If you want to stick it to speculators, the best way to do it is to wait until sentiment is extreme, then hike margins right before bearish supply data. That is precisely what has happened.

I discussed collapsing demand on May 6 in(please see Oil Consumption Demand Destruction vs. Speculative Futures Positions.

CME Doubles Daily Price Limits

Today we see Oil Drops Below $100 as U.S. Supplies Surge

Oil fell below $100 a barrel in New York and gasoline tumbled the most in more than two years after an Energy Department report showed that U.S. supplies surged and fuel demand slipped.

Crude dropped as much as 5.2 percent after the department said stockpiles jumped 3.78 million barrels to 370.3 million last week. Gasoline inventories unexpectedly increased 1.28 million barrels to 205.8 million, the first gain in 12 weeks. Total fuel consumption declined 0.9 percent to 18.2 million barrels a day, the lowest level since June 2009.

“We have a tremendous glut,” said Todd Horwitz, chief strategist at Adam Mesh Trading Group in New York. “The rally in commodities appears to be over. We’re going to see prices work their way lower in coming weeks.”

Crude oil for June delivery fell $5.13, or 4.9 percent, to $98.75 a barrel at 2:17 p.m. on the New York Mercantile Exchange. The contract slipped as much as $5.43 to $98.45. Prices are up 29 percent from a year ago.

Gasoline for June delivery dropped 25.9 cents, or 7.7 percent, to $3.1207 a gallon in New York. The contract declined as much as 9 percent, the biggest fall since Feb. 2, 2009.

CME Group Inc. suspended trading of gasoline, crude and heating oil on the Nymex for five minutes starting at 12:06 p.m., said Laurie Bischel, a spokeswoman for the exchange in Chicago. Trading was stopped after June-delivery gasoline fell 25 cents, the daily limit. Limits were widened to 50 cents a gallon for gasoline and heating oil and $20 a barrel for crude.

Double Limits on Heels of Margin Hikes

The Wall Street Journal reports Crude Tumbles As CME Margin Hike Spooks Investors

Crude futures fell sharply in Asia Tuesday as traders responded bearishly to an announcement by CME Group Inc. (CME) of an increase in margin requirements for oil contracts, which could force speculators and small retail investors to close out positions.

On the New York Mercantile Exchange, light, sweet crude futures for delivery in June traded at $100.37 a barrel at 0600 GMT, down $2.18 in the Globex electronic session. June Brent crude on London’s ICE Futures exchange fell $1.93 to $113.97 a barrel.

The decline followed a sharp 5.5% upward rebound in Nymex crude overnight, as flooding and problems at a Mississippi refinery helped the market to claw back some of the previous week’s losses.

The benchmark West Texas Intermediate light, sweet crude oil futures contract maintenance margins will increase from $5,000/contract to $6,250/contract effective at the close of business Tuesday, May 10, Chris Grams at CME Group told Dow Jones in an email. The move was CME’s third increase in 2011.

US Oil Production Up

Please consider the Short-Term Energy Outlook, May 2011 from US energy Information.

click on chart for sharper image

That is one of ten pages of charts in the PDF.

My friend Tim Wallace writes

Fascinating, eh? Domestic production is UP, as imports are also down. The other side of the USA usage puzzle that no one seems to notice is the increase in exports of finished product since the peak consumption year of 2007. As we have consumed less internally we have exported more.

Looking at the data, in the first 4 months of peak supply – Jan ’08, Feb-Apr ’07, we averaged 21,128,000 barrels PER DAY in distillates supply. We exported an average of 1,205,000 barrels of distillate production per day, for a net of 19,923,000,000 used in the USA.

This year we have averaged 19,008,000 barrels per day in distillates supply, while exporting an average of 2,213,000 barrels per day, for a net 16,795,000 barrels per day used in the USA. This is 3,128,000 LESS used in the USA per day than in the peak time periods, or around 15.7% roughly.

Other factors coming into play bring the number to the 13.3% down my charts currently show.

Speculation a Symptom of Larger Problem

It might feel good to go after speculators, but speculation is only a symptom of the problem.

The real problem is central bank policy (Fed and Central Bank of China) that is far too loose. In 2006, loose money fostered housing speculation, now it fosters commodities speculation.

Mike “Mish” Shedlock
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