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Guest Post: How Oil Speculation Affects Oil Prices
Submitted by Ilene of Phil's Favorites, as a sequel to his earlier post: Goldman's Global Oil Scam Passes The 50 Madoff Mark
Personal correspondence with Phil regarding how oil speculation affects oil prices.
This is a complicated issue as it’s not just the act of creating a contract.
Let’s say there are 100,000 barrels of oil in the world and 10 are
sold each day and they are shipped from various places in various
amounts but generally there are, at any given time, 30 days of oil at
sea (300 barrels). If I am taking straight delivery, I would contract
with the producers to deliver me 1 barrel of oil per day for a year or
5 years or whatever for $50 a barrel. My interest is to have a steady
supply and the producers interest is to have a steady demand. He wants
to charge as much as possible, I want to pay as little as possible.
Enter the speculators. Rather than me (the actual user) haggling
with the producer directly (as is done in most business transactions),
the speculator steps in and offers to buy as much oil as the guy can
produce for $40. I can’t do that because I only need one barrel a day
but if the guy can make 1.3 or 1.6 barrels a day or he can add a new
pump and make 2 barrels a day, knowing he has a buyer at $40, he will
be thrilled (assuming the profits work selling 2Bpd at $80 vs 1Bpd at
$50).
In a perfect world, the speculator is simply taking on some risk and
will make the difference between the $40 they are paying and the $50 I
am willing to pay and they will sell the excess for $40-50 and make a
nice overall profit.
But then the speculators get greedy. They know I NEED 1 barrel per
day and perhaps there was some seasonality to pricing or natural
fluctuation but all the speculator has to do is wait for the price to
rise and then hold it there. If supply is uneven, they can divert some
to storage. They are still buying it, creating demand but they are not
delivering it so there is suddenly a “shortage” where none existed
before. As they accumulate more barrels in storage (say 100) they
realize that getting the price up to $60 makes them not only $10 a day
more per barrel they sell me, but it increases their “wealth” by 20% as
the 100 barrels they have in storage are now valued at $60 – even
though they are actually unwanted barrels that have been manipulated
out of circulation.
Given this situation, it is always in the interest of the speculator
to encourage demand, even when supply will fall behind. They can
encourage highways to be built, block public transportation, fund the
use of plastics for everything, get government to stockpile oil,
discourage clean air laws and block alternative energy legislation and
encourage auto companies to make gas guzzling cars and extend credit to
anyone who wants to buy a cargo truck to take the kids to the grocery
store.
It is also in the interest of the speculators to curtail supply,
which also boosts the value of what they have. They can do this by
teaching the producers to form a cartel to control prices, they can
downgrade refiners and get clean air legislation passed so none can be
built, they can refuse to lend money for oil exploration or give money
to groups who are against drilling or use their PR departments to
vilify governments who are able to supply oil but are not under their
thumb. They may even start a war or two to destroy existing supplies
and knock out competitors’ competing operations.
Another fun thing speculators can do is to get other people to
speculate. Once you get more and more people speculating (and ETFs are
great for this) then more and more product is pulled off the free
market and into the hands of speculators, who end up hoarding something
they actually have no use for, except as an investment. You can goose
speculation all kinds of ways – by making people think they can get
rich, by making up stories of shortages, by manipulating price spikes –
you name it.
On top of all that, you can manipulate the contracts on the “free”
market. All you have to do is get a friend (me) to agree to jack up
the price with you. You and I have 100 barrels of oil in storage and
another 30 barrels in ships on the way and contracts for more years at
$40 a barrel (say 750 barrels). We have a few stories printed in the
news about peak oil and demand and whatever nonsense and then I offer a
barrel (1 of 10 sold that day) for $61 on the open market and you buy
it. Then you offer a barrel (10% of a normal day’s trading) at $62 and
I buy it. Then I offer the barrel for $63 and you buy it and then you
offer the barrel for $64 and I buy it. What has happened? You and I
have spiked the volume of trading by 40% for the day and ramped the
price up 6.5% by trading the same barrel back and forth 4 times.
You paid $61, I paid $62 (+1 to you), you pay $63 (+1 to you) and I
pay $64 (+1 to you) so the whole scam costs me $1 but we have raised
the “value” of our 800 barrels of oil by $4 ($3,200), not a bad ROI for
a day’s work.
So that’s the short version of how it works. It’s kind of like the
4 blind men who feel an elephant and each guy thinks it’s something
else because the part he’s feeling is so different from the others –
unless you step back and get the whole picture, it’s hard to make sense
of it but once you do get the big picture, the parts become obvious….
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If only we had a government body to investigate such market manipulation... if only...
Did Goldman Goose Oil?
