Rising Gas Prices - Fault the Oil Speculators?

[Wiseacre]

If you listen to Obama and the Dems, the rising gas prices are the fault of the godless and wicked oil speculators. Others might claim that it's more a case of rising demand in emerging markets coupled with falling supply, and also a weaker dollar. All that instability in the middle east makes the airlines and shipping industries nervous, and these folks are part of the evil speculators; they're trying to reduce the uncertainty of oil prices by buying large futures contracts. Hard to blame 'em for that, better a high price you can counton than a much higher price you can't afford.

So - calling the economists around here; are the evil speculators the sole problem, or are there other factors in play here?

snippet:

Now it’s certainly true that the price of a futures contract is established by the supply of, and demand for, those contracts--just like everything else. So as oil economist Philip Verleger points out, “forward prices will rise relative to cash prices if a large number of buyers of forward contracts enter the market.” And that’s exactly what we’ve seen, as the advocates of futures market regulation so dearly love to point out. Verleger, in fact, agrees that the commodity index funds that invaded the oil futures markets with tens of billions of dollars have, since 2004, single-handedly turned the market from its normal state of “backwardation” (where futures prices are lower than present physical prices) to “contango” (where futures prices are higher than present physical prices).

If the flow of money into futures markets, however, were driving physical (that is, real) crude oil prices paid by consumers, one would at least expect to find some relationship between the dollars being parked in futures markets and retail prices. But Verleger has been tracking daily dollar flows in the principal futures markets for West Texas crude since January 2005 and finds that, while cash has been injected steadily into those markets, there has been no surge of dollars into those markets over the past few months.

In an earlier test Verleger examined the flow of money invested in the two principle commodity index funds (managed by Goldman Sachs ( GS - news - people ) and JPMorgan Chase ( JPM - news - people )) from January 2006 through June 2009 and found no correlation between the flow of money from these sources into the futures market and the price of West Texas crude. It’s therefore hard to argue that trading volume alone has anything to do with the recent run-up of gasoline prices.

Oil Speculators Are Your Friends - Forbes.com

 

[hortysir]

 

[uscitizen]

The bond market is so low that "investors" are putting their money into commodities thus raising energy and food costs.

 

[Middleoftheroad]

If you listen to Obama and the Dems, the rising gas prices are the fault of the godless and wicked oil speculators. Others might claim that it's more a case of rising demand in emerging markets coupled with falling supply, and also a weaker dollar. All that instability in the middle east makes the airlines and shipping industries nervous, and these folks are part of the evil speculators; they're trying to reduce the uncertainty of oil prices by buying large futures contracts. Hard to blame 'em for that, better a high price you can counton than a much higher price you can't afford.

So - calling the economists around here; are the evil speculators the sole problem, or are there other factors in play here?

snippet:

Now it’s certainly true that the price of a futures contract is established by the supply of, and demand for, those contracts--just like everything else. So as oil economist Philip Verleger points out, “forward prices will rise relative to cash prices if a large number of buyers of forward contracts enter the market.” And that’s exactly what we’ve seen, as the advocates of futures market regulation so dearly love to point out. Verleger, in fact, agrees that the commodity index funds that invaded the oil futures markets with tens of billions of dollars have, since 2004, single-handedly turned the market from its normal state of “backwardation” (where futures prices are lower than present physical prices) to “contango” (where futures prices are higher than present physical prices).

If the flow of money into futures markets, however, were driving physical (that is, real) crude oil prices paid by consumers, one would at least expect to find some relationship between the dollars being parked in futures markets and retail prices. But Verleger has been tracking daily dollar flows in the principal futures markets for West Texas crude since January 2005 and finds that, while cash has been injected steadily into those markets, there has been no surge of dollars into those markets over the past few months.

In an earlier test Verleger examined the flow of money invested in the two principle commodity index funds (managed by Goldman Sachs ( GS - news - people ) and JPMorgan Chase ( JPM - news - people )) from January 2006 through June 2009 and found no correlation between the flow of money from these sources into the futures market and the price of West Texas crude. It’s therefore hard to argue that trading volume alone has anything to do with the recent run-up of gasoline prices.

