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

[Zoomie1980]

It doesn't really matter whether it is short covering or simply bets on ever increasing prices, the fact is the massive amount of speculation short or long has utterly warped the market. The price of oil nowhere near reflects it's real value anymore than the asinine prices of houses in California reflected their real value (and they still haven't fallen far enough to get close yet) or the price of tech stocks in the 1990's reflected theirs.

The plain simple fact is, speculation, no matter what form it takes has turned the oil market into an irrational fiasco. Yet another bubble waiting to implode and so soon after so many got burned by tech stocks then real estate.... These buffoons will never learn and they get what they have coming to them.

 

[gonegolfin]

It doesn't really matter whether it is short covering or simply bets on ever increasing prices, the fact is the massive amount of speculation short or long has utterly warped the market.

It does when Congress is trying to sell something to the people ... legislative action that will hurt the long-only index funds (that have reduced their positions during the price runnup) and help the speculative investment bank shorts get out of the predicament they are in (of their own doing).

As for "speculation" warping the market being fact, it is not fact. It is your opinion based on your very limited understanding of the futures market and how it affects spot prices. This is not a rail on you, I think everyone on this board falls under this description. There are some reasonable arguments out there that are in favor of "speculation" not being the cause or having a limited effect of/on the rapid increase in price. But this is not the argument I have been trying to make in this thread (nor do I necessarily agree with it). This is another discussion.

Brian

 

[Paulie]

It does when Congress is trying to sell something to the people ... legislative action that will hurt the long-only index funds (that have reduced their positions during the price runnup) and help the speculative investment bank shorts get out of the predicament they are in (of their own doing).

As for "speculation" warping the market being fact, it is not fact. It is your opinion based on your very limited understanding of the futures market and how it affects spot prices. This is not a rail on you, I think everyone on this board falls under this description. There are some reasonable arguments out there that are in favor of "speculation" not being the cause or having a limited effect of/on the rapid increase in price. But this is not the argument I have been trying to make in this thread (nor do I necessarily agree with it). This is another discussion.

Brian

Brian, say the speculative pressure stopped dead tomorrow, for the sake of argument.

Are there not still other fundamentals currently lingering that are going to cause a continued rise in price REGARDLESS of speculation?

I say yes. Perhaps the supply/demand model is in favor of lower prices, but I just don't see how the uncertain future of the Dollar, particularly its current state, is going to go allow for the price of oil to continually come down even after the speculative pressure subsides. Not to mention the uncertainty in the war on terror, particularly what might happen in regards to Iran.

What are your thoughts?

 

[politicsezine]

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

America's GDP over the last 5 years was approx. 65 trillion.

$6 trillion for two wars... half of that is $3 trillion. Yes, approx 4 to 5% of the GDP over a 5 year period.

So yes, you're correct it is less than 5% of the GDP (over a 5 year period).

But the Vietnam War cost America only $133 billion in today's dollars.

World War II cost America only $2.3 trillion in today's dollars.

So no, the War on Terrorism has so far cost Americans more than double World War II.

The problem is that is $6 trillion in debt. The US National debt is approx. $9.5 trillion so each citizen's share of this debt is a little over $31,000.

That's a lot of taxes.

Bleeding heart liberals? Bah! Americans are going to be bleeding from the ass when the federal treasury needs to collect.

 

[editec]

Okay, who is taking SHORT POSITONS and why on earth are there so many short positions to cover to begin with?

Because the smart traders saw the pension funds coming in to take long positions which they thought were a mistake? What was their motivation to take those positions they now have to cover?


AND, if the SHORT POSITIONS are having to cover themselves by buying oil, (and I presume this means for DELIVERY?) and there is PLENTY OF OIL TO BE HAD, what is driving up the SPOT PRICES?

I almost need somebody to show me, STEP BY STEP, trade by trade, what is motivating people to buy long or sell short before I can understand what you're saying GG.

As it stands now, Zoomies theory at least has the benefit (for me, I mean, I don't p[retend to get this market) of making some kind of sense.

I can't see how traders, stuck in short positions, can be forced to have to play long positions (or is it they're actually buying on the spot market to cover their longer term(?)short positions?) in order to offset those positions.

I confess to cluelessness.

Help!

 

[Toro]

America's GDP over the last 5 years was approx. 65 trillion.

$6 trillion for two wars... half of that is $3 trillion. Yes, approx 4 to 5% of the GDP over a 5 year period.

So yes, you're correct it is less than 5% of the GDP (over a 5 year period).

But the Vietnam War cost America only $133 billion in today's dollars.

World War II cost America only $2.3 trillion in today's dollars.

So no, the War on Terrorism has so far cost Americans more than double World War II.

The problem is that is $6 trillion in debt. The US National debt is approx. $9.5 trillion so each citizen's share of this debt is a little over $31,000.