How Goldman Sachs was at the center of the oil trading fiasco that bankrupted pipeline giant Semgroup.Christopher Helman and Liz Moyer 04.13.09, 12:00 AM ET
When oil prices spiked last summer to $147 a barrel, the biggest corporate casualty was oil pipeline giant Semgroup Holdings, a $14 billion (sales) private firm in Tulsa, Okla. It had racked up $2.4 billion in trading losses betting that oil prices would go down, including $290 million in accounts personally managed by then chief executive Thomas Kivisto. Its short positions amounted to the equivalent of 20% of the nation's crude oil inventories. With the credit crunch eliminating any hope of meeting a $500 million margin call, Semgroup filed for bankruptcy on July 22.
But now some of the people involved in cleaning up the financial mess are suggesting that Semgroup's collapse was more than just bad judgment and worse timing. There is evidence of a malevolent hand at work: oil price manipulation by traders orchestrating a short squeeze to push up the price of West Texas Intermediate crude to the point that it would generate fatal losses in Semgroup's accounts.
"What transpired at Semgroup was no less than a $500 billion fraud on the people of the world," says John Catsimatidis, the billionaire grocer turned oil refiner who is attempting to reorganize Semgroup in bankruptcy court. The $500 billion is how much the world would have overpaid for crude had a successful scam pushed up oil prices by $50 a barrel for 100 days.
What's the evidence of this? Much is circumstantial. Proving oil-trading manipulation is difficult. But numerous people familiar with the events insist that Citibank, Merrill Lynch and especially Goldman Sachs had knowledge about Semgroup's trading positions from their vetting of an ill-fated $1.5 billion private placement deal last spring. "Nothing's been proven, but if somebody has your book and knows every trade, it would not be difficult to bet against that book and put the company into a tremendous liquidity squeeze," says John Tucker, who is representing Kivisto.
What's known for sure is that Goldman Sachs, through J. Aron & Co., its commodities trading arm, was in prime position to use such data--and profited handsomely from Semgroup's fall. J. Aron was Semgroup's biggest counterparty, trading both physical oil flowing through pipelines and paper oil, in the form of options and futures.
When crude oil peaked in July, Semgroup ran out of cash to meet margin requirements on options contracts it had with Aron, contracts on which it had paper losses of $350 million. Desperate to survive, Semgroup asked Aron to pony up $430 million it owed on physical oil. Aron said no, declared Semgroup in default on its contracts and demanded immediate payment of losses.
Some answers may emerge in late March when former FBI director Louis Freeh releases a report on the trading surrounding Semgroup's demise. He was hired by Semgroup and given subpoena power by the bankruptcy court judge in Delaware. Meanwhile the Securities & Exchange Commission is investigating, and lawyers involved in the bankruptcy say that Manhattan District Attorney Robert Morgenthau's office is looking into the actions of New York firms in the collapse. His office declines to comment.
Goldman says only that any allegations of oil price manipulation are "without foundation." Merrill and Citi declined comment.
Goldman and Aron (where Goldman Chief Executive Lloyd Blankfein got his start) have had a deep connection with Semgroup. In 2004 two former Goldman bankers bought a 30% stake in Semgroup for $75 million through their New York private equity firm, Riverstone. Both men, Pierre Lapeyre and David Leuschen, had helped form Goldman's commodity trading business, and Leuschen had been a director at Aron.
In late 2007 Semgroup entered into an oil-trading agreement with Aron. The companies began trading both oil futures and physical crude. Aron sent much of the oil it bought from Semgroup to a Coffeyville, Kans. refinery in which Goldman owns a 30% stake.
Semgroup's troubles mounted in the first quarter of 2008, when it had to post $2 billion in margin to cover losses. Goldman offered to underwrite a $1.5 billion private placement. Kivisto's attorney Tucker and others believe that it was in the Wall Street research for this offering that Semgroup's trading bets became fatally exposed. In April the banks (Merrill Lynch and Citibank were co-underwriters) required that Semgroup submit its trading positions to a stress test, a process one source describes as a "proctology exam." Goldman ended up abandoning the placement as investors balked at braving the liquidity crunch.
Meanwhile the futures markets had gotten wacky. On June 5, with no news catalysts, oil futures spiked $5 a barrel, the biggest one-day jump since the outbreak of the first Gulf war. The next day, on no news, the price jumped another $10 to $138. Traders say that in the days leading up to the $147 peak on July 12 there was the smell of blood in the water. "We just kept bidding the market higher," one trader says.
According to a trading summary submitted with court documents, Semgroup had entered into some terribly costly trades with Aron. In February 2008 Semgroup sold Aron call options on 500,000 barrels of oil for July delivery with a strike price of $96 per barrel. That meant that at the peak Semgroup's loss on each of those barrels was $51, or $25.5 million on that trade. Goldman says it "can't comment on the trading positions of counterparties."
