Tag Archives: guest posts

On The Egypt Situation & Implications For Oil Markets, By @PaperBarrel

15 Feb

(This post was written last week, forgive the publishing delay –The Analyst)

I have been asked for the past week about possible risks to the Suez Canal as it’s a major a potential choke point for oil flows. According to the Energy Intelligence Agency as of November 2010 nearly 2 million barrels a day of petroleum traveled thought the canal . In the worst and highly unlikely  case – a closure of the canal – shippers of oil would be forced to send tankers around Africa causing tanker charter rates to increase and add around ten dollars to the price of NYMEX Light Sweet Crude. ICE Brent oil would likely be affected more to the upside due to a lack of land storage and other market dynamics that effect the basis between NYMEX Light Sweet that I will write about another time.

I, for one believe Mubarak himself represented the greatest threat to the security of the canal. According to major media sources, Egyptian military generals of to threatened to tear off their uniforms and join protesters in the street against Mubarak unless he gave his resignation today. Many retail traders get caught in the hype and do not know about the Suez canal & it’s control by the Egyptian military. The Egyptian Army has always maintained a large security presence around the canal because of its importance to the economic well-being as well as the international relevance of Egypt.

Had Mubarak not resigned, the senior military officials would have joined protesters in the street and the officers and grunts who had even less love for Mubarak then their superiors would have almost certainly abandoned their posts. Had you had the military abandon their posts guarding the canal that would have been the most dangerous risk for the canal. Terrorists would have looked at an unguarded canal as the opportunity of a lifetime, now that Mubarak has left office and the military is in control this is out of the cards.

Looking to the future, in my humble opinion, no matter whoever ends up in control of Egypt when power is hopefully tuned to civilian rule would have to keep the canal open as closing it would be more of pain in the ass for oil shippers then a real crisis.

The greatest question that should be on the minds of energy traders now is the implication this revolution in Egypt will have in/for the other oil-producing nations in the region. The argument could be made that with the events in Egypt playing out as they have OPEC and non-OPEC producers would likely increase production to buy political good-will from their citizens through handouts. An increase in production would obviously would provide some relief in oil prices in the coming months.

Large energy traders are already arbitraging from March to April due to a market condition known as contango. Contango is simple to understand: if the nearest delivery month future contract price is below the later delivery months the market is in contango. Because April is $3.72 then in March they will buy taking physical delivery for March and sell April futures against it. When delivery is taken the energy trader buys the oil then pays for it to be stored at a cost of $1.35 a month per barrel then as they hold a short position to hedge against price declines. The trader collects the difference between the $3.72 and $1.35 and making $ 2.37 before the financing costs to pay for the oil and fees for delivery.

The major problem is retail traders who have futures accounts can’t do this trade because of the financing requirements and expertise in the physical oil market required, but I thought I would share so you could get a understanding of what the energy traders do.

Paper Barrel has followed the energy markets since for over eight years. He has a bachelors degree in Political Science (focusing on International Security) with a minor in Economics. While obtaining his Bachelors degree he networked in the energy industry in New York. After reviving his degree he took a job as a commodities broker and passed the National Commodity Futures Exam Series 3 .Working as a commodity broker for a year he helped introduce small oil distributors to energy futures and Clearport products to meet hedging needs. Currently works to also broker physical JP54 Jet fuel and consult on hedging strategies.

He mainly focus on hedging energy.. If you are interested in more on energy market & derivatives issues you can follow him on twitter @paperbarrel if you have questions or feedback please email him: paperbarrel at gmail dot com.



ETF Mania, or: A Study of Herd Behavior, By @macrotradr

21 Jan

Nestled on page B11, in this weekend’s Wall Street Journal was an article, “Social” Funds Embrace Emerging Markets. One of the fads that’s irked me for some time is Socially Responsible Investing. Surely, that must go against the whole capitalist ethos, no?

What does Socially Responsible Investing even mean? And I don’t mean the wikipedia definition. I mean, you’ve got 30 secs to explain it to me……….. go!

Uh huh, thats what I figured.  Sounds good though, right?  All you need is a prospectus plastered with an image of giggling children frollicking in a field of daisies, under a sun filled sky et voila!

This whole ETF and theme-based fund frenzy is really starting to get out of control.

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Guest Post: On the Experience of Switching to the Evo from the iPhone

20 Jan

I gave up my iPhone for this. Read below to learn why!

The_Anal_yst posted a query the other day, wondering if anyone knew a single person who switched to Sprint from another carrier within the last few years. When I let him know that I had switched from AT&T’s iPhone 3g to Sprint’s Evo recently, he invited me to share my experience with the readership.

