Thursday, May 22, 2008

Blame Wall Street for $135 Oil on Wrong-Way Betting

I am utterly baffled about the rise of oil: so quick, so steep. This might be one explanation, but only a partial one.

Oil's rally to a record above $135 a barrel came as traders bought crude to cover wrong-way bets that prices would decline, according to data from the New York Mercantile Exchange.

The bet that crude prices would fall didn't pan out.

"It is not a growing market, it is a shrinking market in terms of open interest," said Olivier Jakob, managing director of Petromatrix GmbH in Zug, Switzerland. "It is also facilitating the move upward."

Is it pessimism, or rank speculation?

Crude for delivery in December 2016 ended yesterday at $142.09 a barrel, signaling investors anticipate prices will gain for years. Some traders speculate oil will reach $200 this year. The price of a December 2008 option contract that allows the holder to buy 1,000 barrels of crude at $200 each jumped 67 percent in three days to $1.72 a barrel yesterday on the Nymex.

December 2016: 8 years from now.

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