Shortly before it filed for bankruptcy, Semgroup sold its trading book to Barclays Capital. Barclays' bold bet was that the price of crude would fall, erasing the losses. It is believed that 30 days later Barclays was sitting on a $1 billion gain as oil indeed fell, to $114 a barrel. Barclays wouldn't comment other than to confirm it still owns the book. That prices plunged after Semgroup failed is more evidence of manipulation, says Catsimatidis: "With the portfolio in Barclays' hands they could not squeeze the shorts anymore. The jig was up, and oil collapsed."
Since the bankruptcy, Aron has agreed to pay Semgroup only $90 million to settle up accounts. That's not enough for the dozens of oil producers who still haven't been paid for $430 million in oil that Semgroup delivered to Aron. "We sued J. Aron because Semgroup didn't do it," says Phillip Tholen, chief financial officer of oil company Samson Resources. "I can't fathom why they wouldn't file against J. Aron for those monies."
One possible answer: the Goldman connection. Going after Aron's cash would complicate matters with Riverstone, which still wields sway over the board. The creditors have reason to keep Riverstone and Goldman happy; the duo has teamed up to buy myriad energy assets in recent years, most notably a $22 billion leveraged buyout of pipeline king Kinder Morgan. They are likely to team up again to buy choice Semgroup assets out of bankruptcy.
tyler, I fear you might be a workaholic
You mean Tylers. Yeah, they do work hard.
It still is working hours somewhere around the world... lol
the oil etf's are rigged too when the price of oil went down, my shares went down. then when the price of oil rose, my shares continued to go down. of course I was like WTF. thats when I realized that oil, like pm"s are completely rigged. It took a while longer, and more losses, before I realized the whole market is a rigged casino.
I feel your pain
You need to read the prospectus on these ETFs and get a sense of the slope of prices for the forward crude contracts before making a trade decision. From http://www.unitedstatesoilfund.com/pdfs/uso-prospectus.pdf
_________
The design of USOF’s Benchmark Oil Futures Contract is such that every month it begins by using the near month contract to expire until the near month contract is within two weeks of expiration, when, over a four-day period, it transitions to the next month contract to expire as its benchmark contract and keeps that contract as its benchmark until it becomes the near month contract and close to expiration. In the event of a crude oil futures market where near month contracts trade at a higher price than next month to expire contracts, a situation described as ‘‘backwardation’’ in the futures market, then absent the impact of the overall movement in crude oil prices the value of the benchmark contract would tend to rise as it approaches expiration. As a result the total return of the Benchmark Oil Futures Contract would tend to track higher.
Conversely, in the event of a crude oil futures market where near month contracts trade at a lower price than next month contracts, a situation described as ‘‘contango’’ in the futures market, then absent the impact of the overall movement in crude oil prices the value of the benchmark contract would tend to decline as it approaches expiration. As a result the total return of the Benchmark Oil Futures Contract would tend to track lower. When compared to total return of other price indices, such as the spot price of crude oil, the impact of backwardation and contango may lead the total return of USOF’s NAV to vary significantly. In the event of a prolonged period of contango, and absent the impact of rising or falling oil prices, this could have a significant negative impact on USOF’s NAV and total return.
_______
The ETF does not own oil, nor would it take delivery. The ETF manager is running a futures book with all of the risks associated with doing so. Contango and backwardation can cause the fund to completely lose track of the spot price for a period of time. But even worse, the fund represents a significant source of demand for front-month futures contracts, and it has been a simple matter in the past to front-run one or more of the ETFs at key moments to profit from their roll activity. I don't know how easy it is these days, but some clever people were making money on this not too long ago.
Yea contango is something that kills guys who speculate on prices in the future as if playing the stock market. Betting prices of oil would be higher in the future does you no good if it is already higher in the futures. You have to know something the market does not pure and simple.
see UNG/ nat gas for most painful contango. you've been rolling into 20% front month to back month discounts all summer and now into the winter... i can hardly think of a worse way to flush money down the toilet.
You left off the part about the fed financing the whole operation at 0%.
forward this to dylan ratigan, maybe he can broadcast this straightforward analogy on his show...
themoreyouknow.avi
I'm not buying this argument.
Eventually someone takes delivery and speculators (nearly always) are NOT the ones taking delivery.
The fundamental issues are that:
a) We can't produce more than 85M bbl/day and demand is roughly the same.
b) The price of the commodity is really based on a 21-day supply window rather than the worldwide availability of the product.
c) There are some users who will pay ANY price to meet their local demand.
Speculators simply need to squeeze the must-bid players and can continue to squeeze until demand destruction allows them to find a lower price.
Not to sound too socialist, but the market for all hydrocarbons should be completely controlled and actual reserves and well production open and transparent.
Just my 2-cents.
There are more than 2.77 bln bls of crude, gasoline, distillate and blended stocks in storage throughout the world today. And you say demand is roughly the same as supply? When the future markets let the actual end user determine pricing, then the game will not be rigged. But as long as a producer can speculate in the same market which sets pricing power for the goods in which they sell, why would they not bid up the price. The Saudi's will never have to worry about taking delivery, they simple shut off the valve.
