Saudi Arabia and the oil bank

…The only way to manipulate commodity prices is through the ability to secure supply. In the oil markets, funds, whether ETFs or hedge funds, are categorically unable to make or take delivery of the underlying commodity, and are therefore unable to manipulate the price. It is only “end user” producers and distributors, or the few traders with the capability to make and take delivery, who are in a position to manipulate oil prices, and in order to do so they require funding, or leverage.

I believe that it is macro manipulation by oil producers, funded by cheap money from investors, which has been the principal reason for recent movements in the oil price. The advantage producers have over oil traders is that producers are able to store their oil in the ground for free.

More than 60% of global oil production is priced against the price of the United Kingdom’s North Sea Brent, Forties, Oseberg, Ekofisk (BFOE) quality crude oil. Most of the rest is priced against the US West Texas Intermediate (WTI) price, but in the past 10 years, the WTI price has increasingly become the tail on the BFOE dog through “arbitrage” trading.

In order to support the global oil price, it would be necessary to secure supply through acquiring sufficient amounts of BFOE crude oil lifted each month. By the standards of the relatively few major market participants involved in the market, this is easily achievable if the funding is available.

As the credit crunch unfolded from late 2007, fund money began to pour into existing and new ETFs.

Asia Times