How Naive Are Oil Traders?
I do not pay much attention to day-to-day fluctuations in market prices for stocks, bonds, or commodities. Nonetheless, just by reading the regular news over the last several months, it has been difficult to miss the movement of oil prices. Much of the political news coverage focuses on gasoline prices--because apparently Americans who are largely unconcerned about an authoritarian government that scapegoats and persecutes immigrants, deploys the tools of government to enrich the president and persecute his critics, and cripples the government's ability to respond to natural disasters, public health crises, and other urgent problems, will be moved to object to its unlawful use of military force if that makes it more expensive to fill up their gas tanks and purchase other items affected by higher energy costs.
Because gas prices move more or less in tandem with market oil prices, the news coverage also frequently includes reports of those market prices going up or down. Those prices remain higher since Iran responded to the attacks by the United States and Israel by closing the Strait of Hormuz, which is sensible enough, but I'm interested in the interim fluctuations we've seen over the last several months in response to successive bouts of optimism and pessimism spurred by, respectively, an announcement (usually by President Trump) that an agreement to re-open the Strait is imminent and either a contrary announcement (usually by Iran) or renewed fighting.
With the assistance of Claude (and thus the risk that the output is a hallucination notwithstanding my having spot-checked it), I've created a little graphic to show the shifts:
The details are not especially important. The key point is that oil prices have repeatedly fallen based on announcements of a supposedly imminent deal, only to increase again when it becomes clear that Trump was . . . how to put this? . . . full of shit. The question is why. Commodities markets are supposed to be efficient, so the movement of prices in response to announcements of an imminent deal implies that such announcements provide genuinely useful information, when they pretty clearly don't. What's going on?
One possibility is that markets are not in fact efficient. There is a ton of evidence for this possibility--that is, against the hypothesis that financial markets (including commodities markets) are perfectly efficient. But I doubt that the general inefficiency of commodities markets in capturing all information fully explains the phenomenon we see illustrated above.
What we are observing is a kind of naïveté among enough oil traders to affect market prices. And to be clear, that must mean a lot of such traders, because a small number of traders who naively believe what Trump claims about an imminent deal cannot move markets. More savvy investors would see these MAGA-traders selling oil futures on news of an imminent deal and take advantage of these fools by buying low, thereby driving the price back up. All of that should happen so quickly as not to register in daily closing prices.
The good news here is that over time, the price movements appear to get smaller, so we're seeing some combination of fewer people being taken in by Trump and those who do take him seriously giving less weight to his statements. The mystery is that we're seeing anybody give any weight to Trump's claims. One wonders whether the same oil traders who see Trump posting on TruthSocial that an Iran deal is imminent and immediately sell their oil contracts also think that any day now Trump's "concepts of a plan" for a terrific Obamacare replacement will morph into a full plan and be announced in detail.
Postscript: In the foregoing, I have referred to "efficient" financial markets. As readers of this blog may recall, Professor Buchanan's academic work (including some of it co-authored with me) contends that "efficiency" is an incoherent concept because an allocation of resources is only efficient or inefficient relative to some arbitrarily specified baseline. I am not saying otherwise here. The notion of efficiency in financial markets is more limited: it means that prices on financial markets perfectly reflect all available information relevant to predicting future returns--so that no one can outperform the market. This is known as the efficient capital markets hypothesis (although it has been advanced with respect to all financial markets, including commodities markets, and not just those for capital assets).
-- Michael C. Dorf