Speculation Does Not Explain High Oil and Gasoline Prices? Please!!

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Sat, 05/07/2011 - 20:38 | 1251865 Clowns on Acid
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Sgt doom...nice high level timeline. Add to this the guys that were the architects of the debacle and have taken their profits a long time ago. Bill Clinton, Sandy Weill, Bob Rubin, Franklin Raines, just to name a few....  

Sat, 05/07/2011 - 20:33 | 1251844 r101958
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Sure. (sarc=on) Events in the past week have nothing at all whatsoever to do with the fact that TPTB are desperate to maintain some semblence of the status quo. Nada (sarc=off).

Sat, 05/07/2011 - 20:31 | 1251837 mayhem_korner
mayhem_korner's picture

Silver was the target last week.  The rest of the commodity complex, including oil, was pulled down as a veil for the fledgling store of wealth that broke away from the peleton.

Oil has not followed its own supply-demand fundamentals for years.  It's a currency in its own right, and is a buttress to political leverage and FX wars.

Refining capacity is the bottleneck with crude derivatives - especially in the U.S.  Prices are set on in-transit, water-borne cargoes based on netbacks at major delivery hubs (London, Seoul, Newark, Houston, Rio, etc.).  The seas are full of spec shipments at all times, literally able to "turn" and head for one port over another based on bidding at the choke points.

Bottom line: there is nothing to be found in following rig counts, demand indicators, etc.  The price is totally decoupled from those mechanisms.

 

 

Sat, 05/07/2011 - 20:28 | 1251836 r101958
r101958's picture

Sure. (sarc=on) Risings costs have nothing at all whatsoever to do with finite/scarce resources. Nada (sarc=off).

Sat, 05/07/2011 - 20:23 | 1251827 sgt_doom
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To better understand the underpinnings of now institutionalized ultra-leveraged speculation, please see below:

The Devil’s Timeline

1993:  The Group of Thirty confers with JP Morgan and several other banks on policies as regards credit derivatives.  The G30 then distributes a favorable report on the expanded adoption of credit derivatives but with the caveat that “legal risk” should be removed.  (Please recall this was after the S&L debacle, when slightly over 1,000 banksters were convicted and jailed.)

1994:  Next, a group is formed of the major Wall Street investment firms: Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Bros., Salomon Bros., Credit Suisse FB, called the Derivatives Policy Group, which will begin to lobby congress.

1996:  After conferring with the Group of Thirty, JPMorgan Chase issues the report, Glass-Steagall: Overdue for repeal, which is distributed to members of congress.

1999:  After several failed attempts, the Gramm-Leach-Bliley Financial Services Modernization Act is finally signed into law.  This effectively repeals Glass-Steagall, and allows for the establishment of financial ultra-monopolies (although it is a bit after the fact, given Citigroup’s merger with Travellers).

2000:  The Commodity Futures Modernization Act is signed into law, killing oversight and financial anti-fraud potential which allows for ultra-leveraging by financial ultra-monopolies.

(Taken together, the Gramm-Leach-Bliley Act and the Commodity Futures Modernization Act removes all "legal risk" in response to the Group of Thirty's dictate.)

Of course, the usual congressional yard sale occurs, as detailed within the excellent report below:

 http://www.wallstreetwatch.org/reports/sold_out.pdf

 Notes:

 The Group of Thirty (G30) was created and originally financed by a Rockefeller Foundation initiative in 1978.  It is composed of the top international financiers and members of the world’s central banks.

On JPMorgan Chase and their credit derivatives:  Gillian Tett’s Fool’s Gold is a superb example of a Wall Street-financed (and pre-financed) misinformation trope ostensibly explaining how, although JPM was responsible for a variety of CDO constructions and the credit default swap, it wisely stepped away from the precipice and avoided all risk.

Of course, this is pure fiction and complete nonsense.  Otherwise, JPMorgan Chase wouldn’t be the leader of the pack with regard to credit derivatives, allowing for the bulk of its profits and ability to control markets.  Goldman Sachs averages a nifty $80 billion a year in profit from credit default swaps activity.

Sat, 05/07/2011 - 22:55 | 1252164 Kayman
Kayman's picture

Yeah, making money is a cake walk, when you've fobbed off your leveraged risk to the public.

Sat, 05/07/2011 - 20:08 | 1251797 Clowns on Acid
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Of course ZIRP is a large part of it, and more specifically anticipated real interest rates.

"Hoarding" oil....wait until the hoarding begins for food. Rice...it will become the new meat in Asia.

Sat, 05/07/2011 - 20:06 | 1251787 topcallingtroll
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To paraphrase nixon " we are all speculators now."

When owning a three year CD or cash under the mattress carries speculative risk then how can we be blamed for giving in to the darkside?

