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Blame Wall Street for $135 Oil on Wrong-Way Betting

May 22 (Bloomberg) -- Oil's rally to a record above $135 a barrel came as traders bought crude to cover wrong-way bets that prices would decline, according to data from the New York Mercantile Exchange.

The number of outstanding futures contracts, known as open interest, fell 8.1 percent in a week to 1.36 million at the same time that prices rose 2.6 percent, the data show. Falling open interest and rising prices are signs that traders are buying to exit so-called short positions that would profit if oil fell, and lose money as they rose.

``In a market like today, which is trending higher while open interest is falling, it's a sign that money is moving out of the market,'' said Stephen Schork, president of Schork Group Inc. in Villanova, Pennsylvania. Open interest in Nymex crude futures peaked this year at 1.5 million on March 13.

Hehe, speculators were betting that prices would go down, and as they scramble to limit their losses, they push the prices further up - which means that the prices initially went up despite speculation...

Crude for delivery in December 2016 ended yesterday at $142.09 a barrel, signaling investors anticipate prices will gain for years. Some traders speculate oil will reach $200 this year. The price of a December 2008 option contract that allows the holder to buy 1,000 barrels of crude at $200 each jumped 67 percent in three days to $1.72 a barrel yesterday on the Nymex.

U.S. oil executives told Congress yesterday that prices should be between $35 and $90 a barrel. John Hofmeister, president of Shell Oil Co., the Houston-based subsidiary of Royal Dutch Shell Plc, pegged the proper range ``somewhere between $35 and $65 a barrel.''

$1.72 to hedge oneself agaisnt $200 oil. Seems still pretty cheap to me...

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Thu May 22nd, 2008 at 12:38:42 PM EST

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