Why did Oil suddenly skyrocket?

maratikus Wrote: ------------------------------------------------------- > weakening dollar … Yep- the dollar hit the lowest level against the Euro since it’s inception in 1999

I buy the short squeeze argument, pressure on the dollar, maybe even some optimism that the plan might stave off a depression, but how is oil a “safe haven”?

I think the safe haven status comes from viewing oil similarly to gold, i.e. safer than cash following high inflation as it will ostensibly have a similar real value in X years. Arguably, this real value will increase as supplies are drained, but that’s another branch of this argument. Anyone look at the strip following close? Never seen anything like that, and it owes a lot to Oct closing up $16 while Nov and onwards were only up in the $5-$6 range. No idea how Nov will open tomorrow, or where it will head, barring major news, but it’ll definitely have everyone’s attention.

I’d buy the oil as a safe haven argument well before I’d buy the gold as a safe haven argument.

Here’s another theory: While everyone knows the U.S. government is looking to bail Wall Street banks, few people realize that it’s also bailing out speculative oil and commodities traders in the process, fueling a sharp rise in energy prices. Lehman Brothers (nyse: LEH - news - people ) and AIG (nyse: AIG - news - people ) held enormous trading positions in commodities markets. If those positions had been liquidated suddenly, the price of everything from wheat to oil would have collapsed. The Commodity Futures Trading Commission, the main regulator of U.S. commodity markets, allowed Wall Street’s investment banks and trading companies to take control of massive positions in commodities markets called swaps held by Lehman Brothers and AIG. The result: Oil prices spiked by a whopping $16 per barrel on Monday, the largest single-day rise in oil prices ever. The entire article is here: http://www.forbes.com/energy/2008/09/23/energy-oil-washington-biz-cx_wp_0923energy.html?feed=rss_business_energy

Or everyone was short oil and needed to roll/close out. Simplest solution usually the right one.

So yesterday everyone closed out their positions and oil jumped significantly, then they all decided to immediately sell and thus oil dropped today? Is that right?

russian oligarchs … putin asked ordered them to pump oil up … !!! anybody read stratfor here …

short squeeze could be result of desperate liquidation of short positions in expiring contract. The positions were not rolled over - prices spiked only in expiring contracts afaik.

The “spike” yesterday was in the October Crude contract (which expired yesterday). Today everyone is looking at November Crude which did not spike yesterday. Yesterday’s October Crude contract soared and touched $130 around 2 pm. At the same time, the November Crude contract traded around $110. The move in October Crude was technical: Most traders roll their positions to the next month one week ahead of expiration. Someone with a large short position in October Crude did not get their roll executed before yesterday AND they wanted to roll their position instead of letting it expire (expiration would force them to deliver physical crude oil). Unfortunately for that trader, open interest in October Crude was very low yesterday afternoon, so their need to buy back October Crude was met with a lack of sellers. Normally, oil producers will fill the void for trading sellers (or a lack of open interest) in these circumstances, because producers actually have the oil for physical delivery. Due to the recent storms in the Gulf, the inventory of crude available from producers for October delivery is limited, so selling from producers was also limited. The net effect was one buyer that really needed to buy, and a lack of sellers.

Thanks daviskr, that was a great explanation.