It’s Decision Time – Oil Speculators or The American Consumer?

Discussion in 'Economy' started by JimofPennsylvan, Jun 27, 2008.

  1. JimofPennsylvan
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    JimofPennsylvan VIP Member

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    Congress has a super critical task before it and that is to stop the increase in the price of a barrel of oil in the commodity markets from speculators. Speculators being those individuals that buy oil future contracts in the commodity markets never to receive the oil that is the subject matter of the contract but rather only for the investment opportunity provided by buying and then selling that contract at a profit. Speculators include those investors that buy oil contracts when the price of those contracts begin to rise whether its from a political or production problem connected with an oil producing country, a drop in the dollar, etc. and in their buying along with other such investor buyers accentuate or magnify the market price increase of oil contracts to a higher degree than the negative circumstances warrant. Speculators also include those investor buyers of oil future contracts who individually or collectively with other such buyers because of the their buying power of oil future contracts and utilization of such power, that is their buying alone – no other supply/demand/currency issue, can cause an increase in market prices in oil future contract prices and sometimes a quite significant increase.

    To get to the heart of the issue here, the public hears from the top managers of the New York Mercantile Exchange and ICE Futures Europe Exchange, the U.S. oil commodity exchanges, that if Congress passes regulation increasing the collateral or margin requirements to fifty percent from the current practice of a single digit percentage, sellers and buyers of oil future contracts will just take their business to foreign oil commodity markets outside the reach of U.S. regulation and the price of a barrel of oil will still be the same and U.S. financial markets will just have lost business. By the use of the terms collateral or margin it is meant that if an investor buys an oil futures contract worth $100,000.00 in value how much money does that investor have to pay to make the purchase of that contract, currently the standard is often a single digit percentage many in Congress want to make it fifty percent which in the instant case would be $50,000.00, which as a practical matter would have at least some dampening effect on the buying power of these speculator investors and thus have a dampening effect on their ability to drive-up oil contract prices in the market. The American public and their elected leaders have to keep in mind that what these NYMEX and ICE Futures managers and the investors they advocate for are saying with their proclamations don’t increase the collateral or margin requirements otherwise massive amounts of oil futures trading will just move to foreign commodity markets is that large scale speculative oil trading is going to continue no matter what the U.S. government does and the U.S. government can’t do anything about it and is not going to be able to protect American consumers and for that matter world-wide consumers from this harm.

    To borrow a famous reply from an heroic U.S. general in the Battle of the Bulge during World War II when asked to surrender, the American people and Congress should tell these Financial Market pariahs “Nuts”. The Congress’s position should be come hell or high water this speculation harm is going to stop. One course of action Congress could take is to enact legislation increasing the margin to fifty percent and to reduce the harm from this speculative oil trading just moving to foreign markets Congress could do the following. Make it a crime for any U.S. citizen or U.S. business to buy oil future contracts in any foreign commodity market throughout the world in violation of this fifty percent margin requirement. Moreover, for any non-U.S. citizen or non-U.S. business that buys oil futures contracts in foreign commodity markets in violation of this fifty percent margin requirement the Congress should ban such a person or business from be able to participate in U.S. securities (stocks and bonds) and commodity markets for a period of ten years after that unlawful buy and if at the time of the unlawful buy such a person or business owns U.S. securities or commodities such property will be confiscated and liquidated expeditiously regardless of any loss incurred from a speedy sale. This type of government action would surly help improve this speculation problem. Oil is to important to the U.S. and the World economies to let things continue as is; from what the world’s seen in the last six months in a real sense oil is the lifeblood of these economies, and this speculative trading is a serious blood disease which must be largely eliminated or it will cripple or kill these economies.
     
  2. gonegolfin
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    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
     
  3. AllieBaba
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    He's just mindlessly regurgitating what he's been fed.
     
  4. Charles_Main
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    Charles_Main AR15 Owner

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    Yep!
     
  5. Paulie
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    Paulie Platinum Member

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    Oh, so you don't think the run-up in the price of oil is largely attributed to speculators?
     
