WTI inventory Feb15An astonishing coup appears to have begun 10 days ago, in the last 45 minutes of trading in US oil markets.  Yet we still don’t know who master-minded it, or their full objectives.  .

What happened to oil prices?  Prices jumped 8% in the last 45 minutes of trading on Friday 30 January, taking Brent to $53/bbl and US WTI to $50/bbl.  And by Tuesday they had surged still higher, taking Brent to $59/bbl and WTI to $54/bbl.  This meant prices had risen 20% in just 2 days.

This would be astonishing at any time, in any major financial market.  But it is almost incredible in today’s oil market.

Prices have surged even as the US has been reporting record levels of oil inventory, as the chart shows.  Last week, they were the highest-ever seen since records began in 1982.  And US oil production of 9.2mbd is also at the highest level since records began in 1983.

Clearly the people who master-minded the coup knew what they were doing.

How did it all happen?  Traders were winding down at month-end, and leaving their offices early on the Friday afternoon ahead of the SuperBowl weekend.  A record 114 million Americans were planning to watch the American football final.  And large numbers were planning viewing parties for friends, family and colleagues.

Suddenly, a flood of “buy orders” appeared in the last 45 minutes of trading.  With trading volumes low, the buyers  concentrated their firepower and achieved spectacular results.  This was clever enough and, of course, entirely legal.

But even cleverer was the way that suddenly “a story” was created to explain why prices needed to go higher.  Most  people, after all, would think that an all-time record level in inventory meant the market was very weak – particularly as the peak was taking place in January, normally a major month for consumption.

Instead, a story appeared from nowhere that focused on the decline underway in the number of active drilling rigs in the USA.  This was spun to suggest it was, as the Wall Street Journal reported, “a sign that crude production may be starting to ebb“.

Who benefits from the surge?  The clear winners are the people who developed the concept for the coup and implemented it so effectively.  They obviously had deep pockets to fund their market raid, and also extensive knowledge of how to drive it higher in a matter of moments.  As Reuters reported on Friday:

People have only started paying attention to the oil rig count in the past week despite the fact they have been falling for weeks,” said Gene McGillian, analyst at Tradition Energy in Stamford, Connecticut. “I think the people really benefiting from these market gyrations are the high frequency traders (HFT) as volumes are really up.”

Creating “a story” around the rig count was critical, as it meant the HFT traders (who usually provide 50% or more of trading volume), had the necessary news feed for their algorithms to operate.  Their volume on a quiet Friday afternoon would overwhelm any trading done on the basis of supply/demand and inventory levels.

Of course, the other people who benefit are oil producers in the US and elsewhere.  Most of them will have active trading organisations either in-house, or on contract, in order to manage their sales.

What happens next?  We will find out this week.  If it was a group of traders, then they will likely step back, having made such a large gain in such a short space of time.  They would be foolish to stay in the market, and risk attention turning back to the dire state of the supply/demand balances.

But if it was one or more of the producers at work, then we will likely see further efforts to build on the momentum created.  They will need to widen ”the story” to suggest that the energy ”glut” reported by the International Energy Agency is now about to magically disappear.

Hopefully one of the major news media will follow-up and tell us what is really happening.

WEEKLY MARKET ROUND-UP
My weekly round-up of Benchmark prices since the Great Unwinding began is below, with ICIS pricing comments:

Benzene Europe, down 59%. “Some tentative upward momentum was seen from derivative markets, but there was still no cause for bullishness due to healthy availability in the region”
Brent crude oil, down 46%
PTA China, down 43%. ”Polyester demand weakened significantly in the latter half of the week”
Naphtha Europe, down 43%. “A prolonged strike at US refineries could drive up demand for crude and oil products in Europe although there is mixed reaction to the industrial action in the markets so far”
¥:$, down 16%
HDPE US export, down 26%. “Prices remained mostly stable during the week”
S&P 500 stock market index, up 5%