Why a NYMEX Veteran is Getting Nervous about Oil

Being long oil is a very “crowded trade,” but who’s on the other side of that trade, and what do they know that speculators don’t?

“Crowded trade” is an infamous phenomenon. It’s when traders are all betting on the same direction of a trade. But each trade must have someone else betting on the opposite direction. So who is on the other side of a “crowded trade?” And what do they know that these traders don’t?

And what happens when the traders in the “crowded trade” are all looking for an exit, and suddenly the entire psychology changes?

Oil markets may have reached that point, according to Dan Dicker, a 25-year veteran of the New York Mercantile Exchange where he traded crude oil, natural gas, unleaded gasoline, and heating oil futures contracts. In Oil & Energy Insider, he writes:

When I was standing shoulder to shoulder with all those other oil day traders on the floor of the NYMEX, once in a while I’d get a very funny feeling. All of a sudden, I’d realize that the position I’d built up for myself was largely shared by just about everyone around the ring – and I also sensed that every other trader had had the exact same realization.

That’d be a wary moment – staring around at each other like combatants in an old west quick draw. We’d all still be convinced still in our positions, of course. We, collectively, could be entirely right on the coming trend and just need some patience to all make some money. But we also knew that the first guy to flinch in panic could set off a complete avalanche of traders suddenly becoming less convinced and trying to get out.

I called this “the porthole effect”: The boat might or might not be sinking, and you couldn’t tell through the small hole that was available to you; but if one guy jumped into the porthole trying to escape, he was likely to cause a mob scene of panicked passengers all fighting to squeeze out of that entirely too small of an exit.

This is kind of what I’m seeing in the oil market today.

While “there is a lot to like” in the oil markets, there are also other dynamics at work. The Numbers Report of Oil & Energy Insider spells out some of them.

OPEC members have cut more than 1 million barrels per day (mb/d) in production. That’s less than their promised cuts of 1.2 mb/d made during their November meeting. The deal is further being undermined by some OPEC members, including Nigeria and Libya which are exempt from the deal:

  • Libya has added 162,000 bpd since the deal was announced;
  • Nigeria has added 12,000 bpd but might add a lot more (see below);
  • Iran has brought back 110,000 bpd.

With those additions, net OPEC cuts are “closer to 800,000 bpd,” according to the Numbers Report. Plus, Libya and Nigeria are trying to restore more idled capacity.

Nigeria’s oil production plunged from 2.2 mb/d in 2015 to a low point of 1.4 mb/d in the summer of 2016 due to the attacks by militant groups on oil targets. Production has since edged up to only about 1.6 mb/d. The government is struggling to restore output. It has reinstated a program to pay militants to lay down their weapons. If this improves security, pipelines and export terminals could be repaired, and about 500,000 bpd could come back on line, which would crush much of the OPEC production cut.

The 11 non-OPEC oil producers, including Russia, that had agreed to cut production along with OPEC, have only delivered 40% of the promised cuts in January, according to two OPEC sources cited by Reuters on Friday. The sources in turn cited OPEC calculations based on data from the IEA. Part of the lack of compliance is said to be due to the phased implementation of the cuts by Russia.

In the US, the glut gets worse. Crude oil inventories surged by a near record 13.8 million barrels in the first week of February, after having already surged 29 million barrels in January – compared to the 10-year average increase of less than 13 million barrels.

Part of this surge is due to imports that had jumped as a result of OPEC ramping up production in December to front-run the production cuts starting in January.

At the same time, US gasoline stocks, at over 256 million barrels, have surged above the five-year average for this time of year.

And big money is flowing back into US oil production. Wall Street funded the shale oil boom. After oil prices had plunged, credit to the oil patch tightened and equity issuance collapsed. Now Wall Street is pouring money back into oil production.  In January alone, drillers and oilfield service companies raised $6.64 billion in 13 different equity offerings, with much of the funding flowing into the Permian Basin. And the credit tap has been reopened.

So the fundamentals are mixed, as they say. Dan Dicker sees it this way:

And yet, everyone speculating on the price of oil, just like when I was standing in the pit, seems to be all in one direction – LONG – and staring at each other just as we did, wondering who, if anyone, would flinch.

For an oil market that has really done fairly little since the start of the year, we do seem to be reaching a tipping point, when a fairly sizable move is about to come in the crude market – either recognizing the higher prices that the fundamentals of a rebalancing market and OPEC compliance will bring, or the blow up that comes with traders who are all in the same boat, diving into the porthole en masse.