  6. Toro
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    Congress says 70% of buyers are "speculators."

    Free Preview - WSJ.com

    Though I'd be a little skeptical of what Congress say.

    But I will go back to Michael Masters.

    http://hsgac.senate.gov/public/_files/052008Masters.pdf

    I also read somewhere recently that the primary driver of incremental gold demand this decade has been ETFs.

    Citi estimates that total investment capitalization for commodities is $400 billion. That's less than the market cap of Exxon. Thus, it doesn't take much in capital flows to move the needle.

    Plus, the movement in oil feels awfully bubbly to me. From BCA

    [​IMG]

    The following chart is taken from the latest issue of the superb Bank Credit Analyst. The broken line on this chart depicts what BCA terms the "Mania Index." This index is a composite of past major investment bubbles; e.g., silver, gold, the Nikkei 225, cocoa, the dollar, the NASDAQ, Taiwan stocks and nickel prices.
     
  7. Paulie
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    So let's say for the sake of argument, that the speculators are causing 40% of the run-up. We take them out, and then what else is going to stop the price from continually rising? Interest rates can not be raised anytime soon, at least in my unprofessional opinion. So it looks like a long time before there's going to be any real worthwhile gains in USD value, with definitely some more drop left.

    The price of oil doesn't seem like it has much of an opportunity to drop even without the speculators. I'm sure we probably disagree on the time frame of when the Dollar might gain significant value again, though.

    I believe the speculation is largely fueled by political and economic uncertainty, it's definitely why I bought USO. Assuming it is, then it still seems unlikely the price will stay lower. But I haven't seen your opinion on why the speculation exists.
     
  8. Toro
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    Bubbles can just fall on their own weight. They don't need central bank tightening though it helps.

    I see a lot of problems. Global economies are slowing, including emerging markets.

    The China stock market is down ~60%. India is down ~40%. If the economy isn't slowing in those countries, why have their stock markets been crushed?

    Plus, the dollar is bottoming.

    Personally, I hope oil gets to $200. I'm going to lay out a ton of deep, long dated, out of the money puts on crude. Easy money IMHO.

    Remember that in 1979-1980, Volcker was tightening hard and oil continued to climb for about a year. Investors in bubbles often ignore fundamentals believing things are different this time. Then, at some time, the asset collapses.

    That will happen with oil and all commodities eventually. I just don't know when.
     
  9. gonegolfin
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    You have good reason to be skeptical of what Congress has to say. They prefer to blame others instead of themselves for the reckless spending and neglectful stewardship of the currency under their watch.

    Make no mistake, I believe that the futures market has played its part in the price of oil. But it is not the index funds that are to blame. The speculative shorts are to blame. But this is not the story being told by Congress. This story would not support the solution they have in mind to bring oil prices back down (blaming the index funds and forcing them to liquidate long positions, among a variety of other measures).

    The index funds were welcomed into the market, with many of them commencing operation in the past couple of years. For example, one of the popular oil index funds (DBO) began trading on 1/5/07. They were very clear with their intentions ... they would take out and hold long positions in the underlying commodities they represent. The speculative shorts (mostly commercial institutional shorts, not the commercial hedgers that are also classified in the commercials category) were salivating because they knew the index funds (as well as the pension funds) would never demand delivery (eliminates the short squeeze). Additionally, it was well known that the index funds would need to roll over their positions to the next contract month periodically. This set up the opportunity for arbitrage. When the index funds were starting up, supply and demand fundamentals were not so tight. It looked like easy money for the shorts. And it was ... for a while. But then the supply/demand situation began changing.

    By August of 2007, the index funds were in their long positions and the short speculators were loaded to the hilt. Oil was trading just over $70.00 at the time. Obviously the price has since doubled. And the speculative shorts are screaming. And their shorts are burning.

