Quote from Random.Capital:
I think of it as a collection of binary triggers in the heads' of traders. The data the other poster just put up - it shows at the peak that demand outstripped supply by the slimmest of margins. Seems like nothing, but it is immensely significant - it forces a fundamental change in thought from "I can get it if I need it at some price" to "Holy **** I may not be able to get it at any price".
Those are two wildly different scenarios, and it seems to me volatility should be expected around such moments.
Demand exceeding supply doesn't equate to
fundamental demand exceeding
fundamental supply.
That's the disconnect, here.
Leverage must be considered and futures is an incredibly leveraged market. So how much of that demand was just speculative-long? And how much fundamental-long? Stats say 3% is traded on a fundamental basis alone.
Another take. If fundamental demand for oil was valid at 140$, how did it drop by 75% in 6 months? Suddenly, world demand was cut by
Three-Quarters? Or global reserves suddenly
Quadrupled???
Of course not. Buyers covered their asses, and open interest got light. Bid became thin, and the market collapsed.
Consider it another way. If oil contracts were traded on 0 margin, how many contracts could be bought or sold on any given day, by any given firm, compared to what they buy or sell now? 1 contract for every 100. Or 1 contract for every 50. Whatever their leverage is, right?
So how would that affect volatility? Not so much in sideways markets, but in one-way markets? Instead of 100 contracts at the bid, there's 1 contract. Now consider supply-side. Producers are still
selling the same volume. NOW ITS JUST THE BUYERS WHO CAN'T SWING AS MANY CONTRACTS BY A FACTOR OF 1/50th! What happens when demand withers and supply remains constant??? Thats how leverage is the arbiter of Bubble Economics. Leverage creates artificial demand. At least in futures.
