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Can We Blame Hedge Funds For Low Oil Prices?
Submitted by Michael McDonald via OilPrice.com,
When oil prices were spiking in 2008 and some commentators were predicting prices of $200 a barrel, many pundits and politicians turned to blame speculators and hedge funds for pushing prices upwards. That period of high prices passed and speculators avoided any tough new regulations in part due to mix empirical evidence surrounding the causes of price volatility. Now though, the opposite case is being made; hedge funds shorting oil may be behind recent volatility and the current low price of oil.
Given the benefits to consumers from low oil prices, there is little talk of new regulation to prevent hedge fund shorting, but it is unclear if regulation would do much good in any event. While there is a correlation between hedge fund positions and oil prices, it is unclear if hedge funds are causing moves in the price of oil, or if oil markets are simply responding to a third set of unobserved causal factors.
At a basic level, oil prices are based on the intersection of supply and demand. On the supply side are producers from OPEC to U.S frackers. The demand side is a little more complicated. Of course consumers and businesses fall into the demand category, but it could be that hedge funds also play a role here. If hedge funds and other investors buy up oil in anticipation of a future recovery in prices, then they might be able to help prop up the price of oil or even drive the price of oil higher. That was the case often made in 2007 and 2008.
There is definitely some evidence that is going on today. When investors buy and store oil, they will eventually have to sell it, which moves them to the supply side of the price equation. As a result, theoretically investors should help to limit volatility in oil markets by buying in anticipation of future higher prices and selling in anticipation of future lower prices. As each type of trade is unwound, it acts as a stabilizer for the market and should help to cushion price changes. This is true even when hedge funds and others short oil since eventually they have to buy to cover those short positions.
Still the bigger issue is whether hedge funds and other investors are large enough to materially move the overall oil market, which is one of the largest and most liquid of all markets globally. While the hedge fund industry as a whole manages roughly $2.7 trillion in assets, managed futures or commodity trading advisors (CTA) only manage around $330 billion according to Barclays. For comparison purposes, the overall oil market trades about 96-97 million barrels of oil per day. At an average price per barrel of around $50, that implies a total value of all oil traded of roughly $4.8 billion per day.
Obviously CTA firms could be influencing the price of oil given their level of assets and the level of the traded market size in oil, at least in the short term. CTA firms could represent an additional 10 percent of demand in the market on days when the price of oil appears too low or 10 percent supply on days when it appears too high. That would be feasible and require about $500 million in capital versus total CTA AUM of $330B. Still over the course of a year, total oil trades come to more than $1.25 trillion in value which dwarfs CTA assets and represents a sizeable piece of the overall hedge fund industry.
So what is the moral of this story? It is unclear if CTA firms are having a sizeable impact on the oil industry, but they could be in the short term. Over the medium and long term, the oil markets are far too large to be consistently influenced by hedge funds or other investors especially since at any given point investors are likely to be taking opposite sides of the same trade.
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Considering the huge inventories, how could the hedge funds be responsible for low oil prices? If anything, by short selling oil, hedge funds are accelerating price discovery which will reduce production more quickly than the ordinary market would.
And doesn't a crowded short create a squeeze?
blame, the new thank.
Yeh sure. Lower oil prices can't possibly be due to weak demand, bloated oil inventories, cut throat competition, overproduction due to ZIRP, or a weak economy.
That leaves only speculators and wizards to take the blame.
You forgot unicorns. They fuck up everything.
I thought it was Canadians who fuck up everything?
If you look at the first chart on the EIA Short-term Energy Outlook page, you can see a lot of production just went into inventory. Without that build, demand would have been dropping.
Not sure what kind of Kool-aid the EIA is drinking, but they see some kind of fantasy increase in demand (=economic activity) into the end of 2016. I'm amused at how they can make such projections. A chimp can see that the economic Ponzis are crumbling at an accellerated rate and things are getting far worse, not better.
With inventories and production still high and cratering demand, I would think they would be a bit more conservative in their projections. $55/bbl oil next year with Iran coming on-line and Iraq ramping up? Er... I just can't see it. Am I missing something? They'll need WWIII to see oil have a sustained climb beyond $50 again.
It's like sitting in Detroit a decade ago and thinking, "Detroit will start spending a fortune on big projects and construction any day now and the local economy will take off!" The government really needs to put down the crack pipe for a moment and think about how totally screwed they are.
why not, we blame them for high prices...
It's time we thank them for low prices instead?
commodity prices should only be determined by the user market not the spec market. if everyone who ordered commodities had to take delivery there would be real price discovery. speculators should have to take delivery in order to make a bet. the prospect of a boxcar load of pigs dumped in your driveway should cool the jets on the commodity market.
Coulda, woulda, shoulda, anytime you have a market there will be players, but the rules are being bent with impunity to rig the game. In the short term, the advantage is their's and the long, chaos reigns.......
these dumbasses could care less about the future. all they care about is now. destroying a country is just collateral damage. there are other hosts for the parasites. of course, the parasites are there because other parasites put them there.
Blame the Fed. Easy money for the bottom tier shale producers put the squeeze on the Saudi market share. The same is true for all industries. Enabling firms that are inefficient to remain in business violated the fundamental rules of economics. If the Fed's stated mandate is to whip up a little inflation, they should allow the supply side of the economy to wither. It's the basic supply/demand relationship. So obviously politically motivated is the Fed. Really disgusting.
No. Another worthless article from OilPrice.com
It is Obama's oil war against Russia and Putin.
