Charles_Main
AR15 Owner
We Want Free Oil
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The speculators driving up the price of crude are people who cannot even take delivery of the crude. I watched some of the CSPAN committee meetings and it was pointed out that probably about 1% of those who drive the price up could actually take delivery. But I am convinced the committee will do nothing. Just be prepared to pay $4.50 oil soon if you aren't already.
Of course, here Masters is referring to a variety of commodities and not just oil. But I agree that a lot of money has been poured into the commodities futures market on a bet that commodity prices will increase. I have done it myself as I believe you have as well.
And up to until nearly a year ago, the commercial shorts (other than the expected hedgers) had been piling in against the commercial longs (which for some strange reason includes the index funds) ... until the supply/demand situation began tightening nearly 11 months ago. This is when the real price move took place (doubling to $140). And in that time period, the "speculators" (index funds) actually reduced their positions. So, I have a real problem with labeling the "speculators" (index funds) as evil here. Everything was dandy when the commercial shorts (who are the real "speculators" here) were making money off of the "speculators" (index funds). But once the physical market began to move away from them, they started covering (buying back their shorts) ... providing fuel for the rise in price. During this period of time, the "speculators" (index funds) actually had a negative (downward) impact on the price of oil as they were reducing their long positions.
I do not so much disagree with what Masters has to say. It is where Congress wants to take it (without providing the real truth) that I despise.
Yes, the investment banks as well as the producers are considered as commercial investors (commercials). The users (Ex. airline industry in the case of oil, refiners) are also considered commercials.
But the long-only index funds are also typically registered as commercials. The reasoning being that the long-only index funds get their exposure from the investment banks via the sale of swaps. In my opinion, both the investment banks (selling the oil swaps) and the long-only index funds should be considered as speculators according to the CFTC. Thus, I think they should be included in the non-commercial category. But they are not ... I think that either both need to be reported as commercials or both as non-commercials. You cannot split them.
I am with you. I am a believer that the futures market affects traders' behavior and thus the physical market. You see it in Gold and Silver all the time.
Whether or not we are really in an oil bubble (or a commodities bubble), I really do not know. There are so many variables here and many of them point towards higher prices. But it has also been a parabolic run. I don't think the right thing to do is to come in after the fact and saddle the long-index funds with artificial market correcting measures (intervention). If it really a bubble, it will correct. If it is not, intervention will make the problem worse down the road (while providing the illusion short term that it was the correct action to take).
Brian
Of course, here Masters is referring to a variety of commodities and not just oil. But I agree that a lot of money has been poured into the commodities futures market on a bet that commodity prices will increase. I have done it myself as I believe you have as well.
And up to until nearly a year ago, the commercial shorts (other than the expected hedgers) had been piling in against the commercial longs (which for some strange reason includes the index funds) ... until the supply/demand situation began tightening nearly 11 months ago. This is when the real price move took place (doubling to $140). And in that time period, the "speculators" (index funds) actually reduced their positions. So, I have a real problem with labeling the "speculators" (index funds) as evil here. Everything was dandy when the commercial shorts (who are the real "speculators" here) were making money off of the "speculators" (index funds). But once the physical market began to move away from them, they started covering (buying back their shorts) ... providing fuel for the rise in price. During this period of time, the "speculators" (index funds) actually had a negative (downward) impact on the price of oil as they were reducing their long positions.
I do not so much disagree with what Masters has to say. It is where Congress wants to take it (without providing the real truth) that I despise.
Yes, the investment banks as well as the producers are considered as commercial investors (commercials). The users (Ex. airline industry in the case of oil, refiners) are also considered commercials.
But the long-only index funds are also typically registered as commercials. The reasoning being that the long-only index funds get their exposure from the investment banks via the sale of swaps. In my opinion, both the investment banks (selling the oil swaps) and the long-only index funds should be considered as speculators according to the CFTC. Thus, I think they should be included in the non-commercial category. But they are not ... I think that either both need to be reported as commercials or both as non-commercials. You cannot split them.
So, you are in favor of eliminating hedging altogether? Just who do you think the speculators are? Show me futures data that illustrates that the long speculators are responsible for driving up the price of oil. It might surprise you what you find.
Brian
No, I don't disagree with you on Congress. You know that Congress will get involved at the exact wrong time and **** something up.
If they want to do something about rising food prices, they should stop subsidizing farmers for ethanol.
I had a conversation with some knowledgeable guys from Texas giving us a presentation on Peak Oil this afternoon. I asked them about their opinion about the effect of pension funds on commodity prices. They also think that much of the run-up has been due to those taking the short side opposite the funds a few years back who are now covering as they get squeezed.
I also don't think the funds are evil but any stretch. They are making a rational economic decision that has, so far, turned out to be correct. But they can certainly move markets. Citi estimates that total investments in commodities are around $400 billion, less than the market cap of Exxon, one single commodity company.
And I'm still long commodities but have been lightening up the past few months.
I suppose I should just ask someone at work to find out if funds are registered as commercials. Some funds have gained exposure via swaps but other larger funds have just replicated the index themselves in the futures market. I don't think they are registered as commercials if they are executing the trades themselves since I don't think the swaps replicate the cash returns from holding the allocation not held in margin in t-bills. Some funds have also allocated money to commodity hedge funds such as Ospraie, which will not be registered as commercials, I believe.
As an anecdote, a friend of mine from MBA who was one of the party guys whom we wondered how he got into the program has started a commodities hedge fund. The top, I say!