Sat, 05/07/2011 - 19:54 | 1251770 Clowns on Acid
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Inflation protected assets  = pm's , farmland, diamonds, artwork...guns and ammo. Probably in that order.

Sat, 05/07/2011 - 20:09 | 1251795 topcallingtroll
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You forgot a gas or oil well.

I think natgas will make a very good inflation hedge priced right now. Give oil time to wash out a little mania first.

Sat, 05/07/2011 - 19:55 | 1251766 Clowns on Acid
Clowns on Acid's picture

How come all the make up caked on, talking heads on CNBC (Cramer -"I'm here not to make friends but to make myself $ front running your positions") and socialist / fascist morons...never blame the Speculators when the price of oil (or any commodity) goes down, becomes inexpensive?

If the US just announced that they are opening up oil exploration within the US, oil would plunge to $80/bbl. Of course regulation and "green" special interests (Soros, Gore, et al) would not want this to happen as it would stop the contributions into their Non profits from the Saudis.  

Sat, 05/07/2011 - 19:00 | 1251684 Tracerfan
Tracerfan's picture

Middle East, Middle East, Middle East.

Crude can go to $150 or $200/barrel in the space of hours if a shooting war starts in the "wrong" places.  This is likely to happen, in my opinion, the question is when.

 

When you add in rising demand from Asia (the U.S. is not as important as before) and depletion, it is apparent that oil is UNDERvalued on the futures strip going out several years.

Sat, 05/07/2011 - 18:58 | 1251681 PulauHantu29
PulauHantu29's picture

What a great time to load up and add more oil and silver. I read over 80% of investors in the EU now invest with serious inflation in mind and are buying "inflation protection assets"...

"Inflation protection assets?"....What could those be?

http://www.bullionstream.com/usa/Goldmuenzen_2_2.html

 

Sat, 05/07/2011 - 19:41 | 1251745 Imminent Crucible
Imminent Crucible's picture

"Inflation protection assets?"....What could those be?

They were probably thinking of TIPS.

Sat, 05/07/2011 - 18:32 | 1251637 tom
tom's picture

Nope, Klein is right and you're wrong. Futures markets only anticipate the price of oil. The price of oil is set in physical markets according to supply and demand.

One can definitely manipulate the pricing process by hoarding physical oil, although that is a very expensive amd risky thing to do. You must be very sure the market will accept your manipulation and not suss you out, as your potential profits will be reduced by the cost of storage, which isn't cheap. If you are sussed out and are forced to sell into a weak market, those same storage costs will amplify your losses.

The minor ups and downs of futures markets aren't even noticed by the physical markets. The major ups and downs are driven by the direct consumers - the refineries. When they're hedging against a possible supply shortfall, futures spike. When they realize the market is oversupplied at current prices, they walk away and futures plummet.

The speculator in futures is just guessing which of these scenarios will develop. Unless speculators are willing to pay for the storage to take oil out of the market, they do not affect the quantity of oil supply available, and they do not affect the real demand from real consumers, ie refineries and behind them consumers of oil products. If the speculators don't hoard the oil, then they must sell it, ultimately to the refineries, who will pay whatever it's worth according to supply and demand.

Only extremely powerful speculators have the power to move the physical oil price through the futures markets, without hoarding physical oil. A very large campaign of buying futures by a major speculator will be understood by refineries as a threat by that speculator to hoard the physical oil, and will prompt the refineries to hedge, if they believe the speculator has the wherewithal to make good on the threat. It's like a game of poker: if you want to raise the stakes, you've got to have the cash to back yourself up. The owners of refineries have deep pockets and they are rarely the weak hands at this table.

Sat, 05/07/2011 - 22:46 | 1252143 Kayman
Kayman's picture

"The owners of refineries have deep pockets".

Beg to differ.  Most of the major oil companies have spun off their refineries.

The major players in oil are the OPEC cartel, the corporate oil cartel and the financial cartel.

Oil is not completely fungible, so each refinery has its unique needs.

An independent refinery is a bit player in the oil game.

Sat, 05/07/2011 - 20:05 | 1251784 Smokey1
Smokey1's picture

Nice.

Sat, 05/07/2011 - 18:21 | 1251618 sun tzu
sun tzu's picture

What is it that allows the speculation? ZIRP Fed policy. It's funny how they cracked down on the evil precious metals speculators but hardly touched the oil speculators. The margin requirements for oil speculators should be 50%.

Sat, 05/07/2011 - 17:42 | 1251543 Franken_Stein
Franken_Stein's picture

 

Here's a perfect example for paper oil speculation:

 

Rogue trader could have cost PVM Oil £400m.

 

The "rogue trader" who is suspected of moving the price of oil by up to $2 on Tuesday would have cost his employer $650m (£400m) if the trade had not been discovered and closed, according to sources.

...

http://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/5735874...

 

 

You really have to be a total dumbass or a person with vested interest in order to claim that there is no oil speculation.

