U.K. retail sales fell for a second month in a row in April as ailing housing prices, quick-time inflation and an all-around credit shortage crimped budgets. But oil is suffering no such fate. As consumers and government officials make themselves dizzy from the resultant flurry of infighting and finger-pointing, one news report crops up today claiming this is all because oil traders are covering shorts after wrongheaded bets. Of course. Why didn’t we think of that?

Oil's rally to a record above $135 a barrel came as traders bought crude to cover wrong-way bets that prices would decline, according to data from the New York Mercantile Exchange.

The number of outstanding futures contracts, known as open interest, fell 8.1 percent in a week to 1.36 million at the same time that prices rose 2.6 percent, the data show. Falling open interest and rising prices are signs that traders are buying to exit so-called short positions that would profit if oil fell, and lose money as they rose.

"In a market like today, which is trending higher while open interest is falling, it's a sign that money is moving out of the market," said Stephen Schork, president of Schork Group Inc. in Villanova, Pennsylvania. Open interest in Nymex crude futures peaked this year at 1.5 million on March 13.

Crude futures yesterday gained 3.3 percent to $133.17 a barrel for July delivery, the largest advance since May 2 on the Nymex, and touched a record $135.04 today. Oil rose after a government report showed U.S. inventories unexpectedly declined last week. Oil has more than doubled in the past year.

Open interest has been sliding for months, after the number of outstanding crude futures reached a record 1.58 million on July 16, 2007.

"It is not a growing market, it is a shrinking market in terms of open interest," said Olivier Jakob, managing director of Petromatrix Gmbh in Zug, Swizterland. "It is also facilitating the move upward."

Continue reading on Bloomberg.com

Next article » Ringgiting The Register

Previous article « Brevan Howard’s $1 Billion Float