That's a lot of taxes.

Bleeding heart liberals? Bah! Americans are going to be bleeding from the ass when the federal treasury needs to collect.

The Iraq war nor the Afghan war has not cost $3 trillion.

Joseph Stiglitz estimates that it may cost $3 trillion one day, but that is nowhere near the cost today. I think the total cost has been $700-$800 billion, which is ~5% of GDP this year.

 

[gonegolfin]

Okay, who is taking SHORT POSITONS and why on earth are there so many short positions to cover to begin with?

Because the smart traders saw the pension funds coming in to take long positions which they thought were a mistake? What was their motivation to take those positions they now have to cover?


AND, if the SHORT POSITIONS are having to cover themselves by buying oil, (and I presume this means for DELIVERY?) and there is PLENTY OF OIL TO BE HAD, what is driving up the SPOT PRICES?

I almost need somebody to show me, STEP BY STEP, trade by trade, what is motivating people to buy long or sell short before I can understand what you're saying GG.

As it stands now, Zoomies theory at least has the benefit (for me, I mean, I don't p[retend to get this market) of making some kind of sense.

I can't see how traders, stuck in short positions, can be forced to have to play long positions (or is it they're actually buying on the spot market to cover their longer term(?)short positions?) in order to offset those positions.

I confess to cluelessness.

Help!

I explained in my post why the investment banks established their short positions (it was easy money at the time). As far as the role of the covering shorts is concerned, maybe this recent article will help ... it is the first that I have seen that alludes to the covering shorts driving up the price of oil.

Tight credit driving shorts out of oil market - GS | Markets | Reuters

Brian

 

[Toro]

Evidence of hoarding in the oil markets.

In this study, we examine the relationship between the U.S. real price of oil and factors that affect its movement over time: futures prices, the value of the dollar, exploration, demand, and supply. All of these variables are treated as jointly endogenous and a reduced form vector error correction model, testing for cointegration amongst the variables, is estimated. We find that for model specifications with short-term futures contracts, supply does indeed dominate price movements in the crude oil market. However, for specifications including longer-term contracts that are inherently more speculative, the real price of oil appears to be determined predominantly by the futures price. Moreover, there is empirical evidence of hoarding in the crude oil market: both oil stocks/inventories and futures prices are found to be positively cointegrated/correlated with each other. From a policy perspective, the results of this analysis indicate that if regulators really wanted to limit speculation in the oil market, it should keep the shorter-term futures contracts and eliminate the more speculative six months futures contracts.

SSRN-Speculation, Futures Prices, and the U.S. Real Price of Crude Oil by Lonnie Stevans, David Sessions

 

[Mr. Right]

The oil speculators are not the culprits.

Who's buying oil at that price?

There's something even worse going on here.

If you were buying oil at $140 a barrel, what would happen if suddenly oil crashed and corrected to $70 per barrel?

I'll tell you.

Those retailers who now own next years oil at $140 will go out of business.

Who will then open up new stores that sell gas?

You can't sell the oil cheaper than you bought it. So they'll be forced to sell at $4.00 a gallon.

New stations will open and the price might be $2.75

What happens to Shell, BP, Chevron etc.?

answer: they don't give out franchises anymore.

Who will be there waiting to open gas stations in America?

My best guess is Saudi Arabia is behind this.

They don't increase production when we need it.

They pay Senators to not drill in Alaska.

They buy up American banks and credit card companies like Citi-bank.

Between them and China, we're being attacked and bled dry.

What happens when they call in on our debt?

The world's economy collapses.

Who ever has the more bullets and food wins.

Do we make bullets anymore?

 

[Charles_Main]

See what the people who say more oil will not lower the price do not get, is they are trading in oil Futures!!!!

 

[sealybobo]

The oil speculators are not the culprits.

Who's buying oil at that price?

There's something even worse going on here.

If you were buying oil at $140 a barrel, what would happen if suddenly oil crashed and corrected to $70 per barrel?

I'll tell you.

Those retailers who now own next years oil at $140 will go out of business.

Who will then open up new stores that sell gas?

You can't sell the oil cheaper than you bought it. So they'll be forced to sell at $4.00 a gallon.

New stations will open and the price might be $2.75

What happens to Shell, BP, Chevron etc.?

answer: they don't give out franchises anymore.

Who will be there waiting to open gas stations in America?

My best guess is Saudi Arabia is behind this.

They don't increase production when we need it.

They pay Senators to not drill in Alaska.

They buy up American banks and credit card companies like Citi-bank.

Between them and China, we're being attacked and bled dry.

What happens when they call in on our debt?

The world's economy collapses.

Who ever has the more bullets and food wins.

Do we make bullets anymore?