No, that is not what I am saying. I am saying that the reason for the recent doubling in the oil price (a good part of the doubling in price) is due to short covering by the speculative commercial shorts, not the index and pension funds that Congress wants to blame.Brian you seem to be indicating that you don't believe the run-up in oil is largely attributed to speculative pressure. What then, do you believe is causing the bulk of the rise?
I hear ya.No, I don't disagree with you on Congress. You know that Congress will get involved at the exact wrong time and **** something up.
If they want to do something about rising food prices, they should stop subsidizing farmers for ethanol.
I agree that they can move markets. They are also essential in providing liquidity.I had a conversation with some knowledgeable guys from Texas giving us a presentation on Peak Oil this afternoon. I asked them about their opinion about the effect of pension funds on commodity prices. They also think that much of the run-up has been due to those taking the short side opposite the funds a few years back who are now covering as they get squeezed.
I also don't think the funds are evil but any stretch. They are making a rational economic decision that has, so far, turned out to be correct. But they can certainly move markets. Citi estimates that total investments in commodities are around $400 billion, less than the market cap of Exxon, one single commodity company.
That, I cannot say. But the commercial long side has increased dramatically over the last couple of years. I seriously doubt it is hedging consumers. Over the last several months, I have found several sources that mention the classification of long only index funds. But not a lot of detail is provided. Here is one article that addresses a fair portion of what we have been discussing.I suppose I should just ask someone at work to find out if funds are registered as commercials. Some funds have gained exposure via swaps but other larger funds have just replicated the index themselves in the futures market. I don't think they are registered as commercials if they are executing the trades themselves since I don't think the swaps replicate the cash returns from holding the allocation not held in margin in t-bills. Some funds have also allocated money to commodity hedge funds such as Ospraie, which will not be registered as commercials, I believe.
That is funny. Where did you attend?As an anecdote, a friend of mine from MBA who was one of the party guys whom we wondered how he got into the program has started a commodities hedge fund. The top, I say!
I will say it again ... the reason for the recent doubling in the oil price (a good part of the doubling in price) is due to short covering by the speculative commercial shorts, not the index and pension funds that Congress wants to blame.In 2003 there was $16billion of speculative cash in the oil market, roughly 10% of the total value of the market with 90% being from those who actually deal in the physical commodity. Today it over $260billion and 65-70% of the market is speculative cash.
So yes, I would enact legislation to statutorily limit speculation to 10-15% of the total value of the market...just enough to provide liquidity and NO MORE. Also a tight daily limit on it's movement in either direction.
That is what is the case in many of the agriculture markets today and has been for more than 20 years. And oil is a more critical commodity than any ag contract. It falls well withing the realm of national security and the country faces a grave NATIONAL SECURITY risk from runaway speculation and that is what we have today in the oil market.
The REAL price of oil TODAY continues to be roughly $48/br (cost to produce, store and ship + 20% profit for the producer). The rest is SPECULATION.
No, that is not what I am saying. I am saying that the reason for the recent doubling in the oil price (a good part of the doubling in price) is due to short covering by the speculative commercial shorts, not the index and pension funds that Congress wants to blame.
Brian
I say yes, and no. It's not JUST speculation, and the speculators aren't gambling in my opinion. The geo-political fundamentals indicate every reason to be bullish long term about oil.
If drilling was allowed, some new refineries were built, government cut spending and borrowing so that some surpluss was built up to pay down the debt, and the Dollar started making a serious come back, I'd say there would be good reason to back off on oil.
I don't think any ONE of those points could make enough of an impact on its own, because the others would eventually cancel that one out. But if they should all start coming to fruition together, there would be a great environment for an ease in the price of oil.
I will say it again ... the reason for the recent doubling in the oil price (a good part of the doubling in price) is due to short covering by the speculative commercial shorts, not the index and pension funds that Congress wants to blame.
Brian
Here's a weird question...
America's wars in Iraq and Afghanistan has cost the American public $6 trillion in debt... how many offshore windmills, solar panels and nuclear plants could we have built for the same amount of money? Afterall, we're going to need all that extra electricity ten years from now when hydrogen cars start replacing gasoline-powered cars.
Of course, why would an oil tycoon like Bush bother with such forward thinking? Hydrogen cars aren't going to be on America's roads for another decade or so anyway.
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Merely covering shorts? Do you realize how many short contracts were covered?Sorry Brian but you don't see the speculative share of a market go from 10% to 70% in four short years and claim it has no effect on prices. ...
Merely covering shorts in no way shape or form has anything to do with the price doubling....it is simply too much money chasing a finite amount of product where most of that money has no intent of taking possession of the actual product.
Merely covering shorts? Do you realize how many short contracts were covered?
I brought hard data in my post, to which you did not respond. Explain how the index funds reducing their long positions and the speculative shorts reducing their positions (covering) results in the index funds driving up the price and not the speculative shorts.
Brian
I did not point to any technical or stochastic models. I pointed to hard data in the COT reports. And it says that the price runnup in the recent price double ($70 -> $140) is due to covering by the speculative shorts, not the index funds and others longs that Congress is labeling as "the speculators".You ask every substantial speculative interest and 100% of them claim the price of oil is justified solely on the demand supply fundamental. You can point to all the technicals and stochastic models you want to,
So do you now concede that the covering shorts are causing the runnup? This is the sole point I have been trying to make. Nothing else.but the run up on oil is becuase all the money that used to be in housing and equities has PILED ON the oil futures market and has been driven my irrational panic BUYING, whether that buying is covering shorts or simply funds going long, either way,