    Once the supply/demand situation tightened and continued to get worse, the speculative shorts were boxed in. They have been looking for a way out and do not like that the index funds are utilizing a buy and hold strategy as it impedes that objective. They want the long positions liquidated such that they can make their exit. The index funds are not the real speculators. They are playing by the rules and are executing a buy and hold strategy, much to the dismay of the real speculators (the shorts).

    The index and pension funds are classified as commercials in the COT reports. You can easily verify that since last August (when oil was at $72.42), the number of contracts held by the commercial longs has actually declined (rather dramatically). So, it is not the index funds driving the price up. However, the number of contracts held by the commercial shorts has declined dramatically. They have been covering their shorts and thus driving the price upwards. While their short positions are down dramatically from last August, they are still higher than when the index fund boom commenced. So, there is more short covering to go.

    The following is some interesting data that illustrates my point ...

    You can examine the historical COT reports here ...
    Historical Commitments of Traders Reports

    Date - NYMEX Futures Price (light sweet crude) - Commercial Long/Short Positions
    ---
    06/24/08 - $137.00 - 807,846/803,211 (latest COT report)
    06/03/08 - $124.31 - 830,940/850,616
    05/06/08 - $121.84 - 857,629/881,738
    04/01/08 - $100.98 - 865,064/905,226
    03/03/08 - $99.52 - 879,674/982,509
    02/05/08 - $88.41 - 883,191/908,166
    01/08/08 - $96.33 - 871,166/971,672
    12/04/07 - $88.32 - 897,346/942,629
    11/06/07 - $96.70 - 911,816/996,004
    10/02/07 - $80.05 - 867,494/927,028
    09/04/07 - $75.08 - 938,837/973,366
    08/07/07 - $72.42 - 900,395/1,017,930

    - Index funds and speculative shorts were entering the market in the latter part of '06 and the first half of '07
    - You can see the short covering beginning in August of '07. It has been consistent ... meanwhile the commercial longs have been reducing their positions, not increasing them. They have taken some profits.

    07/03/07 - $71.41 - 907,129/1,000,431
    06/05/07 - $65.61 - 897,214/947,336
    05/01/07 - $64.40 - 830,557/890,444
    04/03/07 - $64.64 - 865,686/922,271
    03/06/07 - $60.69 - 813,652/833,204
    02/06/07 - $58.88 - 822,894/784,268
    01/03/07 - $58.32 - 754,040/744,275
    11/07/06 - $58.93 - 698,770/685,537
    07/03/06 - $73.93 - 563,193/596,678
    01/03/06 - $63.14 - 532,650/503,932

    Also of interest, the futures price has been trailing the spot price during this runnup in the price of oil.
    Speculative nonsense, once again - Paul Krugman - Op-Ed Columnist - New York Times Blog

    In a related article, Krugman responds to Masters' claims.
    Calvo on commodities - Paul Krugman - Op-Ed Columnist - New York Times Blog

    Brian
     
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    Last edited: Jun 28, 2008
  10. Charles_Main
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    The speculators are only the mechanism that raises the price, they are not the sole cause.

    The Cause is our energy policies. The cause is the prospect of Democrat Domination of our government. the cause is Opec deliberately holding back supply, The cause is our refineries running at capacity World wide. The speculators are only able to drive the price up, because people have real fears about supply, and inept energy policy which is sure to come with Democrat rule. The Dems continue to ignore 70% of Americans who are screaming for drilling. As usual Liberals think they know best and most protect us from ourselves. Elitist asses that they are. As usual they are selling a lie to the American people, claiming drilling will not help, or we can not drill our way out of this. Of course we cant, but we sure as hell can help a little by doing so.

    If you want to blame somebody blame those who have repeatedly stood in the way of Drilling for oil, building more refineries, and more Nuke Plants. These are real things we could have done long ago to avoid this crisis.

    Thank Bill Clinton for vetoing drilling in 95. Blame Enviromentalist for blocking any attempt to gain more supply, or build Nuke plants, Then and only then can you blame speculators.

    Charles
     
    Last edited: Jun 28, 2008

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