We don't have a free market in the energy industry. Everybody knows that. We give a trillion a year in subsidies, direct and indirect subsidies, to oil, and somewhere near a trillion dollars to coal. Nuclear energy is also highly subsidized. If we had a real free market that does what a market is supposed to do, which is to reward good behavior and punish bad behavior and inefficiency, wind, solar, geothermal and tidal would easily triumph in the marketplace. You would see them immediately taking over the marketplace. The biggest impediment is these huge subsidies we're pouring into incumbents.

 

[editec]

I explained in my post why the investment banks established their short positions (it was easy money at the time). As far as the role of the covering shorts is concerned, maybe this recent article will help ... it is the first that I have seen that alludes to the covering shorts driving up the price of oil.

Tight credit driving shorts out of oil market - GS | Markets | Reuters

Brian

Thanks.

Okay I read the link.

NEW YORK, July 1 (Reuters) - Tighter credit conditions are forcing leveraged speculators and oil producers with weak credit to close out short positions in crude oil futures, Goldman Sachs said in a research note Tuesday.

The credit crunch may be further skewing the oil market toward the upside by preventing some cash-strapped long players from liquidating positions as many are likely using substantial gains in oil as collateral for other investments, Goldman said.

A similar phenomenon is occurring on the physical side of the market, where weaker oil refiners are being forced to cut inventories due to the high cost of credit, Goldman said.

This above get.

The normal shorts (yin) can't compete with the long (yang) because they are the wrong side of the trend (can't sell off those positions) and have to keep ponying up money to cover their positions.

But what CAUSED the long term trends to start piling up so to begin with?

Just the fact that there was too much liquidity coming from other markets that people were bailing out of, and they ALL (!?!) elected to take long positions?

I still do not understand how that happened. Did all these new players totally ignore the supply demand picture, or soemthing and just willy nilly throw the bets on LONG?!?

But assuming that's true then all I can about this state of affairs is.....

That's it!?​

If that's it, then really this spike is TRULY a collossally black bubble waiting to burst.

Because what that means is that we have a market where there are a huge number of people holding up the prices BASED ON NOTHING MORE THAN THERE ARE A HUGE NUMBER OF PEOPLE HOLDING UP THE PRICES.

 

[Ag107.87]

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 cas

Actually, those numbers are for all commodities, not just oil. Oil accounted for only a small percentage of those numbers, but because 7-8 dollars can buy you 100 dollars worth of oil, it ends up being the same amount, roughly.

However, you state that $16 bln in 2003 equalled 10% of the market and $260 bln now accounts for 60-70% of the market.

So in 2003, you are saying that the oil market was worth $160 bln/annum. However, the world produced 78 mpd at an average price of $30/barrel. That is equivalent to a market value of more than $850 bln, not $160 bln, like you suggest.

And today, at $130/barrel and 85 mpd, that's a market value of $4 trillion (with a t). Which means that $260 bln worth is less than 7% of the current market, not the 60-70% like you suggest. That's 1/10 of what you said.

 

[editec]

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.

Margin calls for Mr Toro?

 

[Toro]

Margin calls for Mr Toro?

Nosiree.

 

[BaronVonBigmeat]

We don't have a free market in the energy industry. Everybody knows that. We give a trillion a year in subsidies, direct and indirect subsidies, to oil, and somewhere near a trillion dollars to coal. Nuclear energy is also highly subsidized. If we had a real free market that does what a market is supposed to do, which is to reward good behavior and punish bad behavior and inefficiency, wind, solar, geothermal and tidal would easily triumph in the marketplace. You would see them immediately taking over the marketplace. The biggest impediment is these huge subsidies we're pouring into incumbents.

Alternative energy fascinates me. I read a lot about it. Not that I'm a greenie, but I'm just interested in new technology and how fast it's being developed.

So I browse websites and blogs and whatnot. And like clockwork, people make a couple of claims, which I have never ever ever (ever) seen a shred of evidence for. Not a link, not a study, not anything. Just an assertion. I don't think people like you are lying, you just take someone else's assertion--which was also skimpy on facts, numbers, sources--and take it at face value.

Claim #1: There are massive subsidies for oil and coal. Massive, I tell you! How much? Hundreds of billions. Or uhh...trillions! What's the name of the program that disperses the handouts to Exxon and co.? Or the federal department that's in charge?

(I'm not saying for sure they don't exist; it wouldn't surprise me if they did; I've just never seen any specifics. Just lots of very vague assertions.)

Claim #2: Without those subsidies, wind/solar would be cost competitive! They would dominate the market!

(Wind already is cost effective actually, if you look strictly at cost per kWh. So why isn't it widespread? A diabolical conspiracy? Capitalists aren't interested in profits anymore? No, they're intermittent power sources. The sun doesn't shine at night. Wind blows sometimes, and other times not. Without massively huge and cheap ways to store electricity, they will never displace coal/oil/nuclear. Okay, solar can work without batteries, to negate your A/C bill in the summer, which is pretty good. But it can't be the backbone of heavy industry.)

