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Oil prices and hurricanes

The Gustav tropical storm has passed over without much damage. The re-insurers (among which Warren Buffet’s one was one of the biggest) got a sight of relief last night, after the tornado has faded right before they hit the shores near Louisiana. And at a sign, the price of oil has dropped abruptly below $110 a barrel, going more down from the record level established in June 2008 ($145 a barrel or so).
Of course, the oild price must answer to these potential disruptions in the supply. But why so much? Why should the oil price vary with 10% on such news, when the Gulf of Mexico supplies amount for less than 1% of the global oil supply?
We at do not think this is about the fact that oil companies are worried about disruptions in their US deliveries (after all, US has some of the lowest pump fuel prices in the world). We don’t think either that the oil companies are dependant on these supplies, since the only reason they built platforms in the Gulf of Mexico is that they are close to the Florida coast. And they don’t have any interest to buy or sell prices 10% higher – they make money out of the oil products, not from the oil itself.
Rather than this, it looks like market manipulation. has shown that in the past the oil was overtraded more than 7 times the actual volumes by the hedge funds. When this happens, of course the variations in the oil price are amplified, probably more than 7 times, since hedging usually requires to enter in a swap – more specifically to buy both a call and a put option, on different prices, on the same asset and with slightly different due dates. So any such event is a predictable cash cow – you buy a put option at a high prices which you execute right before the hurricane and sell a call option after the hurricane, at a much lower price. Or you buy oil contracts well in advance and sell them in the middle of the tornado’s pass over Louisiana, to make some good money. Every trade occurs of course without leaving the office – or even the computers of the smart Harvard guys who get paid more than $200k a year.
Then why bother with the supply of oil shrinking? Or with polution? Or with alternative sources of energy? After all, when you make such an awful amount of money after a hurricane, the morning after is much brighter. An you will have plenty of time to walk, not to drive your car around…
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