The big question: Who is on the other side of that crowded trade? Who are the entities that are taking these bets? Dicker:

They’re domestic producers, about to file quarterly reports, who’ve seen a greater than $50 crude price as a respite for all those rigs they’ve been adding over the first quarter this year – about 200 or so.

In other words, US producers are hedging their production by selling futures. So Dicker asks, “Are they necessarily more right than the speculators?”

History – or at least my long history in futures – says that they almost always are. In a battle between pure money on one side and commercial physical assets that are the underlying “currency” of the bet, the commercials almost always come out on top.

And Dicker, who remains bullish on the oil sector over the longer term, concludes that “if history is the judge,” there could be “a fairly sizable, and imminent, move down.”

After 25 years of apathy, US trade relationships are suddenly under scrutiny. Read…  This Is How Out-Of-Whack US Trade Relationships Really Are

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  46 comments for “Why a NYMEX Veteran is Getting Nervous about Oil

  1. Taco says:

    Which one of these is the best way to short oil?

    List of Short Oil ETFs

    DDG – Short Oil & Gas ProShares ETF
    DNO – US Short Oil Fund
    DRIP – Direxion Daily S & P Oil and Gas Exploration and Production Bear 3X Shares ETF
    DUG – Ultra Short Oil & Gas ProShares ETF
    SCO – Ultra Short DJ-UBS Crude Oil ProShares ETF
    SOP – ProShares Ultra Short Oil & Gas Exploration & Production ETF
    List of Inverse Oil ETNs

    DTO – Power Shares DB Crude Oil Double Short ETN
    SZO – Power Shares DB Crude Oil Short ETN

  2. cdr says:

    He’s probably nervous because it’s an honest market now. Not too many years ago, higher and higher prices were the norm – partly due to supply and demand for the physical and partly because of demand for paper oil which biased the price higher, not lower. It was basically a fixed market yet completely honest.

    Today, supply and demand are the forces in play and the swagger of those who claim to be in the know is looking more and more phony.

    • robt says:

      It was never really a fixed market. OPEC periodically just priced according to spot. In the late ’70s, spot went crazy because everybody was stockpiling due to panic buying (remember we were going to run out of oil by 1987 according to the news media, who simply divided stated reserves by production rates?).
      Then the bottom fell out because there was no more storage capacity, coupled with producing countries selling excess to their quota under the table for lower prices.

    • Christopher spisak says:

      Honest market!!?? The oil market is the most rigged manipulated market of all.

      • CrazyCooter says:

        Does rigged mean controlled?



        • More [dangerous] mind games. The problem is in lack of a common/shared definition of a “free,” fair,” and transparent market.

          The overwhelming majority of the participants in the petroleum markets see it as “fair” because they follow the “rules,” and accepted behaviors of the “market,” while “outsiders,” which are the large majority of the population see a casino with marked cards, rigged wheels, etc.

          The question then is where did these “rules,” both overt (legal requirements) and tacit (trade customs) come from.

  3. robt says:

    Many loan agreements have a covenant requiring some degree of hedging, and prudent financial planning requires it anyway, so the oil producers always will hedge.
    I don’t believe the idea that the commercials are always ‘right’ is necessarily true – they deliver the goods, and like the stopped clock that’s right twice a day, they are cyclically ‘right’, just as the long specs are ‘right’ as long as prices are bid up – and as long as they can cash out and don’t get caught. Just as often as the commercials have been right, the specs have been right.
    If prices rise for a year and oil producers have still hedged, have they been ‘wrong’?
    Anyway, it does look from the charts that it’s time for a correction. Unless the specs do have their way, for a while longer, speculators being the way they are:

  4. bubbles everywhere says:

    oil prices rising at while demand continues to rapidly collapse,so you have to ask who’s proppin up these prices (guess),and will yet another massive fed induced bubble survive and will drillers be forced to dump the excess crude in the atlantic to bleed off the excess inventory glut

  5. RD Blakeslee says:

    “In a battle between pure money on one side and commercial physical assets that are the underlying “currency” of the bet, the commercials almost always come out on top.”

    That truth is just as prescient in personal finance as it is in commodities trading. For example: Long run, useful land is a better store of value than greenbacks.

    • nick kelly says:

      Always? Post 1929, cash wasn’t just King it was Emperor. Perfectly good hard assets especially land, went for pennies on the dollar. Nice houses in good locations were taken by cities for unpaid taxes.

