Crude Oil Price Returns to Level of Pre-Margin Hike

on Zero Hedge:

Fed Fingers at Work

My thoughts exactly:

“I also suspect that this selloff was not an accident, that it was possibly orchestrated by the Fed acting behind the scenes. The surge in commodities was becoming an enormous problem for them. Bernanke said at his press conference that there was nothing the Fed could do about it. That was a preposterous statement and it should have rung bells. While the Fed did not overtly ‘do anything about it,’ there’s no way that this is just the invisible hand of the market at work, in my view.
“The question now is whether the Fed will be able to control or mitigate the process on the downside. I have my doubts. Markets can be manipulated up to a point. When they become unstable, the reactions can become self-feeding and uncontrollable. The powers that be may find that there are unintended consequences. This is where I would hope that technical analysis will come in handy." Lee Adler, Wall Street Examiner

Markets Rocked, Terrible Turmoil

Jobless claims rose for one of the largest disappointments to consensus in memory. Stocks taking a hit, despite that Goldman is trying to makes excuses and brush this miss aside. If it is all due to "seasonal adjustments", then why didn't the consensus take that into account also? And ECB President Trichet is sounding dovish, sending the Dollar higher and Euro plunging. Meanwhile, the True Finns party, who just took power, is saying that Greece must default and is refusing any more bailout to the EU.

Results:

Dollar -- much higher
Euro -- much lower
Stocks -- moderately lower

Crude oil -- significantly lower
Commodity -- significantly lower
Gold and silver -- significantly lower

Also: commodity margins have been raised by exchanges over and over again over the past few weeks and months. Silver has been raised four times in less than two weeks. One silver contract on May 9th will require a margin of about $38,000 -- for ONE contract!

Congress Vs. Speculators

Executives of the Chicago Mercantile Exchange recently testified before Congress that there could be terrible consequences to trying to force speculators out of the futures markets. Here are a few facts that were pointed out:

• The Nymex increased margins 140% during 2007, and the price of oil doubled. Clearly, increasing margins won't bring down the price of oil
• Speculators are already required to put up 33% larger margins than exchange members who take delivery
• Restraining capital in this country will only cause capital flight to other places in the world where there is capital freedom. If this country doesn't accept or attempts to restrict capital, there are numerous other global futures exchanges where speculators can send their capital -- and they will.
  
• Research indicates that long traders tend to be much better capitalized than short traders. Therefore, increasing margins will only restrict those who short the markets, thus sending prices higher, not lower.
  
• Speculators only come into the market because the fundamentals are supportive of higher prices. Speculators don't drive prices higher; they follow the market.
  

Be careful what you wish for, because you may make matters worse!

More on Margins

Here is an interesting article with a different angle on the margin increase:

Higher Margin Requirements Wont Dent Ag Bull

Positions Reduced Prior to USDA Report

The lazy trading has now begun to give way to moderate selling in the soybean market. Still, this controlled, significant selling is good for trading. Excellent trading conditions!

One of my favorite news websites is reporting that traders are reducing their positions in anticipation of the USDA crop acreage report next Monday, March 31. Perhaps the lower volume overnight and in early trading today is in anticipation of Monday's report.

They are also reporting that the new margin requirements begin at the end of today's trading session. They are also reporting that limits will increase tonight for both beans (new limit is 70 cents) and corn (limit expanded to 30 cents). This is significant, because it suggests that the increased margins have less to do with credit tightness, and more to do with expansion of limits to allow accurate market price disclosure. I see this as a very positive event, because accurate price discovery is beneficial for traders, I believe. The large number of limit up and limit down days in recent months have made it more difficult for day traders like me. The increased limits will help, I believe. Traders will be wise to take note of these developments.

Monday is also the end of both the month of March and the first quarter of 2008, so this may be a very busy day. This will probably have an impact on large fund trading, so strong, rapid movements should be expected.

The farmer strike in Argentine continues, lending more sales to American soybeans. This event is also significant because it underscores how geopolitical events can affect futures prices, and it emphasizes the supply concerns of tight global grain stocks.

Lastly, an emergency closure of the Mississippi above St. Louis is having an impact on cash sales, and thus, prices. This also tends to affect futures prices to some degree.

Deleveraging Hits the Commodities Markets

There will be more mayhem to come this morning when the grain markets reopen. CNBC has just reported that the Chicago Mercatile Exchange has just announced that they will significantly increase margin requirements this morning at the open of the markets. In some cases they will increase margin by as much as 50%(for corn) and 30% for soybeans. This is obviously the effect of the credit squeeze coming into the futures markets.

