Posted by iaa425 on Oilexco $ART board:

Just after Hurricane Ike, word on the street was that facilities had suffered little or no damage. The price dropped below $90 as the shorts piled in.

But, the refineries must have known quickly that the damage to the pipeline system was considerable and that GoM crude would be off line for quite a while. So, they bought those same futures intending to take delivery today.

Now, almost all futures contracts get settled in cash. Today, the refiners wanted to receive the crude. So, they elected to take delivery and the shorts had to find supply. They couldn't.

The shorts had to keep raising the bid price until they could find some company willing to sell crude, which Wednesday's EIA reports will show is at the lowest levels (in terms of days of supply) for decades.

Eventually, the shorts found supply at more than $25 above Friday's close. The contracts were settled and the November contract is back at $107 or so.

Interesting, in two respects. First, since physical demand is almost never asked for on futures contract, short squeezes rarely occur. But, when a commodity is in short supply, a short squeeze can occur - a lesson some hedge fund traders would have learned today. Second, many on this board and on Oildrum have been asking is the supply really that tight? The market answer is "you bet"! So tight that the holders of physical supplies wouldn't sell - even when offerred $25 more than last week's close.

Tomorrow, it's likely back to "ho hum" crude prices. But, since the shortage is real, it is unlikely that we will see sub $100 crude for a while.

JMHO

Paul