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Is The Trend In Oil Changing? Paul Singer, Morgan Stanley, Raymond James Weigh In


Oil soared yesterday as talk deep inside hedge fund circles might be centering on Paul Singer’s charge that oil appears to have been manipulated to a low level.

Singer and hedge fund manager Carl Icahn have both noted that the differential between the relatively small supply adjustment of nearly 1.5 million barrels per day resulted in market price swings lower of dramatic proportion.

This previously noted anomaly came into sharp focus today as Paul Singer confirms previous supply and demand variables reverberated by unnatural forces not paying attention to basic math.

Markets mean revert after manipulation, as the SNB Swiss franc decision proves. In other words, if the markets are manipulated lower they will correct at some point. Free markets often exhibit such mean reversion characteristics and artificially controlling market forces typically backfires for very logical reasons.

oil-trend Paul Singer

Is Paul Singer’s acknowledgement of a mis-priced asset under the rise in price of oil?

Paul Singer’s acknowledgement regarding supply and demand could be a reason for the price rise, as also might be basic math conducted by Morgan Stanley and Raymond James.

In a research note today, Morgan Stanley’s Jamie Maddock and Martijn Rats said the price of oil has “collapased to an exceptionally low and likely unsustainable levels.”  Free market principles were also visible when Raymond James analysts Jeffrey Saut, who mused that the “The best cure for low prices is low prices.”  In other words, when free markets are allowed to operate without interference, the available supply in society is moderated by demand to create a balance in the financial universe.

The brokerage researchers didn’t get this cosmic, but what they did do is their old school math.  In fact, they may have math in the same old school that Paul Singer and Carl Icahn noted on January 23 :

In a CNBC interview today, Icahn addressed the thin blue line in oil: the magical 93 million per day consumption level. Calling the level very sensitive to a small differential in supply and demand, Icahn noted that roughly 1.5 million barrels per that tilted to oversupply resulted in a monumental 50 percent drop in the price of oil. When the oil supply and demand equation changes it can “wreck havoc,” he said.

It was here Icahn started to talk from the same book asPaul Singer, to a degree. While they might be drawing different conclusions, Icahn and Singer both noticed how a relatively small change in supply and demand shifts the pricing dynamic in dramatic fashion. Both notice the same oddity: When oil supply is only adjusted by 1.6 percent (1.5 million barrels of additional daily oil supply, using Icahn’s math) how is it the price of oil moves by 50 percent?

The Morgan Stanley report, for its part, made a prediction that might not come to pass. While noting what had become reasonably obvious, “the oil price decline overstates weakness in fundamentals,” the report then went on to say they “do not expect a sharp, near-term recovery.”  This last prediction remains to be seen, as certain signs of a trend are beginning to form.

While the price of oil may, on a fundamental basis, have found its point of mean reversion, algorithmic trend followers might not have caught the trend just yet as further trend indicator confirmation will be required. Momentum-based algorithmic commodity funds trading the oil market typically identify market price trends slightly after they have occurred while fundamental traders can generally connect discretionary dots in a way computers can’t.  For instance, a formula would likely have never factored in the Saudi political desire to achieve lower oil prices to sweat out competition and achieve foreign policy objectives. What they might detect, however, is the point when the trend has gained a degree of mainstream acceptance. That’s what managed futures trend following is about to a small degree.