Stakes are high as US plays the oil card against Iran and Russia
John Kerry, the US secretary of state, allegedly struck a deal with King Abdullah in September under which the Saudis would sell crude at below the prevailing market price. That would help explain why the price has been falling at a time when, given the turmoil in Iraq and Syria caused by Islamic State, it would normally have been rising.
The Saudis did something similar in the mid-1980s. Then, the geopolitical motivation for a move that sent the oil price to below $10 a barrel was to destabilise Saddam Hussein’s regime. This time, according to Middle East specialists, the Saudis want to put pressure on Iran and to force Moscow to weaken its support for the Assad regime in Syria.
http://www.theguardian.com/business/economics-blog/2014/nov/09/us-iran-r...
Did The Saudis And The US Collude In Dropping Oil Prices?http://www.zerohedge.com/news/2014-12-24/did-saudis-and-us-collude-dropp...
Of course, they did.
The Oil Coup US-Saudi Subterfuge Send Stocks and Credit ReelingU.S. powerbrokers have put the country at risk of another financial crisis to intensify their economic war on Moscow and to move ahead with their plan to “pivot to Asia”.
Here’s what’s happening: Washington has persuaded the Saudis to flood the market with oil to push down prices, decimate Russia’s economy, and reduce Moscow’s resistance to further NATO encirclement and the spreading of US military bases across Central Asia. The US-Saudi scheme has slashed oil prices by nearly a half since they hit their peak in June. The sharp decline in prices has burst the bubble in high-yield debt which has increased the turbulence in the credit markets while pushing global equities into a tailspin. Even so, the roiled markets and spreading contagion have not deterred Washington from pursuing its reckless plan, a plan which uses Riyadh’s stooge-regime to prosecute Washington’s global resource war.
http://www.globalresearch.ca/the-oil-coup/5420293
most extra supply has come from Canada and USA?
US imports 7.5 million barrels of oil per day today. As does China.
You wouldn't believe that if you listened to the US propoganda media that is hell bent on trying to convince the sheeple that the US is 'energy independant' on account of the shale oil.
And why is low oil prices bad again – I forgot
It is Obama's oil war against Russia and Putin. .. thank god someone gets it..!!!! Global Research Good site. Ive always wondered why the Tylers will reference Wall Street JOO nal, CNN, CNBS and not the Veterans Today, Global Researchs of the world ?
no the over supply is the cause. The banks pumped up oil prices using unlimited FED and savers money using an oligopoly....holding oil way above its native price. This causes everyone and there brother to drill...then add that new technology allowed them to pump massive quanities... So now you have massive oversupply and still oil is above its inflation adjusted nominal prices...so Oil is going to low $20 or lower! The technology can be rolled out across the planet as well driving the price lower. Places like Canada Russian are going to very hurt by this
But most of the O&G producers that used the "new technology" couldn't even make it pay at $80-$100 barrel oil. So why will they be more successful at $40? Or lower?
Lest we forget, we can thank Turkey and ISIS for their black-market oil too.
Bingo . And these sick criminals in the media followed their orders and introduced the phrase/word "stimulus" like "Bolshevism" "conspiracy theory" to the English vernacular as a way of swaying the mind. It never ever was "stimulus" unless you were the bank criminals
they forgot their own theory. crushing anyone economically can only be done if the target is in debt. russia is not in debt. the plan will (and has) backfired.
Blame?
We blame China and their "new normal" after their credit driven heroin binge has come to an end and gone into reverse. They are going to strain the financial system to the breaking point. Financial perverts!
Or maybe, it's all the Black Market Syrian ISIS Oil flowing into Turkey at 50 cents on the dollar...
Hedge funds are certainly led around by the gold cartel on the Comex.
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The Comex Is A Zombie Market: Hedge Funds Record Short Paper Gold - Dave Kranzler
http://thenewsdoctors.com/?p=552825
Oil, Gold, Stocks, Bonds are all manipulated by the same entity and that are not the hedgefunds.
Interestingly people point to fundamentals for oil price behavior but those same fundamentals do not apply to the other markets?
If a tide of cheap money lifts all ships then why not also oil and gold?
Oil is clearly manipulated.
Last March, it occurred to me that TPTB had crashed oil in order to induce Japan to further debase the yen and support the yen carry trade (http://pebblewriter.com/the-yen-carry-trade-explained/) This was the 'carrot' in an apparent carrot-and-stick scenario.
In fact, CL's crash began on the very same day that USDJPY broke out from a lengthy holding pattern.
Watch, and you'll see that every time USDJPY starts to slump (stronger yen) CL will suddenly spike higher -- the 'stick', i.e. punishment for NOT supporting the yen carry trade.
Nothing has happened since then to change my mind. The problem, now, is that lower oil prices are starting to cost bankers real money in terms of loan losses, etc. So, as usual, the CBs have painted themselves into a corner: support the yen carry trade and push most stocks higher (at the expense of oil industry and dependent states) or support the oil industry but kill off the primary driver of higher stock prices.
The latest development: more and more algos are now tied to CL. So a bounce in CL - even though it will hurt Japan if it can't maintain purchasing power - could have a net positive effect on stocks.
http://pebblewriter.com/an-offer-japan-cant-refuse/
"Now though, the opposite case is being made; hedge funds shorting oil may be behind recent volatility and the current low price of oil."
That is just too funny, considering there is supposedly getting to be a shortage of places to store oil.