Oil Can

The commodities market is also stratified three ways:

  1. The business fundamentals, the most basic supply demand question. E.g. How much of the product is being bought and sold. Is there a deficit of product in the market, a glut? Are inventories rising or falling? How much is consumption slowing down?

  2. The narratives competing among the traders. These narratives are often speculative and probabilistic. On a most basic level, these are conversations about whether price will go up or down, over what timetable, and by how much . There is no “true” price for oil, and so like a political contest, rhetoric moves the market. A commodity market that should be (and historically has been with few exceptions) regulated simply by supply and demand becomes a meta-argument about narrative when billions of dollars are on the line for the hedge funds and other traders making sophisticated bets using borrowed money (i.e. leverage) E.g. If OPEC says they will cut back supply by X million barrels per day, and there is 80% compliance among OPEC members, we would foresee U.S. inventories for April dropping by 800,000 barrels (a business fundamental), thereby raising barrel prices by $X each.

  3. Buy/Sell pressure among the traders and “market movers”. Ultimately, commodity price moves based upon the size, number, and price of the bid (buy) or ask (sell) lots for a given financial instrument such as a commodity future. Smaller traders tend to push at the outskirts of a price range, and market movers (called thus because they move larger blocks of shares with more money) can either stabilize or destabilize price by propping up price points or bursting through them. E.g. If one has a great argument for why oil should go up, and the fundamentals are also good, but Trading Company XYZ decides to unload all their oil futures for tax purposes at the end of the year, price will likely retrench, at least temporarily.

Rules of the Market:

  1. The fundamentals always win. This is obvious, but cannot be overstated. Business fundamentals always overcome hype. E.g. In 2000, I owned Be Incorporated, a no-revenue tech company whose operating platform kernel I believed would one day overtake Apple’s. Even as price continued to decline to the single digits in 2001, I read the stock’s chatrooms faithfully for positive news that a turnaround would occur and send its price shooting. I realized later that the upbeat talk was some kind of lingering epiphenomenon from the stock’s brighter days, and had no indication of what might actually happen to its price. Even to the very end, I believed the stock would turnaround eventually, and because I believed in the company itself, the stock was a safe investment. I didn’t realize at the time that there were market forces external to my faith in their product.

  2. There is no such thing as the long haul. A certain family member of mine is a strong adherent of the Peter Lynchesque investment philosophy that one should try to buy “good” companies with solid leadership, and over the long haul, this basket of diversified U.S. stocks will beat any other specialized fund or investing strategy. This has been the tune sung by brokers, and has become the justification for the investment of worker’s retirement wealth into stocks, and not without good reason [see long-term DJIA chart].

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