      The prediction to beware of in this time or maybe any time, is the one that is certain. The point of The Black Swan by N. Taleb is that economic reality is inherently unpredictable.

  6. George McDuffee says:

    Most, if not all, of the oil problem can be traced back to the failure of the regulators to regulate so as to insure a reasonably free (and fair) market, by limiting speculation and market manipulation.

    Three specific suggestions (which will never adopted):

    * Central bank issuance of regulations requiring a much higher, possibly prohibitive, effective interest rates on crude oil related loans, particularly those relating to crude oil futures, and expansion of the crude oil supplies. This is critical in the era of N/ZIRP.

    * Reinstatement by the CFTC requiring some plausible connection with the volume of the commodity traded to minimize speculation. For example, the air lines are heavy users of petroleum based fuel so are justified in significant (jet A) hedging, while Chase bank uses some petroleum based products, for example heating oil, but should be limited in the amount of oil they can hedge.

    * Limit the volume of crude oil and other petroleum derived (e. g. gasoline, Jet A) futures traded to the actual physical volume of the commodity commercially available and/or consumed during the duration of the futures contract. It makes no sense to allow the hedging/sale of futures contracts for 100 million bbls of crude, when only 50 million bbls are projected to be available during the term of futures contract, and only 40 million bbls are projected to be consumed during the term of the futures contract. (figures are examples only, not real data) Indeed, a limit of 50% (or lower) of the projected commercially available supplies and/or consumption seems justified. The current futures markets, without such limits, are in the final analysis simply “asset” bubble generators and OTB sites.

    • robt says:

      Regulators defining a reasonably fair market is an exercise being currently conducted in Venezuela. The success of this program is regularly reported in the news.
      Central banks regulating crude oil supplies would be about as successful as their efforts to unilaterally define national interest rates irrespective of local conditions in different regions of the country, and maintain the value of their currencies, which in the case of the USA has meant depreciation of 98% since in inception of the Fed. We would end up with an ocean of oil at inflated prices, or none at any price.
      The only time in recent history that the distribution of gasoline was attempted to be controlled by the government, the ’70s, ended up with lineups as far as the eye could see, and distribution chaos. If the supply of gasoline is a function of the supply of oil, you could expect similar results with Central Bank/Politburo control of oil.
      Current markets provide one of the most perfect examples of price response and supply fulfillment.

      • RD Blakeslee says:

        “The only time in recent history that the distribution of gasoline was attempted to be controlled by the government, the ’70s, ended up with lineups as far as the eye could see, and distribution chaos.”


        My approach to such comedies was then, and is now, adaptation and avoidance. Back in those days, then as now, I lived in the country (an essential element!)

        Every so often, a tanker truck pulled up to a local gas station and unloaded. On a few of those occasions, I got in line with a trailer loaded with empty 55 gallon drums which I loaded with enough gas to last me for several months. They were stored in a shed so I was only bothered by the lines at lengthy intervals.

        • robt says:

          If you’re a fan of macabre humor, consider the case of John Denver, Mr Love Your Neighbour environmentalist, who filled up 10,000 gallon tanks on his estate during the gasoline shortage.
          Then years later he was killed when his micro-fuel-consumption plane ran out of gas.

      • George McDuffee says:

        While what you say is true, there is no need to regulate the production/distribution/sale of petroleum and its products (or any commodity for that matter), only the need to prevent mal allocation of capital into an obvious asset bubble, and the conversion (subversion?) of a useful commodity market into a casino with marked cards, rigged roulette wheels and fixed slot machines.

        • robt says:

          Yes, there is no need to regulate production and distribution of any commodity.
          Misallocation and malinvestment corrects itself periodically.

      • nick kelly says:

        The ‘attempt to control gasoline distribution’ was a result of an emergency resulting from the Arab embargo of oil to the US following the 1974 Arab- Israeli War.
        The US government didn’t create the shortage.

        BTW: that was when inflation really took off. It wasn’t when Nixon took the US off the gold standard in 1971 although that laid the foundation.
        You could still put one coin. a quarter, in a coke machine in 1973.
        That ended two years later.

