Blame game, oil edition: ETFs, regulator failure, Wall Street fraud or Covid-19?

The epic 2020 oil crash is the unintended consequence of several factors converging for 30 years: regulatory failure, reckless central-bank money printing, and Wall Street fraud.

When central banks nationalize and continually meddle in markets, refusing to allow capitalism to be capitalism, bad things happen, and terrible unforeseen outcomes impact future generations.

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The central banks have manipulated and distorted asset prices for over a decade, ever since the 2008 financial crisis. Their meddling has destroyed the markets’ price-discovery mechanisms, which has resulted in massive debt, allowed trillions to pour into Ponzi stock buybacks and enabled outright fraud.

Earlier this month, Singapore’s biggest oil trader, Hin Leong Trading, imploded when all the banks mysteriously cut off its credit lines. No reason or explanation was given. Later, it appeared that accounting fraud was behind its almost $4 billion Ponzi scheme, and 23 international banks are on the hook. ABN AMRO was one of the first to file charges related to Hin Leong’s letters of credit.

In early March, oil prices collapsed 30 percent in one day, from $45 per barrel to $30. The decline was the most significant single price decline since the 1991 Gulf War. On Monday, West Texas Intermediate Oil (WTI) May futures contract prices dropped from around $23 down to a low of -$40 owing to delivery constraints. To be clear, that’s a difference of $63 or -273 percent.

There are many complex technical factors pushing oil prices lower – for example, the super contango between May, June and July futures, as well as the Covidiots who, for some reason, were buying into the United States Oil Fund’s exchange-traded fund (ETF) last week. Yes, COVID-19 has created an army of know-it-all day traders who will incur heavy losses during the coming depression.

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The 273 percent collapse may actually have been caused by "forced selling” by these idiots. A large hedge fund, bank, trading company (such as Hin Leong), or a combination of players blew up, and some mindless neophyte with no knowledge of how to trade futures was assigned the task of immediately closing out open futures positions to avoid further losses. So, they sold and sold and sold into a market that had very little liquidity and NO DEMAND or available storage, thus no possibility of delivery. As a result, all that prices could do was drop and, like Humpty Dumpty, they then had a great fall, and kept falling until they reached -$40.

Which brings us to the majestically titled United States Oil Fund ETF. USO has collapsed by 73 percent this year. Its general partner/sponsor is United States Commodity Funds LLC and it’s managed by Ray Allen. According to Bloomberg, USO owned 25 percent of the outstanding volume of May WTI oil futures contracts as of last week. If one party is allowed to own 25 percent of any futures contract, any buy order or sell order of that large a futures position will easily distort prices lower if selling, or higher if buying. It sets the table for price manipulation. The Commodity Futures Trading Commission and US Securities and Exchange Commission should conduct a thorough investigation into the large holdings of 25 percent by one counterparty and how ETFs selling 25 percent of any futures contract can massively distort prices – and they should do this right away!

Was USO responsible for the liquidity problem that magnified the other possible factors above? Its actions were definitely a contributory factor in this debacle, if not the entire cause. Should the US Securities and Exchange Commission and other regulators investigate? You bet. Will they? Unlikely, because fraud is never genuinely investigated on Wall Street. In fact, it’s enabled.

The examples above are the economic warning signs the buy-the-dip traders in the stock market failed to listen to. Washington DC’s feckless regulators have turned a blind eye to the manipulation of futures prices for years. And the regulators have ignored and enabled price manipulation by the protected class of bullion banks, which have all the while been blatantly fixing gold and silver futures contracts with impunity.

If you want to hear more about precious-metals price manipulation, feel free to send me a tweet. All of this price manipulation is about to change because it’s different this time.

We’re headed into a global depression, so demand for oil will drop off a cliff. The risk-reward trade on oil was $10 per barrel, which we easily traded through, but the ‘recovery’ from this depression will take years. So, hold on for dear life and look out below.