Nymex Raises Oil Margins

Even oil traders found an excuse to leave the market today. Crude closed at $131.35 and about $8 below Friday's high. There was a lot of news in the oil sector with something for traders on both sides of the market. Saudi Arabia announced a meeting on June 22nd for global producers, consumers and oil companies to discuss high oil prices and what to do about them. They also announced an immediate increase in production of 500,000 bpd to 9.45 million barrels per day. They said in addition to the 500 kbpd they would provide additional oil to anyone who needed it. They are clearly trying to retard high prices because they fear the consequences.

High prices cause demand destruction and lower demand causes much lower oil prices. They would rather demand and price remained constant. Prior periods of demand destruction took several years for demand to return to prior levels. That cost OPEC billions of dollars in income. Once you buy an economical car it cuts your consumption for years to come. They would rather you continue to drive your gas-guzzler with slightly lower prices.

The IEA cut demand growth estimates by 110,000 barrels per day in Q3. That may sound like a lot but you have to put it in perspective. That is a drop in GROWTH not demand. They expect demand to grow by 1.5% in Q3 to 86.34 mbpd up from 85.07 mbpd in 2007. That is still growth of 1.27 million barrels per day. They expect oil prices to average $132.67.

The EIA also cut its estimates for non-OPEC production growth to 310,000 bpd from 570,000 bpd in the April estimate. The EIA said output would be lower from Russia, Norway, Mexico and Brazil. For 2009 they expect demand to rise another 1.3 mbpd with non-OPEC output lagging with only a 1.1 mbpd gain. They warned that delays in projects could push that number lower and prices higher. They also said current spare capacity has fallen below 2 mbpd for the first time since 2006 as demand increases and supply declines in many countries.

The CFTC launched a taskforce to formally investigate the implications of large speculators. The 25-person board will make policy recommendations to the CFTC focusing on the role of and possible need to rein in index trading and trading on foreign exchanges. However, the fox is in the henhouse. Members of the board will include representatives from Morgan Stanley, Goldman Sachs and JP Morgan. They are some of the largest energy traders on the planet.

The Nymex announced yesterday that margin requirements for energy trading would increase as of the close of business on Tuesday. For the miNY crude contract that increase was roughly $500-$600 depending on the class of customer. Members were slightly lower than retail traders. For the majority of people trading the miNY crude contract the $600 increase in margin is not going to slow them down. For major players with thousands of the big contracts in their portfolio the $1000+ increase in margin could cause them to knock a few contracts off their position but I doubt it will be material. The decline in oil prices today was probably due to the Saudi meeting, news of the 500 kbpd increase in production and the unknown about how the margin requirements would impact open interest at today's close.

We also noticed that commercials were rolling their positions forward ahead of expiration on June 20th. The future contract months were down significantly less than the front month July contract. Today's close should be the decision point. As we move closer to the June-20th expiration we should see another spike like we saw in the May/June expiration cycle.  

Jim Brown

OptionInvestor.com