        • robt says:

          The temporary tightening of supply would have been better handled by the market, the companies, than the government. Yes, the government did involve itself in the distribution, and made a mess of it, a comedy of errors, and a testament to the failure of central control of anything.
          Taking the US dollar off gold convertibility between nations was a symptom of inflation not the cause, just as consumer price increases were a symptom of inflation, not the cause. The run on US gold by other nations, especially France and Germany, was because the settlement price of gold was price-fixed at 35 dollars for decades, while the world was flooded with dollars – that was the cause, after years of war, and ‘Great Society’ spending.
          A slightly earlier symptom of inflation was the shortage of coins in Canada and the States prior to and concomitant with the removal of silver in the coinage, Gresham’s Law in action. Stores were short of coins and would ask you for exact change.
          What was amusing is that one of the reasons given by the government was that all the coins were being used in vending machines, thus the shortage, but of course the real reason was that the valued silver coins were being hoarded and melted. They can still be bought today, as ‘junk silver’ in bags, and follow the spot price of silver. A thousand dollars of pre-1968 coins sell for 14-15,000 dollars. They could be useful when the dollar is inflated to zero value.

      • nick kelly says:

        ‘Regulators defining a reasonably fair market is an exercise being currently conducted in Venezuela. The success of this program is regularly reported in the news.’


        You can fill an SUV for the price of a chocolate bar in Venezuela. The oil industry, like the rest of the economy is collapsing.

    • What you said :

      As a prepper and a stacker, I have long advocated some kind of connection between the paper futures market and the (i) annual metal production numbers and also (ii) some kind of real exposure to the metals ( such as hedges to offset REAL exposure ) by the paper issuers, whether long or short.

      Perhaps I am a gold bug, can’t say for sure. But I do resent a system that allows 100 times as much paper gold to be traded on the Crimex — as there is gold metal mined annually.

      Crimex is what I and my buddies call Comex, and it fits. Just like bankster fits in the investment banking world.


      • Indeed!

        My suggestions were not intended to somehow replace the “free market” with central planning, but to insure the “free market” remains honest and functions as a “free market.”

        As it stands, far too many people are gaming the system, to the point where it is becoming increasingly counter-productive and unstable/dangerous. As indicated, IMNSHO, much of this traces back to excessively low interest rates, which promotes speculation and mal “investment.”

        A rise in interest rates to more normal levels will cause massive problems for the asset bubbles and marginal activities which depend on cheap finance.

        We have worked our way into a severe “double bind” socioeconomic situation, with government debt [management] being even more sensitive to interest rates than the asset bubbles.

  7. Jack says:

    This is a really excellent article. Thanks Wolf. I love learning!

  8. OutLookingIn says:

    Soon to arrive on the futures scene?
    The new China based Oil Futures Contract (fully convertable) Trading Platform, priced in yuan.
    With Russia, Iran and Saudi Arabia now selling oil to China denominated in yuan, the other oil producers will be able to do the same. With the added bonus of being able to convert yuan to gold bullion on the Shanghai Gold Exchange.
    Those countries who must buy oil, but who produce gold will be able to do the same in reverse, by-passing their need to hold US dollars.
    What happens to all those unwanted dollars sloshing around the world? They come back home. The price of oil in US dollars may go far higher, but it won’t be gauged by the value of the oil, but by the eroding purchasing power of the US dollar. Inflation cometh. Big time.

  9. anthony hall says:

    $55 a barrel is daylight robbery. there is a global glut. Maersk Oil is in trouble. in the UK we are being Ripped at £1.20 a Litre; $10 a Gallon. in the US $4 a Gallon produces suicides. Big Oil is having a Big Feast. the Oil Market should be $30 a Barrel. it is totally Rigged.

    • nick kelly says:

      Check the tax on gas before you put ALL the blame on Big Oil (what other kind of oil would there be- it’s a capital intensive biz, not an Internet phenom)
      In Canada the gas stations owed by majors sometimes have the breakdown in a pie chart on the pumps. Here the gov grabs about a third.

    • robt says:

      The price of oil/gasoline in real terms today is half of what it was 100 years ago. And they had almost no taxes then. Without the government rip-off, gas in real terms would probably be 1/4 of what it was 100 years ago.

      • anthony hall says:

        when oil was $140 a barrel , UK petrol was £1.25 a litre. Now oil is $55 a barrel we are paying £1.20 a litre. the 5 Big Oil Majors are making a Killing at the Motorists expense.

    • tj says:

      Anthony, please check your calculator again: at 1.20/liter the equivalent in US$ is 6/gallon and not 10. (GBP-USD is 1.25)

    • chris Hauser says:

      anthony hall the trader?

      strikes me that oil producers have a lot of debt, and when they can make money to get above water, they produce, and that’s where we are now.

      long seems rickety, yep.

      but given that the world runs on oil, i have no interest in getting run over.

      but i like some of the companies that move the stuff around, and make the stuff into higher value stuff.

      that i am long.

