Economic Rebalancing

The global economy is horribly out of balance, with the United States going deeper into debt each year as a result of a huge trade gap. This blog describes the process of global economic rebalancing. If you have any comments or questions about the posts here, please don't hesitate to use the comments section.

Monday, September 18, 2006

Energy Price Fluctuations and Hedge Fund Implosions

Oil and Natural Gas prices are bouncing all over the place and I think a good part of it has to do with games being played in the financial markets.
A couple of large hedge funds have blown up from the natural gas price fluctuations. MotherRock was too short and Amaranth was too long and steep moves wiped them out.

Given the nature of hedge fund manager compensation, the manager has no incentive to play it safe when he's down a lot on the year. He may as well increase the size of his bets hoping to swing back into positive territory so he can score some big fees. If the manager gets hit really hard, then he closes out his positions so that he can pay back his bankers and gives the remaining funds back to investors (often some poor pension plan).

On Wall Street news events and fundamentals are playing less and less of a roll in moving prices as large players leverage up to squeeze whatever paper profits they can out of the market. Since year end bonuses depend on paper profits those are as good as any as far as the traders are concerned.

Oil spiked up around the time BP announced they were shutting down a major pipeline in Alaska. Since then US crude inventories have been dropping, but the price has been dropping sharply in spite of that.
I suspect some oil traders have been wiped out along the way, as they are forced to unwind their positions at the bottom. Meanwhile, commercials have been unwinding their short positions at a tidy profit:

It looks like more traders and the hedge fund investors they represent have been taken for a ride.

Long term, energy prices will probably have to rise substantially in dollar terms if Americans are going to reduce their energy consumption and unwind the trade gap. In the meantime anything can happen to energy prices and volatility in these markets seems to be on the rise for now.

Links to this post:

Create a Link

<< Home