And yes you sound like Comrade Hugo!
Actually no.
Futures contracts are a legal obligation to deliver at a specific date in the future unless the contract is closed out. A tiny fraction of players actually take phsyical receipt It's mostly an accounting transaction that takes into account hedgers use physical forward contracts as well as delivery points.
The problems with trading delivery months is that the basis risk, the difference between the physical price and the futures price, is out of wack for several technical reasons which is why postions are rolled over long before delivery basis come into play.
The real problme here is that hedge funds are already highly leveraged and then they use that leverage to trade highly leveraged futures contracts. At some point the CFTC must place limits on total leverage of traders. Until then the commodity markets will remain out of sync with the physical markets.
agreed.
a 50% rise in price twice in 3 years on never changing demand in the short period of time, is anything but f. coincidence.
just ask yourself, how long did it take for oil prices to recover after the drop in the mid 90's? Or by how many percent the Chinese (our actual oil demand has been ether flat or dropping in the last 18 months) could have increased their demand? If everyone uses the same amount of oil or less and Chinese is the only side increasing the demand (assuming that propaganda is true) have they increased demand by let's say purchasing 50% of total of all cars on their roads?
Bullocks.
At least at a casino you get free drinks for gambling and a great looking hostess.
Public transportation sucks. It's awful to share the same space with TB and lice infested 'people'. Criminals ride the light rail. Take the bus yourself. I'm driving.
This is society and human behaviour at work which has done in varying degrees over centuries
The rich get richer and think they have it okay, they get greedy, exploit the poor as much as they can, get complacent.... poor don't like it, but don't do anything. the rich push and push and squeeze and squeeze but because the rich eventually become too greedy they drive the poor to extremes where dying is a better option.
Greed and Fear, the market, the population.
And society is generally kept in as much ignorance as possible, they have to keep the masses from communicating and also keep the children indoctrinated as to the "wise" ways of those in power.
There have been many books warning of these recurring scenarios but it is in the interests of those who hold the money to dumb down the masses as much as they can
Ok, ^ above I assumed that Oil is unit elastic, which means a 50% rise in demand would cause a 50% rise in price. In reality, the picture is even worse because the demand for oil is reletively inelastic, which means that real demand is driven by economic activity rather than changes in price. (given the prices are not insanely high.) So the lower oil prices did not necessary produce more driven miles anywhere in the world, including China.
Therefore OIL prices in the last 6 months were not driven by real demand. Nether they were driven by real supply, which was reported as slightly in excess of the demand.
So the only real explanation is BS or expected demand which is just an imaginary number released by GS & Co last summer (remember their target of 90+/barrel? )
p.s.
http://www.energybulletin.net/node/27600
the only mistake in the above article - it wasn't the suppliers who charged any price the want, it was (are) the middle man courtesy of...
Look, I will not say that these markets are not rigged, and have obviously been so since at least the Clinton Administration.
Personally I sat on a rather large OTC Desk during the
"Big One" of 87, and the partners said, "The next one who answers the phone is fired!" This was no small firm in the OTC universe either. I can only imagine what goes on today upstairs, how hard is it to unplug a server by "mistatke".
But to address the post, if you lift an offer at anywhere between 61-65, in your picture painting example, an I as a trader will also step in behind you and offer up the ladder, and if know one comes in to lift me, I have my broker out whacking bids large, and I'll be on the bid 25 tic's lower to cover the short my broker just created for me against your bogus run up. That is the problem out there today, in all markets, there are very, very few old school traders left, most are just kid's that haven't traded beyond a computer screen. Myself, I've been an upstairs trader, floor trader, floor broker, MQTO, and traded options, bonds, stocks and futures. All with a fairly good degree of success. Not blowing my own horn here, but the only reason these markets are so easily manipulated is there are too few players, and not enough hate left on the Street, Salomon vs. Goldman, or any other old rivals, it's just the jack off plunge team, backed up by the government bucks, and Obama's regime is not the first, this has been going on since before the dot com boom. That's why everything you were taught is so whack, if we run interest rates so low, they'll have to buy stocks just on speculation to provide some return. No different with gold, oil or sports book parlays. Unfortunately, this is all going to end very, very, badly for us all.
Unfortunately, this is all going to end very, very, badly for us all.
I used to think the same thing. The problem is, for it to end badly, it has to end. And there seems no end to the gimmickry available to keep any of it from ending. It will go on. And perhaps it goes on and on badly, but that's a very different thing.