Some Background: I live and work in a suburb outside of Sacramento, California. UC Davis, if you know where that is. I’d been on AT&T with my family since it was Cingular in the 90s. My family is still on AT&T and most of my friends are as well. And I was, honestly, very happy with AT&T and the iPhone itself, as are all of my friends and family that have them. I rarely, if ever, had dropped calls; my signal was always very good, usually even reaching into the elevator inside the concrete building in which I work. For the two years I had my iPhone, it was rarely out of reach and was easily my favorite object.

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Guest Post: Managing the War Between Hedgers and Liquidity Providers, by @eradke

2 Nov

The following is from the perspective of a futures trader but can be applied to all markets.  Being a trader in 2008 was great; being an investor was not so great.  Today it is not that forgiving for either side.  I was naïve to think that 2008 was not going to last forever.   I knew where the money was coming from, the retirement accounts of my fellow citizens of the World.  You can make a moral judgment if you want, but it was my job to provide liquidity.  I could have lost it just as easy.

In early 2009 I saw the markets changing.  It blew out a lot of people.  I walked away for six months.  It was depressing, people I saw every day just disappeared.  The biggest problem with trading is that you can never really spend the money.  For an independent trader, you are the business.  What the average person sees as cost of living, it is our overhead.  Despite working with money every day most traders are not that good at managing it.  They look at as an income, something constant, when it is really is just a bonus check.  When the market changes, there is natural attrition.

The top of the food chain in markets are institutions, followed by professional traders, and lastly retail.  The first people to leave are the retail.  Retail does not like to lose money; they do not have the wherewithal to figure out why.  When retail goes away professional and institutional traders pick on the weakest traders.  Eliminating another class of market participant.  As the range becomes tighter and volatility slows the top professional traders leave.  How motivated would you be if you had to go to work making 5% of your normal pay and it cost you the same amount to get to work?

When everyone is making money there are no problems.  But when the pie gets smaller, participants fight for their survival.  They become animals fighting for what seems like their last meal.  They run out of money, they feel the game is rigged, or they feel there is no upside in taking the necessary risks.  If participants stay away for an extended period of time the mechanics of the market change.  When this happens, the market cannot perform its function.  Price discovery, raising capital and hedging.

The easiest way to get people back in the market is for the markets to rally.  That is why none of the underlying fundamentals matter, at least right now.  Rallying is the only way for the market to repair itself.  The problem is when it does rally those that were long will use the new money to get out.  If there is not more new money we will break again.  A market is as proportionately functional as the willingness and amount of participants in said market.  The most efficient way to get participants back is a feeling they are missing out, ie rallying.  This is also expensive.

The other way and most destructive way to keep liquidity providers in the markets is by “volatility jumping”.  As we saw with the equity index markets this is destructive and it is the largest market.  It causes the price of commodities to rise, oil, corn, meats, etc.  It can be done with less money because there are less people trying to make it efficient.   Instead of taking money from retirements they take it from the businesses providing goods.  In most cases it is passed on to consumers in the form of higher prices.  That will end badly.

The CME Group, NYSE, etc are making dangerous assumptions.   Much like the market assumed housing prices would continue to rise forever; we are assuming the market is going to continue to have liquidity providers and hedgers. People like me, take advantage of inefficiencies.  We make the market efficient, when the risks are close to the rewards.  We watch otherwise.

The biggest change from the past is that the major American exchanges are now corporations.  Their motivation is to profit, they do this by increasing volume.  It is their fiduciary responsibility.  There has been a shift of advantages, in terms of commission breaks, to retail investors.  They are sacrificing quantity for quality.  A constant stream of one night stands and sport fucking.  As I mentioned before retail leaves first.   A problem for efficient markets.

I recently attended the World of Opportunity Event at the CME Group.  The panel consisted of Scot Warren, Managing Director, Equity Index Products & Services — CME Group, Tim Gits, Senior Vice President and Head of Sell Side Relations — Eurex, Raj Chopra, Director, Corporate Development — ICE and Marco Bianchi, Senior Vice President & Head of Business Development — NYSE Liffe.  I was curious to see where they thought the new opportunities were/are.

All four panelist were really good, Scot Warren was an exceptionally great communicator.  One of the topics they failed to talk about is hedger and liquidity provider relations.  This is a real problem.  I am sure they are addressing the problem but to my knowledge not publically.

I am always considering who is on the other side of my trade.  What time frame are they using?  Are they retail, another professional, or an institution?  Are they accumulating a position or are they scalping?  I am beginning to wonder if there will always be someone.

By Eli Radke



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