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specifically the IPE where a lot of game playing has gone on especially at the close in the past.

A real hedger doesn't lose.  say you wish to buy oil next month at $50 and that's where the future is trading.  You go buy your hedge.  Then come the day you want the physical oil you buy at noon and then sell his hedge off simultaneously (or just does an efp -- trades oil for futures) he at most loses the bid/ask.  No harm.

Some big sellers (say a Scandihooligan) sell large quantitiies of physical oil off of the IPE settles on a derivative basis.  That is, they use the settle to price a physical sale without going through the futures for most of the oil.  So another player(the buyer) can trash the settle with a much smaller quantity and gain a profit.  The problem is letting the other side have leverage.

there are easy solutions to the problem

  1.  Actually hedge.  Sell the oil on the exchange as they see fit and then take back futures on an EFP when they actually sell the oil

  2.  sell the oil fixed price and avoid the exchange all together.

But they won't.  They'd much rather piss and moan and blame manipulation than take responsibility.  So they price off of Platts (journalist "assessments" of the market based on trying to sort through the lies) or market settles.  And wonder why the settles get moved against them on an exchange with low volume and no physical delivery requirements.  Not to mention they try to sell to traders at real value + a few cents thinking their average oil is always worth more than average.
by HiD on Tue Mar 27th, 2007 at 05:10:33 AM EST
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