Gentlemen, place your bets.
so is the conclusion that the nature of exchange based oil trading is that it allows multiple parties to engage in collusive price-fixing behavior while appearing to be independent risk taking free market participants?
if so then this mechanism is a 'bad' like other forms of price collusion that we as a society have established laws against? i may be convinced. i also might be convinced the above correspondence is correct in the pricing actions and results but i think that some of the players don't even realize the aggregate effect of their behaviors generates the same result as if they (as an industry) all sat down in a room and decided what (beneficial) price to sell the product for. in this case the idea is that the oil exchange is not benignly a mechanism of price discovery but a mechanism of price collusion with plausible deniability.
if the argument is just 'people with money are pre-buying things people without money will later need' then i'm afraid this oil speculation argument is tied up in a larger question of whether the current wealth distribution is sustainable.
Wow - I'm not really sure where to begin to refute the nonsense in this article.
I guess I'll just start by listing the incorrect assumptions and the invalid argument that follows from
them:
1.
"Let’s say there are 100,000 barrels of oil in the world":
-- Let's not. Nobody knows how much oil there actually is, though many believe that the supply is running
out. That's exactly the reason for having a market in oil, with the uncertainty of the true amount reflected in prices.
2.
Oil market participants can be cleanly divided into 3 groups - producers, users, and speculators.
-- No, every adult person living in a modern society on the planet is both a user and a speculator.
Some people are all three. When gas is cheap, we all fill our tanks to take advantage of lower prices.
Some of us are a bit smarter and try to hedge our costs by buying oil ETFs, etc. ,by being speculators.
Every person has a right to speculate in oil to cover their own living expenses.
3.
Speculators are not really proper market participants because they are just unnecessary interlopers between
producers and users : "the speculator steps in and offers to buy as much oil as the guy can produce for $40",
and "In a perfect world, the speculator is simply taking on some risk and will make the difference".
-- This is the most common error made by people criticizing speculation.
Consider the producer - of course "the producers interest is to have a steady demand", but like any business, that is sometimes difficult.
He just wants to be paid a good price *now* for his future production so that he can roll the profits back into his business.
So he sells his future supply in the futures market. Who do you think is willing to buy at that price so that they can sell the oil later for a better price?
Yes, it's the speculator. There is nobody else that will take that risk.
Speculators are absolutely essential in this role.
4.
Speculators are greedy bastards: "But then the speculators get greedy. They know I NEED 1 barrel per day and perhaps there was some seasonality to pricing or natural fluctuation but all the speculator has to do is wait for the price to rise and then hold it there."
-- If only it was that simple! A quick check of the history speculation should convince anyone that being a speculator is NOT the path to easy riches. Look up Amaranth for example.
5.
Speculators are omnipotent: "Given this situation, it is always in the interest of the speculator to encourage demand, even when supply will fall behind. They can encourage highways to be built, block public transportation, fund the use of plastics for everything, get government to stockpile oil, discourage clean air laws and block alternative energy legislation and encourage auto companies to make gas guzzling cars and extend credit to anyone who wants to buy a cargo truck to take the kids to the grocery store."
-- LOL - The author apparently knows some very powerful speculators. In fact, these guys must actually control the world, if what he says is true.
But, it isn't even close to being true - if anyone or any corporation was that powerful, they certainly wouldn't need to speculate in oil - they could just print as much money as they want - forget about trivial stuff like oil.
6.
It's simple and easy to manipulate the oil market: "All you have to do is get a friend (me) to agree to jack up the price with you."
-- The author clearly has no clue at all about size of the oil market. This one is really sad actually.
So, this article and the ones before it, are either the work of someone who has no understanding of markets at all, or more sinisterly, is the propaganda of some communist organization.
1.-- Let's not. Nobody knows how much oil there actually is, though many believe that the supply is running
out. That's exactly the reason for having a market in oil, with the uncertainty of the true amount reflected in prices.-
Yes let's leave it as nobody knows. So it doesn't mean anything that many believe that supply is running out. Try not to dispute yourself.
2.-- No, every adult person living in a modern society on the planet is both a user and a speculator.
Some people are all three. When gas is cheap, we all fill our tanks to take advantage of lower prices.
Some of us are a bit smarter and try to hedge our costs by buying oil ETFs, etc. ,by being speculators.
Every person has a right to speculate in oil to cover their own living expenses.--
Not every adult person living in a modern society on the planet is not both a user and a speculator. The only absolute in life is uncertainty. Hedging your energy budget by buy buying oil ETfs is comparable to buying stock in Sony to hedge for that $499.99 PS3 dropping to $399.99 on Black Friday. As for my living costs, I try not to run my household budget based upon any speculation.
3. -- This is the most common error made by people criticizing speculation.
Consider the producer - of course "the producers interest is to have a steady demand", but like any business, that is sometimes difficult.
He just wants to be paid a good price *now* for his future production so that he can roll the profits back into his business.
So he sells his future supply in the futures market. Who do you think is willing to buy at that price so that they can sell the oil later for a better price?
Yes, it's the speculator. There is nobody else that will take that risk.
