Tuesday, July 15, 2008

Oil speculation update

Per Yahoo's AP story, today "Oil prices plummet over $6 amid economic fears"...this is attributed in part as follows..."Analysts also attributed the sell-off to Thursday's expiration of options contracts, which tend to increase volatility, and to computers programed to automatically sell once prices reach certain thresholds"...based on Hussman's commentary in my previous post, spot demand is pretty weak in the US, and given that a large number of expiring contracts were held by speculators(which constitute fictitious demand which crowded out actual end user demand) there is suddenly extra spot supply. Given weak demand and extra supply you get an obvious explanation for the drop in price at option expiration.

"The drop, which eclipsed last Tuesday's slide of $5.33, marked the biggest decline in dollar terms since the Gulf War."

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