Making a Buck off War Rhetoric: Longs vs. Shorts -- Realpolitik, Economics and the War on Iraq, Part 1
MSI,
This article makes a lot of sense to me. As usual, Al Martin is either enjoying one of the best fantasy lives in America, or else he's completely blown past the corporate media smoke screens. Probably some combination of the two would be my guess. It is at least an interesting speculation.......about speculation. --Ray
almartinraw.com
Longs vs. Shorts:
Realpolitik, Economics and the War on Iraq
(Sept. 23) The bizarre spectacle of Hillary Clinton and Brent Scowcroft appearing together on television to debate the pros and cons of waging war on Iraq is more significant than most people imagine. Hillary Clinton argued that the United States should attack, while Brent Scowcroft called for "restraint." The reason why Scowcroft and others of the old crusty hard Bushonian right are now turning against a war in Iraq is because, through secret offshore trading accounts, they've gone short oil.
In the oil business, it is commonly presumed that in $30 oil there is a war premium of $10 per barrel. Consequently there are people who are increasingly tempted to get short oil. People are betting that this thing with Iraq can be resolved without a huge invasion.
Remember the last time we invaded, oil spiked up $11 a barrel, but it only stayed there for four or five days. That involved a massive invasion of Iraq with more than half a million troops. Whatever military action we take against Iraq now would not be as extensive as it was before. It would not involve as many troops. It would be an intensive type of warfare. The threat of the disruption would be substantially less than it was before, so even if oil spiked up temporarily, it is a likelihood that the price of oil is going to come down.
You are starting to see some of the Smart Republican Money get short long-term oil contracts. But the reasons they're exerting their influence in going to war with Iraq is that they don't want to carry short positions through a spike. That means they would have to come up with a lot more money, margin money.
If they carry short positions into a war with Iraq, it would force the price of oil into a knee-jerk spike, when some of the more speculative shorts get out. The longs will be looking for every last penny they can get, but the big money shorts would be the Smart Money Republicans. Even if the price of oil spiked up five or six bucks, they're going to have to shell out a lot of money out of their own pockets to hold onto these short positions, if you make the presumption that even if you go to war in Iraq, unlike the last time, the price of oil is already relatively high prior to any military action.
Therefore the feeling is that this might mitigate any spike action because there is an awful lot of longs in the oil market (professional trading longs) which are just sticking in there, just waiting. They're going to sell into a spike the minute it happens.
A lot of the open interest in the Nynex contracts would suggest that you've got a big intermediate term trading long position built into the market and a growing short position.
The longs understand that $30 per barrel oil is not sustainable -- unless there's a war in Iraq. It is economically not sustainable. There has to be a war in Iraq for that price to be sustained and even increased.
What these longs are looking for is that they likely will support the market and keep it up around $30 a barrel. They whip up enough war rumors so that it frightens out the speculative shorts, which becomes a floor underneath the market.
What everyone is looking for is a five or six-dollar war spike on the first day or two and then all the longs are going to get out.
What you're going to see is a sharp spike up and a sharp spike down because as those longs get out, there's not going to be any buyers underneath the market.
It's an unusual situation. By that I mean that you have a strong long position and now you have an increasingly strong short position so it becomes a real battle between well-financed long positions and well-financed short positions.
Since both long and short positions are expecting the same thing to happen, that is, a five, six, or as much as eight dollar, one day, two day or three day spike in the price of oil, you have all the longs looking to get out on that spike. And you've got all the shorts looking to increase their short position on that spike. In other words, they then become sellers as well.
The only difference is that they're selling short, but it's the same selling pressure. So now you have the two big money factions -- both turning sellers on any spike. And that's why the shorts feel comfortable in being short in a nervous market because they know that there's a huge long position that's looking to get out and that they themselves, meaning the shorts, are going to take the opportunity of any spike to average up their short position by increasing their selling, i.e. hammering the bids.
Look at this thing six months or twelve months down the line. When oil breaks, there's going to be an awful lot of money made on the short side of the oil market.
All I know about the short faction (the Scowcroft faction) is that they're short, and that it's some sort of shadowy offshore Republican trading partnership kind of deal. George Bush Sr. is involved in it, and so is James Baker, Scowcroft - literally the whole cast of characters of the old Hard Right. They do a lot of business in Nymex oil.
And the proponents of the long faction and going into Iraq? The reason why the Republicans have so much support to go into Iraq is because the big oil companies have been shelling out a lot of money, supporting the idea of going to war in Iraq. They've been giving unusually heavy contributions to both Republican and Democratic parties.
Oil companies are behind a lot of this pro-war pro Iraq invasion advertising we're beginning to see. They just try to hide it under names like "World Resource Council" or "World Hydrocarbon Energy Think Tank," to gussy it up.
After the invasion of Iraq the first time, oil spiked up as much as $16 so that by the fourth day before it broke, oil spiked up to $41- $42 a barrel. After that, it absolutely fell apart.
In late '91 and early '92, Republican fortunes were made on the short side of the oil market. And this is simply what they're looking to do again. The only thing that is different is that you see a bigger trading short position than there probably should be at this time, given that the market is still likely to go against the shorts.
The reason why is that the shorts feel more comfortable. It's because the price is so high that you have a big speculative long position in the market. Anytime there is a big speculative long position in the market, no matter what the fundamental risks are to the shorts, the psychological risks to the shorts are reduced because they know that both they and the longs (the other side of the contracts, in other words) are both looking to do the same thing in a spike.
On the other hand, if we do not go into Iraq and work it out diplomatically or we assassinate Saddam Hussein or whatever, then the price of oil is coming down.
The big speculative long position is going to be looking to liquidate in a hurry. And the shorts are going to be right there to pound the bids. What happens is the shorts sneak in the back door -- when they know there's a huge speculative long position that is every bit as nervous as the shorts are because the price of oil is unusually high.
Therefore the longs are just as nervous as the shorts and they are going to be just as quick "to pull the trigger," meaning get out of their position. The shorts actually have more bases covered than the longs do.
If there is war in Iraq, you're going to see that war premium bleed out of the market. When that begins to happen and oil gets down to $29 or $28 particularly about $26.50 or $27, the longs are going to panic and there will be panic selling. Then what will happen is that the shorts will sneak in the back door and hammer all of the bids.
As the shorts are hammering the bids, increasing their short positions, the oil market, like any other commodity-based market, can go into an absolute frenzied free-fall.
If the longs have to come up with margin calls, and they know the only reason that's been holding up the price of oil is the reason that no longer exists, there is no bottom.
Let's put it this way -- if everyone comes to the same conclusion that there is not going to be a war in Iraq, the price of oil will go from $30 a barrel to $20 a barrel in five days.
This is the way everything works. All markets are based on manipulation. There is no such thing as pure capitalism. We, particularly the Republicans, try to pretend that there is such a thing as pure capitalism and pure free enterprise. There isn't and there never has been. The free market concept - all it ever has been is a "concept."
Markets are not free. Those who manipulate them ultimately direct the direction of all markets. The price or value of an underlying commodity or asset ahs little to do with the availability of that asset or what that asset is really worth on a day to day basis.
Oil right now isn't worth any more than $20 a barrel. The demand/supply picture is such that if it were a pure free market, oil would be about $20 a barrel. That's all its worth, but the reason it's trading at $30 a barrel is manipulation.
The entire free market concept is just a convenient fiction. That's all it's ever been. Its just pabulum for the masses to make the masses actually believe that markets work the way they've been taught they work.
<Continues downstream........> |