Speculators are absolutely essential in this role.--
Producers don't want a good price, they want the highest price possible. Speculators used to be end demand users, i.e. Airlines, refiners, petro-chemical producers and other industrial manufacturers. Not suits sitting behind trading terminals. But, I agree that speculators are essential in this role. We must know with full transparency who the speculators are.
4.-- If only it was that simple! A quick check of the history speculation should convince anyone that being a speculator is NOT the path to easy riches. Look up Amaranth for example.--
You have to be kidding, you yourself own oil ETFs. Need I say more. Amaranth, hahahaha!
5.
-- LOL - The author apparently knows some very powerful speculators. In fact, these guys must actually control the world, if what he says is true.
But, it isn't even close to being true - if anyone or any corporation was that powerful, they certainly wouldn't need to speculate in oil - they could just print as much money as they want - forget about trivial stuff like oil.-
Why print money when you can borrow it at 0%, or hell get a loan from Uncle Sam and never pay it back. Example- GM's Tarp bailout for energy efficient vehicle plants.
6. -- The author clearly has no clue at all about size of the oil market. This one is really sad actually.--
I read nothing to lead me to your point of view. It would help to back up your argument with facts not feelings. I will leave that up to you, maybe you can educate yourself.
Your comments:
"Not every adult person living in a modern society on the planet is not both a user and a speculator. The only absolute in life is uncertainty. Hedging your energy budget by buy buying oil ETfs is comparable to buying stock in Sony to hedge for that $499.99 PS3 dropping to $399.99 on Black Friday."
-- A rather poor counter-example isn't it?
A PS3? - it's not an expense.
Buy shares in Sony to hedge a FALL in price in their product?
- what are you talking about?
"As for my living costs, I try not to run my household budget based upon any speculation."
-- It's not possible to avoid speculation unless you are living completely isolated from society. There are some purchases that MUST be made by everyone (energy, food, shelter). Everyone constantly attempts to optimize their expenses by delaying purchases, using substitutes and by increasing their own stocks of essential goods in anticipation of increasing prices. That is speculation.
"We must know with full transparency who the speculators are"
-- For what purpose? Will your own actions change if you had that information. I doubt it. You already know who the BIG speculators are. You can probably guess quite accurately what they are doing already.
"You have to be kidding, you yourself own oil ETFs. Need I say more. Amaranth, hahahaha!"
-- My point was: The author of the article had a ridiculous example of how a speculator might squeeze a user by 'wait for the price to rise and then hold it there'. As if the user didn't have other choices, or that this was somehow a risk-free activity for the speculator. Amaranth is an example of how a big bet can go very wrong. There is no "too big to fail" in a real market.
"Why print money when you can borrow it at 0%, or hell get a loan from Uncle Sam and never pay it back. Example- GM's Tarp bailout for energy efficient vehicle plants."
-- The last time I checked (yesterday), near 0% borrowing with infinite term is still available to almost anyone. So, you are reinforcing my argument. The article authors idea that speculators are so powerful that they can artificially create demand for oil so that they can make money is completely false. There are obviously much easier ways to make money.
"It would help to back up your argument with facts not feelings. I will leave that up to you, maybe you can educate yourself."
-- I assume you mean that I didn't bother to give a reference for the size of the oil market to refute the assertion in the article that the oil market is easy to manipulate? Yes, I didn't bother because only the laziest people can't use Google search.
But for those who might be interested, here's an address:
http://www.iie.com/publications/papers/verleger1207.pdf
- "Everyone constantly attempts to optimize their expenses by delaying purchases, using substitutes and by increasing their own stocks of essential goods in anticipation of increasing prices. That is speculation."
You are wrong on this point. Your example is called consumption which is the expense necessary for a standard of living at that moment. Speculation is not a life necessity and yet it expects a return on that investment (not expense) in terms of dollars, not life benefits.
- "Amaranth is an example of how a big bet can go very wrong. There is no "too big to fail" in a real market."
Hence the purpose of the article, that there is no "real market". When you have manipulation, you no longer have a market. You have participants operating a market, but the free-ness can and is manipulated. How? Because there is a very small finite number of participants at this level. We're not talking end consumer level, but raw materials level, and only a relatively few people participate at that level. End consumers as a whole set demand for goods, not raw materials. The producers and middlemen can control supply of raw materials, not because there isn't demand, but because there is, if you know what I mean.
- "artificially create demand for oil so that they can make money is completely false. There are obviously much easier ways to make money."
Again, you suppose that the manipulators are creating demand, when in fact, they're reducing supply. Two sides to a trade, but manipulators on the supply side, not the demand side (middle men are also on the supply side). Now if you have two participants on both side, how can you not see manipulation, especially if they're sufficiently large enough (well capitalized at 0%)?
There seems to be a lot of resistance by some people to accept that almost everything in life involves some degree of speculation or the taking of risks. Some people are natural risk-takers, others attempt to avoid it.