The price of gold has dropped precipitously on the news (but is now finding support and starting to rebound -- I'll probably buy), and so has oil. I expect the grains to be affected as well, but the grains markets are closed until 10:30 EST. This is likely to force many (not me, fortunately) to liquidate some of their positions in the commodities markets, driving commodity prices downward.

This has happened before. Just about two months ago, wheat margins suddenly increased, causing many traders to liquidate their positions and causing wheat prices to plunge. However, the effect was only temporary, since once these positions were unwound, wheat prices surged higher once again. I will seek to take advantage of this change both on the drop and again on the rebound, if events are similar this time. I suppose this provides an advantage to traders like me who don't overleverage their trading accounts. It will be another wild ride today, I suspect.

I can't help but wonder if this is possibly another machination to try to force commodity prices lower in an artificial manner. If so, it will only work temporarily, but the effect is likely to be significant on a short-term basis. We will know that there is some nefarious agenda behind it if margins on only food commodities are affected. It stock market index futures are unaffected, then we will know that this is part of a plan to artificially force food prices -- and thus, inflation -- down. One must certainly consider it questionable that with the extreme volatility in the stock markets over the past few months, margins on the stock index futures have not been raised significantly! This is no coincidence! If we see margins increased on treasuries also, this will be further evidence that manipulations of the financial markets are occurring in order to force money out of "safe" places (like treasuries, food commodities) and back into the stock market. Interestingly, the price of gold, after plunging initially, is rebounding vigorously.

It also teaches traders that they shouldn't use leverage excessively, because it could force them to liquidate positions and lose money. Stay out of debt, folks! Keep you margin at a healthy level, without excessive leverage! Especially during these uncertain times!

Mixed-(Up) Grains

Grain prices closed mixed today, with corn closing almost at its settlement price for yesterday, while soybeans closed near its lock limit down price, and wheat closed up for the day. The gradual downward slope of corn and soybean prices during the first half was difficult to trade early in the day, but profitable. Wheat continues to be the most volatile of grains, with recent margin changes reflecting the tremendous volatility. The wheat margin is now more than double the margin of soybeans. It may perhaps be more profitable for traders to leave wheat alone, and trade soybeans instead.

Wheat Prices Plunge to Lock Limit DOWN!

Wheat prices plunged overnight to lock limit down, after going lock limit UP 90 cents yesterday, and increasing 70 cents last night. Prices on wheat dropped more than $2.00 in overnight trading, after rising 70 cents in the first few minutes! I've never seen anything like this before in the futures markets!

Historical Precedent Just Two Weeks Ago?

This is very likely a short-term event, and may be a great buying opportunity, if history repeats itself. When the CME increased its lock limits from 30 cents to 60 cents 2 weeks ago, prices plunged because the increase in margins forced brokers to liquidate the long positions of many traders that no longer had account margins that were sufficiently large to cover their positions. This may have occurred again last night, since the CME increased the lock limit from 90 cents (just 30 cents 2 weeks ago) over the weekend to $1.35 -- more than doubling it in just two days! More forced selling has almost certainly occurred. I suspect prices may likely rebound within the next few days -- perhaps even today!

Grains Calm Down, Oil Surges

Fortunately, wheat and other grains prices appear to have calmed down and moderated somewhat mid-session today. It remains to be seen whether the Chicago Mercantile Exchange will return to the 30 cent daily lock limit, if prices remain stable. It would certainly be possible for renewed buying interest to push prices back toward the lock limit of $11.53, also. Both soybeans and corn are trading modestly down today. Here is the mid-session commentary taken verbatim from the CME website:

"Overflow support from Minneapolis is easing and sellers were active in Chicago and Kansas City and the markets quickly moved from sharply higher to sharply lower on the day for many contracts. A lack of new demand news and fears that the market is close to a top sparked increased selling pressures.... An increase in margin requirements added to the long liquidation trend."

Crude Oil Turmoil

Oil, on the other hand, has surged to higher prices, even following a significant jump in prices last Friday. Unfortunately, much of the world's crude oil rests in the hands of the world's dictators, and they have learned that they can talk the price of oil up by issuing threats. Hugo Chavez, Venezuela's socialist dictator, is creating more and more turmoil at home, confiscating more and more private property. His poll numbers are dropping, so he talks foolish rhetoric against the United States. This has driven the price of crude oil higher today.