Oil Speculators Are Your Friends - Forbes.com

That snipet is misleading. Or the entire link is (I didn't read it).
They seem to be making the point that it takes more money to drive up prices, but that isn't the case at all. Because speculators can buy or short oil, it is more similar to a betting line in sports. If a team is favored by ten points and everyone bets one side or the other the line changes to reflect how the crowd is betting. It only stops changing when an equilibrium is met (half on each side, or in this case (half the money on each side).
But I don't blame the speculators. They are what they are. The only problem I have with speculation is that it seems to riaise prices prematurely, or in some cases, raise it when in the end nothing ever happens (which could be the case with Iran).
But that fact is countered by the speculators motive. Their "job" is to buy when it is cheap (abundant) and sell when it is expensive (scarce). In theory it should help to smooth out the peaks and valleys. Assuming they do their job well.
Still, I am a slight peak oil theorist (not to the extreme that we are actually going to run out one day) and I figured that whenever the economy begins to improve oil prices will skyrocket and only recede if the economy goes back down.

 

[Wiseacre]

If you listen to Obama and the Dems, the rising gas prices are the fault of the godless and wicked oil speculators. Others might claim that it's more a case of rising demand in emerging markets coupled with falling supply, and also a weaker dollar. All that instability in the middle east makes the airlines and shipping industries nervous, and these folks are part of the evil speculators; they're trying to reduce the uncertainty of oil prices by buying large futures contracts. Hard to blame 'em for that, better a high price you can counton than a much higher price you can't afford.

So - calling the economists around here; are the evil speculators the sole problem, or are there other factors in play here?

snippet:

Now it’s certainly true that the price of a futures contract is established by the supply of, and demand for, those contracts--just like everything else. So as oil economist Philip Verleger points out, “forward prices will rise relative to cash prices if a large number of buyers of forward contracts enter the market.” And that’s exactly what we’ve seen, as the advocates of futures market regulation so dearly love to point out. Verleger, in fact, agrees that the commodity index funds that invaded the oil futures markets with tens of billions of dollars have, since 2004, single-handedly turned the market from its normal state of “backwardation” (where futures prices are lower than present physical prices) to “contango” (where futures prices are higher than present physical prices).

If the flow of money into futures markets, however, were driving physical (that is, real) crude oil prices paid by consumers, one would at least expect to find some relationship between the dollars being parked in futures markets and retail prices. But Verleger has been tracking daily dollar flows in the principal futures markets for West Texas crude since January 2005 and finds that, while cash has been injected steadily into those markets, there has been no surge of dollars into those markets over the past few months.

In an earlier test Verleger examined the flow of money invested in the two principle commodity index funds (managed by Goldman Sachs ( GS - news - people ) and JPMorgan Chase ( JPM - news - people )) from January 2006 through June 2009 and found no correlation between the flow of money from these sources into the futures market and the price of West Texas crude. It’s therefore hard to argue that trading volume alone has anything to do with the recent run-up of gasoline prices.

Oil Speculators Are Your Friends - Forbes.com

That snipet is misleading. Or the entire link is (I didn't read it).
They seem to be making the point that it takes more money to drive up prices, but that isn't the case at all. Because speculators can buy or short oil, it is more similar to a betting line in sports. If a team is favored by ten points and everyone bets one side or the other the line changes to reflect how the crowd is betting. It only stops changing when an equilibrium is met (half on each side, or in this case (half the money on each side).
But I don't blame the speculators. They are what they are. The only problem I have with speculation is that it seems to riaise prices prematurely, or in some cases, raise it when in the end nothing ever happens (which could be the case with Iran).
But that fact is countered by the speculators motive. Their "job" is to buy when it is cheap (abundant) and sell when it is expensive (scarce). In theory it should help to smooth out the peaks and valleys. Assuming they do their job well.
Still, I am a slight peak oil theorist (not to the extreme that we are actually going to run out one day) and I figured that whenever the economy begins to improve oil prices will skyrocket and only recede if the economy goes back down.

Maybe you should've read the entire article. The point is that speculative money by itself isn't the reason for spiking oil prices. There are other forces at work that are more powerful.

 

[Mr. H.]

Interesting to note that the article also points out how speculation has at times played a role in oil price decreases.

I've always understood it (futures trading) to act as a sort of buffering mechanism- that is, it prevents frequent and violent swings in the market either up or down.

 

[Trajan]

inflationary $$ pressures....and the speculators are a part of the market, always have been and do serve a purpose.

 

[mudwhistle]

The bond market is so low that "investors" are putting their money into commodities thus raising energy and food costs.