 

Not even speaking of the shenanigans going on at Goldman Sachs' owned ICE futures exchange in Atlanta, GA.

 

Sat, 05/07/2011 - 17:46 | 1251563 IdioTsincracY
IdioTsincracY's picture

+ 1,000

Sat, 05/07/2011 - 17:53 | 1251581 Franken_Stein
Franken_Stein's picture

Thank you.

Sat, 05/07/2011 - 18:34 | 1251644 Shylockracy
Shylockracy's picture

Like most Hofökonom, Paul Krugman is both a total dumbass and a person with vested interest.

Sat, 05/07/2011 - 17:26 | 1251530 JustACitizen
JustACitizen's picture

Yeah - it's just supply and demand...billions of interest free dollars demanding a yield from the "peasants".

Sat, 05/07/2011 - 17:15 | 1251502 Quintus
Quintus's picture

"...a surging U.S. first time jobless claim that sent oil, silver and other commodities plunging. "

Really?  Silver raid started Sunday May 1st, Jobless Claims printed on Thursday May 5th.  Hard to take any analysis seriously that claims that markets reacted to events 4 days in the Future.

Sat, 05/07/2011 - 17:12 | 1251495 speedy
speedy's picture

The question is what exactly sets the spot price for the day?

Is it what the futures price is for next month, or is it what someone is willing to pay for oil ( and take delivery) on that day?

 

Or, is it because the speculators bid the price up/down for sometime in the future, that can affect what people are willing to pay for oil today on the spot market?

 

So many questions, who knows the answers?

Sat, 05/07/2011 - 16:53 | 1251465 Jasper M
Jasper M's picture

Marvelous and rigorous docnstution of the sillier elements of recent Durdenism. GOOD job!

Sat, 05/07/2011 - 16:35 | 1251411 Seasmoke
Seasmoke's picture

are people still filling up their tanks every other day so they can drive to their low paying jobs and then are thankful for having that miserable job ?

Sat, 05/07/2011 - 16:37 | 1251409 Weisbrot
Weisbrot's picture

in Orwellian 1984 speak if you disagree with the Gov-ment it could go badly for you. thankfully things have become that bad here....at least not yet.

Sat, 05/07/2011 - 16:32 | 1251404 Seasmoke
Seasmoke's picture

everyone said $4 was the tipping point , now we will see

Sat, 05/07/2011 - 13:45 | 1251183 falak pema
falak pema's picture

yes bully for u on Ag! You got flacked for that! 

Sat, 05/07/2011 - 17:59 | 1251558 akak
akak's picture

He/she did not get flacked for their prediction on the price of silver, which was fairly accurate (at least in the short term since), but for his/her arguments against holding silver for both the short AND the long term, which were weak, shallow and in points outright specious and disingenuous --- indeed, little more than a litany of vapid, PM-bashing "mainstream" talking points.

Mon, 05/09/2011 - 14:58 | 1256413 falak pema
falak pema's picture

stop feeling sorry for yourself...its an obsession!

Mon, 05/09/2011 - 15:17 | 1256502 akak
akak's picture

Well, that was a total non sequitur.

I have no idea what are you talking about.

Sat, 05/07/2011 - 12:39 | 1251076 jm
jm's picture

Dian:

#1. Excellent call on silver last week.

#2. I always thought that gasoline just followed the price of the input-- oil + refinery capacity.  Just because demand goes down, refinery capacity can come down more, right?

#3. Can you talk down sugar next time?

Sat, 05/07/2011 - 20:21 | 1251814 sgt_doom
sgt_doom's picture

Instead of B.S. postings like this blog post, simply open the books of trading on ICE Futures by Goldman Sachs and Morgan Stanley, and Phibro's (Citigroup) speculating activities.

Also, throw open the books of all those hedge funds' speculation.

That would prove your most specious thesis, Diane-in-their-pocket.

Sat, 05/07/2011 - 22:37 | 1252111 Kayman
Kayman's picture

Yeah, gas is up 40% in the past 6 months.  Of course the multi-billion dollar postions taken by Goldman and their criminal cousins have nothing to do with the price of gas at the consumer level.  sarc/off.

Puke/ on.

Sat, 05/07/2011 - 20:10 | 1251788 Q_Shtik
Q_Shtik's picture

This is a test.

Sat, 05/07/2011 - 13:08 | 1251144 asiablues
asiablues's picture

Thanks.

Speculation is a factor in gasoline prices because of RBOB future contracts, which takes 2-3 months typically to impact the pump. 

The fundamentals like refinery run rate, inventory levels do play a part as well.  Refinery utilization is already down to around 83%, which is one of the reasons there are consecutive weekly draws in gasoline inventories.  It will take some time to replenish the stockpiles, and with the summer driving season, it will be interesting to see how gasoline price will react.  

Will get back with you on sugar.

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