That may be the underlying reason for much of the animosity towards speculators. The risk avoiders feel threatened by the risk-takers (speculators) and try to curtail those activities, which they see as reckless.
You say: "Hence the purpose of the article, that there is no "real market". When you have manipulation, you no longer have a market.".
It's amazing that when markets don't produce the results that some people expect, they immediately make accusations of manipulation. Of course, they don't actually have any evidence of this, but that doesn't stop them.
You say: "End consumers as a whole set demand for goods, not raw materials."
LOL - are you serious?
You say: "Again, you suppose that the manipulators are creating demand, when in fact, they're reducing supply."
I supposed no such thing. The author of the article used that as an example.
*He just wants to be paid a good price *now* for his future production so that he can roll the profits back into his business.*
That's good point! They trade paper (actually bytes on storage disks) not even actual oil.
There's proper market regulation in place alredy and you cannot really abuse futures markets as there's a limit on how much oil (or other commodity) one can trade.
Otherwise it would be so easy for somebody to come to the market and just buy all the oil available and then sell it later at much inflated prices.
Futures market are regulated and noone really eager to get into trouble with SEC or other regulators.
PS:
http://www.ftacademy.com
Gee, sounds an awful lot like GOLD. Except oil has an actual use.
nice post.. very clear for those who do not understand
Speculators apparently never go short???
The Fed/Feds facilitate this for most petrodollars are directly recycled into US treasuries.
First point is that the futures price of oil converges on the physical (spot) price at expiry of the spot month and not vice versa: no other contract month has any relationship with the spot market price for crude oil or any other futures contract.
Second point is that even this is only the case for a deliverable contract like WTI. The ICE BFOE/Brent contract is cash settled and is essentially just a bet.
Third point is that only those market participants capable of actually making or taking delivery will still have contracts open in the spot month, and that excludes ETFs and most other players.
I managed the deliverable Gas Oil contract for six years on the IPE, and I can tell you that no broker would have dreamt of letting a client keep a position into the spot month who was incapable of making or taking delivery. So only those players capable of securing supply - and that necessarily means being capable of making and taking delivery - are capable of manipulating the physical market price.
That is why GLG are getting into the physical business; why Oxy bought the Phibro trading unit off Citigroup, and probably why Vitol bought Petroplus infrastructure assets.
The fact that ETFs and other funds are NOT involved in manipulating market prices actually brings down the number of suspects in relation to oil market manipulation quite drastically.
The next point is that the storage in the hands of trading intermediaries is de minimis - only a few days global production at most. This means that the capability of intermediaries acting alone to manipulate prices in anything more than the short term is minimal. It didn't stop the traders jerking the Brent forward market around every month, but that was relatively harmless fun - pretty much zero sum - among consenting adults.
The macro manipulation we have been seeing - both in the long run up to the spike last year and again now - involves the people who store oil in the ground for free. ie producers.
At the zero bound, it makes more sense for miners and drillers to leave oil and metal in the ground than to exchange it for financial assets. So in these circumstances we see the forward curves on oil and metals mirroring the yield curve. eg we saw Dec WTI and Dec S&P mirroring each other - the same rationale applies to all financial assets being pumped up right now.
We see an arbitrage - mainly through the Brent/BFOE complex - between the money and oil forward price curves which is facilitated by financial intermediaries. Essentially fund money is loaned to oil producers who in return loan oil (sell oil forward) to the funds - via investment banks.
The oil market is pumped up by borrowed money and hype until eventually product demand drops and blows back to crude oil and the music stops, with a dramatic collapse and deleveraging. Rinse and repeat.
The ETFs who operate on-exchange are in fact bringing much needed liquidity to those producers genuinely trying to hedge. ETFs are essentially off-loading the price risk of dollars in favour of taking oil price risk: while producers hedging are doing the opposite - off-loading oil price risk in favour of dollar price risk.
The bottom line is that the global market in crude oil and oil products is now entirely dysfunctional and needs root and branch reform. Even the producers who on the face of it benefit the most in the short term from pumped up prices actually lose out in the longer term from the way that their budgeting and investment is totally wrecked.
We need to start over.
Wow - I had to read this twice. Twice, because I don't expect drivel when I read material posted on ZH, so I was caught off guard.
A challenge to the author: Please write another article explaining to everyone why oil went from $145 to $30.
That's easy. The speculating funds and investment banks were forced to raise money during the general market decline, stops were hit, and price cascades downwards.
I think you're putting the cart in front of the horse, but either way, the author's premise is that speculators can control price of oil without consequence, such as a market rebalancing toward reality. Short term deviations/manipulations may be possible, but the author fails to consider what happens in the long term.
