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More on the Mystery Decline

After nearly two weeks, the sudden decline in oil prices is still a mystery.

Prof. James Hamilton, the go-to expert on energy pricing, disparages the “Fat Finger” theory. (This is the shorthand insider term for a mistake).

For starters, look at the chart of the intra-day trading:

Prof. Hamilton explains two important things:

1) The fundamentals do not change that quickly; and
2) QE3 will definitely have an effect.

Here is his conclusion:

There are several channels by which QE3 may end up influencing the quantity of oil physically produced and consumed. A lower value for the U.S. dollar would mean a greater quantity demanded worldwide at a given dollar price of oil. A higher level of economic activity (the ultimate goal of QE3) would also boost demand for the physical product. And lower real interest rates may make it profitable to store more oil physically, leaving less available for the ultimate users of the product. So I would have expected QE3 overall to be one factor that could contribute to a higher dollar price for oil.

But any investors who have been assuming that QE3 will boost the price of oil for no reason other than the fact that other traders expect it to raise the price of oil may find themselves tripping painfully over the fat finger of reality.

John Kingston at Platts adds a very important point: The market did not immediately rebound! in the long history of erroneous trades, the market learns of the error and the price responds. Mistakes are costly. Since this was not the case, it suggests other explanations.

And finally……

Let’s not wait for the official verdict on this one. We are only now learning about an overnight mystery move in 2009.

It seems that the trader in question was drinking while trading!

While we cannot anticipate every twist of the markets, we do provide a helpful monthly perspective through our “Eyes on Energy” report. It has been pretty accurate. This is a no-cost, no obligation service. Just write to us at (main at gas-lock dot com).

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