Several years ago I spoke about this on television; I asked why a gallon of gas was over $3.50 at the pump. The answer has more to do with hedge fund managers than it does with the oil and gas industry. Here’s why.
Hedge managers who need to boost earnings at the end of the quarter play a game called imaginary supply and demand. They buy and sell (sell short) to manipulate the price of an underlying commodity. So, for oil, as in this example, the price of a barrel can go from $95 to $150 dollars very quickly.
You also see them do this in the summer. Think about this: have you ever wondered why a hurricane can hit the Gulf and the price at the pump goes up almost overnight? Because of imaginary supply and demand. What really happens is that it would take about a month and a half to see a price increase at the pump from a natural disaster if the game was played fairly. Oil typically has to be pumped out of the ground, transported to a refinery and then distributed to various wholesalers as middle men. If the chain breaks, it take a while for the full effects to be felt all the way to the pump.
Wall Street, long ago, figured out a way around this by hyper inflating the price structure to make significant gains.
Now comes a different and more complex form of computerized trading called high-frequency trading. The way the markets are structured now, the average investor on Main Street can NOT ever have an advantage absent insider trading. The game is rigged. The prices of stocks are imaginary. Small investors will always have to buy high and sell low. Katsuyama calls out the big boys for what they are: crooks.