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

[Charles_Main]

We Want Free Oil

 

[Paulie]

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.

Pssshh. Be prepared for MUCH more that that, dude. You'll be WISHING you were paying $4.50 soon enough.

 

[Paulie]

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

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?

 

[Toro]

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.

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.

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 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!

 

[sealybobo]

robert kenedy jr just spanked the chevron exec on larry king. the oil exec is smooooooth, but he's also lying or not telling the whole story. he said more drilling at home won't do crap and they'll just sell our oil to asia.

and...why did the gop congress from 00 to 06 take tax credits away from alternative energy companies? because they want to slow down progress? no other explanation makes more sense.

 

[sealybobo]

Grand Oil Party. Lol

 

[Zoomie1980]

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

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.

 

[Zoomie1980]

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!

Correction, FEAR of a supply problem became acute about a year ago, after being a mere "concern" for the prior two years. ACTUAL demand peaked last July and flattened for the remainder of the year and global demand for May was actually DOWN almost a full point from May a year ago. June will show and even bigger slowdown in demand with the US alone down over 3% from a year ago. June will show and almost 2 million barrel a day SURPLUS. The US strategic reserve is now only a two million barrels from being full and US stocks of oil and refined fuel are at a TWO YEAR HIGH!!

Again and again and again, it just as the Saudis say, the is no shortage of supply and will not be ANY TIME SOON, even if Iran goes haywire, which they won't. So the run up continues to be either uniformed speculation (the lemming effect) or something more sinister. I'm still in the camp of simple speculative stupidity, but if we keep having ever higher and higher surpluses in supply and it keeps going up, I will begin to believe in the latter.

 

[gonegolfin]

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?

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

 

[gonegolfin]

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 hear ya.

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.

I agree that they can move markets. They are also essential in providing liquidity.

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, 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.

"Identifying the impact of fund money is difficult. Investments in index funds are often classified in the ;long; commercial category of the CFTC Commitment of Traders Report. Again, an imbalance in this
sector would be expected to evolve if there had been a significant change in market structure. But, despite
a sharp increase in the number of contracts traded, the ratio between commercial short and long positions
remains relatively constant. In other words, as index fund buying has increased, so too has commercial
selling. This is not necessarily a bad thing.
There tends to be a natural imbalance between hedgers in the oil and other commodity markets. Producers
can hedge, but who takes the other side of the transactions? Refiners buy crude, but are partially hedged
by their product sales. On the consumer side, airlines, major freight companies and heavy industry could
hedge, but small truckers and domestic users are unlikely to have the scale to make hedging viable. This
leaves the speculators to make up the liquidity. Controversially, it could therefore be argued that the influx
of buy-side index funds has actually helped to improve market functioning (liquidity), rather than
distort prices."

http://omrpublic.iea.org/omrarchive/13jun06over.pdf

It is interesting that some of the other major commodities have the index funds broken out in the COT reporting. But they should also break out the speculative shorts and not allow the investment banks to hide under the commercial category. Of course, this does run the risk of moving more contracts to other exchanges.

Another ...
"Several years ago, index funds managed to get approval from the CFTC to be treated as commercial traders. Unlike speculators, subject to limits on positions, commercial firms producing or selling commodities aren't restricted in the number of futures contracts they can buy if their holdings are legitimate hedges."

FOCUS: Index Funds Eyed After Commodities Boil

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!

That is funny. Where did you attend?

Brian
Austin, TX

 

[gonegolfin]

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.

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

 

[politicsezine]

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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[Paulie]

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 should have been more specific. The average person is being led to believe that the run up in price is because "speculators" are running the price up by buying in futures that they never intend on taking delivery of. Basically, most people think that there is speculative pressure LONG, without even knowing what it means. They think that there's a bunch of evil investors out there plotting to run the price up real high by buying long so that they can all take massive profits.

This, according to you, is NOT what is happening. Correct?

 

[sealybobo]

THE GOP is so un american it is sick. selling america to foreign interests. turning the american middle class from the best on earth to average in the industrialized world.

the only reason we had a robust middle class was because of government and regulations. otherwise, wages wouldn't go up, no sick days, max work hrs, workers rights etc. no such thing as free markets. democracy more important so they don't become kings and we don't become surfs. the rich have been trying since the minute we got independence. our founding fathers warned us.

 

[Zoomie1980]

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.

Goldman Sach's today made the classic "bubble" mistake in the "analysis" of the oil market trying desperately to curtail inevitable Congressional action against the speculators but claiming the price of oil was purely supply demand by claiming, "if today's trends continue... we will be in critical shortage by 2015 and that is what drives the price..."

That is shear LUNACY in many fronts. It is amazing the "analysts" can even hold a job in the industry by being that completely IGNORANT.

1) The current trend over the last 12 months is a DECREASING demand and INCREASING supply going from barely 300,000brl surplus production 12 months ago to 2,000,000brl today!

2) Today's trend (as in the errant supply shortage they THINK they see) will NOT continue. Human consumption patterns change over time, sometimes by shocking degrees. By 2015 will most likely see a wholesale conversion of the US, European and many Asian vehicle fleets from gasoline to hybrid, electrics and fuel cells well underway with possibly collapsing demand by the end of the decade. Who knows, but that scenario is AT LEAST as likely as a crisis of supply.

And those are just two major points these "Einsteins" and Sach's haven't got a clue.....

 

[Zoomie1980]

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

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. Oil has yet to be ANYWHERE NEAR a supply shortage. Not one barrel of purchased oil has gone undelivered to a customer due to a supply shortage. As of TODAY we have a 2,000,000 brl a day SURPLUS and we are expected to pump more than we consume for AT LEAST five more years before we actually hit REAL shortages (assuming demand continues to grow at the same rate for the next five years it has for the last....it will not). 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.

 

[Zoomie1980]

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.

<object width="425" height="349"><param name="movie" value="http://www.youtube.com/v/NLKExuHlQMQ&hl=en&border=1"></param><param name="allowFullScreen" value="true"></param><embed src="http://www.youtube.com/v/NLKExuHlQMQ&hl=en&border=1" type="application/x-shockwave-flash" allowfullscreen="true" width="425" height="349"></embed></object>

Iraq is the cheapest war the US has ever fought costing less than 4% of GDP...

 

[gonegolfin]

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

 

[Zoomie1980]

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

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, 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, these speculators are in the market with money that has NOTHING TO DO with producing, shipping or consuming the product....which is what a futures market is for.

My family has been int he oil business for over 100 years. I KNOW oil, period, and oil today is NOT worth ANY WHERE NEAR $140 a barrel. It's not worth $50! Any time a commodity price goes up when there is a SURPLUS production AND a predicted SURPLUS production for years on out, it is NOT obeying any sort of fundamental, but is driven by IRRATIONAL speculation. I can't make it any simpler than that.....oil is "worth" about $45 today. It is a commodity in SURPLUS SUPPLY. EVERYTHING MORE is SPECULATIVE.

 

[gonegolfin]

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,

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".

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,

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.

Note that the market only became "irrational", as you put it, once the shorts began covering.

Brian