Quantitative Easing, inflation, silly energy policies, and the fact that oil prices are based on a shrinking dollar is raising energy and food costs.

 

[Middleoftheroad]

If you listen to Obama and the Dems, the rising gas prices are the fault of the godless and wicked oil speculators. Others might claim that it's more a case of rising demand in emerging markets coupled with falling supply, and also a weaker dollar. All that instability in the middle east makes the airlines and shipping industries nervous, and these folks are part of the evil speculators; they're trying to reduce the uncertainty of oil prices by buying large futures contracts. Hard to blame 'em for that, better a high price you can counton than a much higher price you can't afford.

So - calling the economists around here; are the evil speculators the sole problem, or are there other factors in play here?

snippet:

Now it’s certainly true that the price of a futures contract is established by the supply of, and demand for, those contracts--just like everything else. So as oil economist Philip Verleger points out, “forward prices will rise relative to cash prices if a large number of buyers of forward contracts enter the market.” And that’s exactly what we’ve seen, as the advocates of futures market regulation so dearly love to point out. Verleger, in fact, agrees that the commodity index funds that invaded the oil futures markets with tens of billions of dollars have, since 2004, single-handedly turned the market from its normal state of “backwardation” (where futures prices are lower than present physical prices) to “contango” (where futures prices are higher than present physical prices).

If the flow of money into futures markets, however, were driving physical (that is, real) crude oil prices paid by consumers, one would at least expect to find some relationship between the dollars being parked in futures markets and retail prices. But Verleger has been tracking daily dollar flows in the principal futures markets for West Texas crude since January 2005 and finds that, while cash has been injected steadily into those markets, there has been no surge of dollars into those markets over the past few months.

In an earlier test Verleger examined the flow of money invested in the two principle commodity index funds (managed by Goldman Sachs ( GS - news - people ) and JPMorgan Chase ( JPM - news - people )) from January 2006 through June 2009 and found no correlation between the flow of money from these sources into the futures market and the price of West Texas crude. It’s therefore hard to argue that trading volume alone has anything to do with the recent run-up of gasoline prices.

Oil Speculators Are Your Friends - Forbes.com

That snipet is misleading. Or the entire link is (I didn't read it).
They seem to be making the point that it takes more money to drive up prices, but that isn't the case at all. Because speculators can buy or short oil, it is more similar to a betting line in sports. If a team is favored by ten points and everyone bets one side or the other the line changes to reflect how the crowd is betting. It only stops changing when an equilibrium is met (half on each side, or in this case (half the money on each side).
But I don't blame the speculators. They are what they are. The only problem I have with speculation is that it seems to riaise prices prematurely, or in some cases, raise it when in the end nothing ever happens (which could be the case with Iran).
But that fact is countered by the speculators motive. Their "job" is to buy when it is cheap (abundant) and sell when it is expensive (scarce). In theory it should help to smooth out the peaks and valleys. Assuming they do their job well.
Still, I am a slight peak oil theorist (not to the extreme that we are actually going to run out one day) and I figured that whenever the economy begins to improve oil prices will skyrocket and only recede if the economy goes back down.

Maybe you should've read the entire article. The point is that speculative money by itself isn't the reason for spiking oil prices. There are other forces at work that are more powerful.

My point was against this, your bold from the article.

It’s therefore hard to argue that trading volume alone has anything to do with the recent run-up of gasoline prices.

Volume matters exactly 0% as far as price. I don't know why they are even arguing against it. Everyone that knows anything about gambling knows that. Its pretty much common knowledge. More people betting on a sports game doesn't change the line, more people betting on one side or the other, that changes the line.
If short selling was not allowed, then volume would matter greatly. But since it is allowed, it matters exactly 0%.

 

[Paulie]

The bond market is so low that "investors" are putting their money into commodities thus raising energy and food costs.

Quantitative Easing, inflation, silly energy policies, and the fact that oil prices are based on a shrinking dollar is raising energy and food costs.

Wow it's about time a non Ron Paul supporter recognized the dollar's role in the price of oil.

But as for speculators, with all the tension between Israel and Iran, and in Libya, and Syria, it's no wonder speculators are running to oil. It's not like they're just doing it to fuck with us. There's a real reason to want to be invested in it right now.

You can't have cheap oil and also have more war in the middle east. You get one or the other, so take your pick.