  10. Mike R. says:

    Is there any DOUBT that the price of oil is a key factor in controlling inflation/deflation by the Central Banks? Same can be said for gold.

    This is why futures markets were never reformed to force only users of commodity to play the futures market in a significant way.

    GS and JPM are tasked with holding oil prices UP as high as possible for any suppply/demand imbalance. I’d say they have done a damn good job as the price of oil is much higher than I think supply/demand would normally support. Same for gasoline.

    We all know gold is manipulated lower through the futures market. Oil is the one key commodity that flows through almost every cost structure. They can’t let oil collapse. That would be hugely deflationary and devastating to the world economy.

  11. Cameron says:

    I’m not in the oil market but here are reasons why I believe being long oil makes sense:
    – Travel ban on mostly oil exporting muslim countries.
    – Iran ‘on notice’ almost immediately by the new administration.
    – The recent Yemeni raid by the US military.
    – The new Secretary of State is the former chairman and CEO of ExxonMobile.

    In my opinion short term volatilities aside oil is likely to move higher regardless of the demand.

  12. Maximus Minimus says:

    I noticed that all figures are for production as if the producing countries had zero consumption which is clearly not the case. Along with oil wealth comes hilife and in most cases runaway population growth. How much do the oil producers actually export?

  13. william says:

    Gold/oil price ratio trends are pointing to a falling gold price and/or rising oil price.

  14. Drillers output (extract) 90+ million barrels per day of some sort of greasy liquid. They need to output 100+ million barrels per day but can’t because the geology won’t let them. The difference between actual output and what’s needed represents a shortage.

    Shortages don’t allow prices to rise because shortages don’t make anyone richer. Instead, shortages represent a ‘tax’ credit, shifting it away from customers toward the drilling industry; this strands the customers.

    That’s what is underway right now: the drillers are pumping as much as they can and coming up short. The customers fall out of the market faster than the shortage propagates, which gives the appearance of a ‘glut’. The absence of customer borrowing strands the drillers which adversely affects output in a vicious cycle. Even without the geological constraints, the requirements of the industry suck credit out of the entire economy. Bottom line; the customers are broke … and they are taking the oil companies down with them.

    Why the broke? Because driving a car (x 1 billion cars) does not pay for the car or the fuel or the roads; what pays is loans. After 100+ years of non-remunerative cars and trillion$ in (bad) debt the credit system has broken down: the loans cannot be repaid.


    At this moment the entire oil industry is insolvent, including national players like Petrochina and Saudi Aramco.

    • chris Hauser says:

      jeez, that’s a gloomy gus.

      cars trucks buses trains planes ships going out of style? light and heat on the way out?


  15. AlphaRob says:

    From what I understand USO has built in contango where they have to account for the monthly rollover of contracts. So even if the price of oil were to remain constant USO would fall due to this decay. Is there an inverse oil ETF that can benefit from this? I think some of the inverse VIX ETFs can rise in a flat VIX environment.

  16. Yoshua says:

    Before peak oil high oil prices led to increasing production and low oil prices led to increasing consumption.

    After peak oil high oil prices lead to a cut in consumption and low oil prices lead to a cut in production.

    The oil market will never rebalance again. Saudi Arabia has already announced that they will continue to cut production for months and years.

    • chris Hauser says:


      palaces in the desert built on sand.

      sounds like vegas and palm springs.

  17. CrazyCooter says:

    I can’t see anything but collapsing demand on the horizon … pump all y’all want, refine all y’all want, ship all y’all want. Oil is directly tied to economic activity – long simply means y’all really think things are going uphill from here.


    I don’t trade (never will), but I would GTFO and wait for the downward momentum at this juncture.

    Besides, if you aren’t plugged into the white house (i.e. Trump), how the hell can you have chips on the table until policy is hitting the paper/streets? Biggest dice toss in history (unless you are an exempted insider – then you are backing up the trucks).

    Too many years of too much debasement to not avoid the “lets shed fat and find the value” phase of the business cycle. Maybe the North Cali dam meltdown will be the black swan that starts it all.



  18. George says:

    Is diversification of the energy grid worthwhile? Along with use of hybrid-powered vehicles and such?

    And not just from the consumer society p.o.v., industry of all kinds would benefit from increased competition among energy suppliers.

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