Comments on: Crude markets are being bullied by black swans Mon, 26 Sep 2016 03:26:00 +0000 hourly 1 By: randymiller Sat, 19 Mar 2011 15:14:37 +0000 It’s all about the psychology of the herd, the herd being retirement funds, hedge funds, “investors” who will not ever produce or use the commodity in the amounts they are buying. The real decision for the commodity fund manager is, “what will spook the herd next, and which way will they go?” In 2008 all it took was for some “expert” at Goldman Sachs or Morgan Stanley to say “with the situation in Nigeria, with the possibility of an Israeli attack prompting Iran to close the Straits of Hormuz, we believe oil will hit $200/bbl later this year.” The herd spooked and oil went to $140. Never mind that there never was an actual shortage of oil, the herd’s perception that there might be a shortage some time in the future caused them to spook. In 2008-2009, when the herd saw that the Israelis were not going to fly, and that a weakening economy would reduce demand, they spooked the other direction, liquidating their long positions as fast as they could, driving the price down to $35.

In 2011, corn and soybeans follow the price of oil up, on the bet that higher oil prices mean higher biofuel prices. Corn and soybeans are the feedstock for biofuels, and they are also feedgrains for livestock. Volatility in the feedgrains market keeps ranchers from expanding the stock cow herd. Fewer stock cows means a smaller beef supply down the road, and voila’ hamburger is at $3.50 per pound.

So the real information people need is this: What are the possibilities that action X can cause the herd to stampede? Las Vegas quotes odds on a given team winning the super bowl, with all kinds of side bets. Las Vegas needs to start betting on which way commodities prices will go. Vegas oddsmakers do their homework, and can be relied on a lot more than pundits. When you are trying to figure out who will win an approaching election, ignore the polls, and check the odds in Vegas. All the evidence shows they are far better at indicating who will win.

And if Vegas will start doing that, all those fund managers can just do their betting in Vegas (we should actually call them bettors now). The herd betting we have now creates volatility in commodities markets, volatility that does real damage to commodity producers and consumers, and in the end, the retail consumer. Make no mistake about it, real families suffer when gas is at $3.75, hamburger is at $3.50, and a box of corn flakes is twice what it should be.

Oil prices going up