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    Sam's Exchange: Are We Being ‘Mushroomed’ with Oil Prices?

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    You know what it is to treat someone like a mushroom? Keep them in the dark and feed them bullshit. This is the best way to grow a mushroom and is an Australian colloquialism used when we want to keep the truth from someone, and in fact feed them disinformation.

    You know what it is to treat someone like a mushroom? Keep them in the dark and feed them bullshit. This is the best way to grow a mushroom and is an Australian colloquialism used when we want to keep the truth from someone, and in fact feed them disinformation.

    We are told that the demand for oil is high, and that the Iranian sanctions and the threat of war with Iran are real, and that these factors are keeping the oil price high. However, what if the truth were different, and the world is awash with oil, and in fact oil prices are being kept high by the collusion of oil producers and investment banks? Would this constitute being mushroomed?

    What we are seeing now, through transactions taking place opaquely between producers and investment banks with funds to sell, is a two tier oil market. There are those who know where the icebergs are, i.e. a couple of producers and investment banks - and those who are on the Titanic, the investors.

    The two major centers for trading in oil market contracts are in London and New York, and they are ICE (Inter-Continental Exchange) and the Chicago Mercantile Exchange's NYMEX (New York Mercantile Exchange) division. But on neither of these markets can financial participants actually buy and sell physical crude oil and set the price.

    These exchanges may best be described as betting shops or casinos, and moreover as casinos where the roulette wheel has about 10 zeroes favoring the house. In the context of mushrooming, ICE and NYMEX provide a cloud of disinformation about the true state of the oil market which is taking place out of sight among consenting adults.

    The world is awash with oil at the moment. Iran, for example, has so much spare crude oil above ground they literally cannot give it away, despite their best efforts. The obvious reason would be because of the sanctions on Iranian oil; however, the sanctions are yet to affect the current contracts in place. This does not explain why nearly one in three of Iran’s oil tankers is being used for above ground storage at the moment. This is almost unprecedented. Iran is offering, unofficially of course, heavily discounted oil to buyers, in an effort to move some of this excess stock.

    Then there is the curious case of an oil tanker returning recently to Valdez, Alaska, with more than 300,000 barrels of crude oil still in its cargo. Two weeks earlier the ship had set sail with 1.2 million barrels of oil on board for a refinery on the west coast of America, only to find that the storage tanks at the refinery were so full, they could not take the full shipment, and so 300,000 barrels were duly shipped home again. Valdez still supplies a large portion of the West Coast of America’s oil. For the last two years, stocks for crude oil in the United States have been at all-time highs, while more recently West Coast refineries are decreasing their production as demand shrinks. Yet oil prices remain high?

    Probably the greatest responsibility for the “mushrooming ”of the oil price rests with Saudi Arabia which will shortly for the second time this year charter a fleet of over a dozen VLCC tankers to ship more than 20 million extra barrels of oil to the United States. Saudi Arabia’s above-ground storage facilities are already overflowing, as are the USA’s private facilities.

    The only logical place for an extra 40 million barrels of Saudi oil to go would be into the USA's huge underground Strategic Reserve facilities, where they would neatly fill the gap left by last year's release of oil in response to the Libyan crisis.

    The purpose of these strategic reserves is as a response to an emergency, for example, if there was a supply disruption to the United States, then the government could use some of the strategic reserve to fill the gap. Alternatively, they can be used to reduce the price of energy for Americans in times of high oil prices by releasing more stock onto the market. Maybe President Barack Obama is thinking of doing this ahead of the presidential elections later this year?

    It is generally believed that oil companies trade oil more than 22 times between extracting it from the ground and selling it to the end user, but in fact that's just paper oil changing hands, and has no effect on the price.

    What is affecting the price has been the ability of producers to literally sell ownership of oil in the ground or in storage to investors and thereby support the price with money borrowed from what Goldman Sachs calls “Muppet” investors.

    So the average man on the street is kept in a state of constant threat that the supply of oil is incredibly tight and the threat of war is so real, that they are prepared to pay excessive prices for energy. Energy is a finite resource, but what we are seeing is the intentional mispricing of energy on a cosmic scale by one or two oil producers - facilitated by investment banks - and at the expense of general consumers and investors.

    Oil should be visibly priced at the point at which economic interest changes rather than when cargoes of oil are actually delivered. This would effectively create real-time pricing of oil rather than the current petro dollar system of price rigging of oil when actual cargoes are delivered.

    If you control the cargoes, which the producers do, then you control the price of the oil and that means that on the casino markets of ICE and NYMEX, the house always wins.

    So, are we being “mushroomed” with the price of oil? Absolutely, and that’s no bull!

    The views expressed in this article are the author's and do not necessarily represent those of RIA Novosti.

    Current markets are anything but global or integrated.  What if we had a paradigm shift in the way we think and transact when doing business with each other?  Balanced global trade can only occur if we have transparent, accessible and efficient markets.  We are on the cusp of achieving this, although most people cannot see it.  Sam’s Exchange aims to give its readers a clearer view and a platform for discussion.  Markets, trade and economics are in fact nothing more than the result of our thoughts and actions expressed in numbers, not the reverse.

    Sam Barden is founding Partner of SBI Markets DMCC, a Dubai-registered commodities trading and advisory company.  Barden has worked in the global financial markets for more than 17 years in Europe, Russia and the Middle East.  He has advised and executed strategic transactions for both the government and private sector, in particular in energy and commodity markets, advising various energy producing nations on their strategic market developments and interaction.  He holds a degree in economics and finance from Victoria University, Melbourne, Australia.

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