Why the big spike in the price of oil?

Although there is some legitimate concern about ongoing outages due to Hurricane Ike and talk of reductions in production by the Saudis, the real cause of the big spike in the price of oil today is a combination of short-covering for rolling over to the new front-month contract and a belief that the U.S. dollar is about to fall off a cliff due to the massive amount of new Treasury debt needed to fund the "rescue" of Wall Street. Monday was the last trading day for the October NYMEX crude oil futures contract. Anybody holding a short position expecting further declines had a choice between taking delivery or buying out of their short position in the current front-month contract (October) and then selling the new front-month contract (November) short to continue to bet on future declines. There is usually unpredictable volatility on these monthly transitions, but the events of the past week have just added to the unpredictability. With all of the economic weakness, a lot of people were probably bettting on further oil declines and they just got caught in a classic short squeeze.

A third factor is that there may be a feeling that the old "long commodities, short the dollar" trade that worked so well earlier this year might be coming back in vogue if the dollar continues to slide due to new Treasury issuance.

A fourth factor is that wuth the financial stocks off limits to hedge fund shorting, beaten-down commodities were probably looking appealing again.

The real bottom line is that even though the October front-month contract closed at $120, the new front-month contract of November closed at only $109.7. It may take a couple of days for the new front-month contract to settle down. OTOH, if hedge funds (and the big banks) do seriously go after commodities again in a big way, the trend could become even more unpredictable.

Maybe the feeling is that since Congress will be so focused on the big "rescue", nobody will waste any breath complaining about evil speculators manipulating energy and commodities prices.

Meanwhile, the retail price of gasoline continues to decline off of the Ike Spike, down 1.8 cents yesterday alone and down 11.6 cents from the peak of the Ike Spike. In other words, trading demand by speculators exceeds actual real demand for the product.

-- Jack Krupansky