 

[Charles_Main]

Alternative energy fascinates me. I read a lot about it. Not that I'm a greenie, but I'm just interested in new technology and how fast it's being developed.

So I browse websites and blogs and whatnot. And like clockwork, people make a couple of claims, which I have never ever ever (ever) seen a shred of evidence for. Not a link, not a study, not anything. Just an assertion. I don't think people like you are lying, you just take someone else's assertion--which was also skimpy on facts, numbers, sources--and take it at face value.

Claim #1: There are massive subsidies for oil and coal. Massive, I tell you! How much? Hundreds of billions. Or uhh...trillions! What's the name of the program that disperses the handouts to Exxon and co.? Or the federal department that's in charge?

(I'm not saying for sure they don't exist; it wouldn't surprise me if they did; I've just never seen any specifics. Just lots of very vague assertions.)

Claim #2: Without those subsidies, wind/solar would be cost competitive! They would dominate the market!

(Wind already is cost effective actually, if you look strictly at cost per kWh. So why isn't it widespread? A diabolical conspiracy? Capitalists aren't interested in profits anymore? No, they're intermittent power sources. The sun doesn't shine at night. Wind blows sometimes, and other times not. Without massively huge and cheap ways to store electricity, they will never displace coal/oil/nuclear. Okay, solar can work without batteries, to negate your A/C bill in the summer, which is pretty good. But it can't be the backbone of heavy industry.)

damn good points, but I am sure Kirk will just claim you work for Exxon, or at least they are you butt buddies.

 

[editec]

Nosiree.

Meaning you did not, on the day when you proposed to take a long position in oil futures not take those positions?

Or do I not understand how that market works?

Serious question, BTW.

 

[Zoomie1980]

Okay, who is taking SHORT POSITONS and why on earth are there so many short positions to cover to begin with?

Because the smart traders saw the pension funds coming in to take long positions which they thought were a mistake? What was their motivation to take those positions they now have to cover?


AND, if the SHORT POSITIONS are having to cover themselves by buying oil, (and I presume this means for DELIVERY?) and there is PLENTY OF OIL TO BE HAD, what is driving up the SPOT PRICES?

I almost need somebody to show me, STEP BY STEP, trade by trade, what is motivating people to buy long or sell short before I can understand what you're saying GG.

As it stands now, Zoomies theory at least has the benefit (for me, I mean, I don't p[retend to get this market) of making some kind of sense.

I can't see how traders, stuck in short positions, can be forced to have to play long positions (or is it they're actually buying on the spot market to cover their longer term(?)short positions?) in order to offset those positions.

I confess to cluelessness.

Help!

I've traded futures as a cotton and corn shipper for decades. Trying to keep it simple, basically, when a future's contract comes due, those that still have positions MUST either take delivery of the real product or ship it, period. They HAVE to. That is why all speculators have to flush before due date as they want to do neither. If you are shorting the market you MUST buy to eliminate your position to zero. Most will cover their shorts then establish their speculative position again on the next contract date. If the market is loaded with short positions, that can lead to a near panic buy near the end to cover those positions....driving the price up.

The WHOLE THING, though is SPECULATION. The REAL merchants simply use the market to hedge contracts in the REAL commodity and liquidate positions as soon as the producer or consumer FIX their price. Their profits are in their BASIS (points on or off the market), not the actual dollar amount of the commodity.

And example: If I have a contract to buy 50,000 bales of cotton from a farmer or gin for -50 Oct 2008 and have sold it to a mill for 150+ Oct 2008 I have a 200point profit on my contract. Now if the farmer fixes or the mill fixes their price, to protect by 200pt profit I have to buy or short an offsetting amount in cotton futures. That protects my negotiated profit. Once both sides fix, I liquidate my futures position.

Speculators, however, are not in that game. They are betting on a movement all the time. Regardless of short or long positions when markets get out of whack either way in massive way that activity completely WARPS the market to where it no longer obeys its fundamentals. THat has happened in oil.

Unfortunately for oil, that market is not nearly as regulated and controlled as the New York Futures exchange (for cotton, orange juice, etc...) Or the Chicago mercantile board. There are strict limits on daily moves in those markets and strict limits on volume as well. We DESPARATELY need that in oil, too. We do not have that there and thus chaos rules that market today.

 

[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

I would favor legislation that limits speculation to less than 15% of the total market value in any commodity. That is largely in place in many futures markets in grains, meat, and cotton today, in the US and UK, although its not federal statute but the rules in place in those exchanges. Limits on the number of traded contracts and daily limits on price moves.