted by sheepish fund managers who will repeat the narrative over and over on CNBC and Bloomberg.

And what happens when the public starts to question the reason behind high oil prices? The US Congress, a subsidiary of the major Wall street banks, will subpoena the oil companies and criticize them for not  producing enough oil. Meanwhile, Wall Street's prop desks continue their manipulation with complete impunity. Only in America.

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1 comment:

  1. I can believe it oil will not go down much unless theirs a 1930's style depression.