The Dynamics of Oil Prices

Sometimes, price action in financial markets really is a consequence of news in the real world. Cause: Hurricane Katrina takes out a huge amount of refinery capacity. Effect: Oil prices rise. Simple. But journalists aren’t having such an easy time of it with Gustav. Oil futures are hitting new lows in the $105 range, well below where they were trading before anybody even knew a hurricane was coming. Can hurricanes cause oil prices to fall?

Surely not, that would be silly. On the other hand, it wouldn’t be much sillier than the stated reason for today’s price action, fears about "slowing global economic growth". After all, there’s been precisely zero news on that front over the past few days.

Sam Jones has a smarter take on the dynamics of oil prices: when trades get crowded, they can unwind quite violently. And in recent weeks the short financials/long commodities position has been very popular. If a lot of people are scrambling to get out of that trade at the same time, that’s much more likely to explain plunging oil prices than vague notions of traders speculating on Chinese demand growth.

Or maybe it’s just that hurricanes in the Gulf always send oil prices towards $100. Seems about as plausible as anything else.

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