For instance, the author claims that speculators can store oil, thus decreasing available supply, and thus increasing price. Even if demand remains the same, that can only be a short term effect, since storage becomes incrementally more expensive as more storage is required -- thus, the incremental carrying cost of oil will supercede the incremental market rate for oil demanded, and the speculators will be forced to sell. It's the same effect as a Dam; you can prevent the flow of water to a point, but then you either have to start the flow again, or the dam will collapse entirely after the water level (oil storage costs) rise beyond the dam's capacity (quantity the speculator can store, and would cause new supply and stored supply to enter the market at the same time), and thus causing a massive flooding-- either way, the dam/storage is a temporary disruption. And the 'storage' argument was actually one of the semi-rational things that author said, though even that falls short of an even-handed presentation of the issue.
"speculators can store oil, thus decreasing available supply, and thus increasing price."
You can store oil in the producers oil field with the right kind of agreement. You have to be big, and you have to include the oil producer in the game.
Sure.
When the cops show up , the three card monte shills scatter , and the box is kicked to the curb.
The cards flutter to the floor.
There, it's been explained for ya.
bubbles pop.
Thanks for asking the obvious: due to (ultra)deleveraging --- but don't forget the other obvious event --- they hedge both ways --- so they earn when the market drops as well.
Homework assignment: thoroughly research TradeSpark.
"Oil market participants can be cleanly divided into 3 groups - producers, users, and speculators.
-- No, every adult person living in a modern society on the planet is both a user and a speculator.
Some people are all three. When gas is cheap, we all fill our tanks to take advantage of lower prices."
and how many tanks do you fill out, 5 ~ 10 offshore tankers? ROFL
I suspect a bit of generally unrecognized mischief on Tyler's part in posting this. :)
I agree Marla! - I got sucked into it completely!
LOL - I'm going avoid posting responses in the late evening from now on.
I'll just kick back with radiozh and wait for it blow over ...
I trust.
If it's mischief, it is mischief for a good and honorable cause.
One need only peruse the data from that Airline Transport Association report awhile back to see the obvious oil speculation going on, and to anyone familiar with ICE Futures this has long been obvious....
One might also consider the fee Shell gets with its new iraqi contract for pumping oil: about $2 a barrel
Speculators make money out of high price volatility, rather than high prices. When the price is too high, as it was at $143, they help to drive it down, and when it is too low, as it was under $50, they help to drive it higher.
I am fed up with this American centric argument, that oil prices are too high and driven by evil speculators. Either pay the price to fill your tank, take the bus or walk (the exercise might do you good) this is how market forces are suppose to work - you don't have a god given right to cheap fuel.
excellent article on seeking-alpha about what is really happening to oil with round-trip trading.....oil is sky high during a world wide depression not because of a shortage but because of trading on ice:
http://seekingalpha.com/article/172797-the-global-oil-scam-50-times-bigg...
ICE does not set the price. Nymex does. On the last days of trading the prices of the 2 diverge and the ICE settles to the Nymex price. Here is a test, go buy 40,000 ICE on the day before settlement and see if the price of Nymex goes up even 10% as much. Have you ever traded on either or you just believe what you read? Nymex has OTC swaps too. Just because something is correlated doesn't mean causation. You are the reason smart traders make money.
The oil is high because central banks and politicians want it to be high. It's called "reflation efforts". Speculators are just the executors...
"http://seekingalpha.com/article/172797-the-global-oil-scam-50-times-bigg..."
Actually, that article is crap, but the comment stream has some valuable stuff in it.
You can usually tell someone who has data and information in the examination of oil production and consumption. They reference articles.
The big problem right now is there are so many articles being written that are crap and get referenced. ANNNNNNNNND we have the IEA itself under attack has for having their data influenced.
The IEA says one thing particularly that is attention getting: Present producing fields are seeing production declines of 6+% per year -- with the most aggressive modern methods possible to increase recovery of original oil in place. 6%/yr of 78 million barrels a day is a nasty loss to try to overcome.
There is a second datapoint that you have to go to a Stanford professor of Petroleum Engineering to get (Roland, he has a very balanced and non ominous youtube lecture online). It is that the Baker Hughes count of drill rigs shipped to the Saudi's Ghawar field has exploded. That means they are drilling frantically to try to hold production from that field up. That Field Is 50% Of Total Saudi Production. Think very carefully about this.
Does this mean the Bill O'Reilly was correct?
Just mailed ms. Kroes, European Anti-trust, to investigate ICE and some more...
Told her Tyler would be happy to provide some inside info...
Godspeed.
Peak Oil isn't nonsense. It's reality and you're going to feel it in your lifetimes. Get a clue.
drives me nuts when "speculator" in oil is only on the buy side.
However, speculators are blamed for driving the price of food down (milk for example). It's interesting... In some commodities they only go long, in some only short. Go figure.
Re - Semgroup i didnt know the story but can someone explain why the company took such a huge short position in the market(speculation by them that went wrong?) that was seen by all the sharks out there. What did they expect?
Oil trading is corrupt we need more players the mergers of the oil companies that has occoured in the last twenty years and lack of trading limits on exchanges has not been benificial.