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238 comments on Countdown to $200 oil: $140 oil and speculation
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238 comments on Countdown to $200 oil: $140 oil and speculation
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http://news.xinhuanet.com/english/2008-06/29/content_8456576.htm
A report the U.S. Congress released Monday showed that, in January 2000, 37 percent of the NYMEX crude futures contracts were held by speculative traders; but in April 2008, the number has soared to 71 percent. Meanwhile, the proportion of contracts held by commercial traders greatly declined.
The U.S. Commodity Futures Trading Committee (CFTC) revealed in May that it began investigating potential price manipulations in the oil trading market in December 2007. The early findings show that since the sub-prime mortgage crisis large amount of speculation fund has turned to buy commodities like crude as a hedge against inflation.
Why not? More money piling into the same amount of product means higher prices. You said it yourself, if money is not bidding then why not just put it under the mattress.
What I meant by this is it's unclear how much of the money ends up buying product and how much ends up in derivatives of product. For example, when you buy stock options you don't actually buy or sell stocks and hence have no effect on the stock price. I'm not clear on whether options trading on commodities (or other fancy ass derivatives that seem to be the rage with wall street nowadays) are where the big numbers are or whether all this money is in the physical market. Even when looking at the physical market whether future or spot one has to look at the difference between long and short rather than just the number of contracts held by specs. If a heavy short position is squeezed by underlying commercials needing more product, then specs will losing money from a push upwards.
I know if I were a spec (and I'm not in the market in any way) then I'd be long but still one looks around the media and guesses that many people think we're at unfathomable heights ready to crash - one can't help but wonder if the media is playing a part for wall street in making sure that some specs are willing to take the losing bet.
Along the same lines, hedge funds and institutional investors tend to move as a herd because when something goes wrong they can all claim solace together that they did the right thing but lost out. ie. when all funds lose money, they blame the market but when a unique single fund opposing conventional wisdom goes wrong, well everyone knows who to blame.
"I'm not clear on whether options trading on commodities ... are where the big numbers are or whether all this money is in the physical market."
Not in the physical according to most TOD posters but I would maintain there is still a linkage with the physical via information.
The report says that 71% of future contracts was held by speculators. But does the report specify a date when this percentage was held? If I'm correct, at the end of each month (actually 3 bus. days prior to the 25th) the number of contracts held by speculators should approach 0%. If they where to hold on to these contracts they would need to take delivery, which I'm sure no speculator wants.
So you can't simply say that in April 2008 speculators held 71% of the contracts. Because on the 22th of April the number of contracts held by speculators would surely have been close to 0%.
Shit, I don't know.
I was just quoting the news article I linked to. That's my point exactly, I don't understand it, but I'm trying to.
I believe that there are clearly more investment dollars in the oil futures market (thank you, in part, Ben Bernanke).
Perhaps it is the case that there could be (insert your own percent)% speculators in the market at any given time, but based on whether they are long and/or short they may not have a corresponding effect on price - one way or the other.
On Friday Karl Denninger said this in his Frightful Friday commentary:
Moe Gamble said this on Friday's DB:
So, it seesm that if you know where to look and how to interpret that it is realtively "easy" to determinthe level and effect on specualtion in the market.
Perhaps the what, where , and how of oil futures speculation effect could be the suject of a guest post by someone who can walk (many of) us through this?
Of course this seems to be happening downthread ;-)
Pete
That may be 71% across all contract months - as speculators are closing out all their delivery day contracts, most they tend to be 'rolling over' into the next month (ie: taking out a new contract for the next delivery month)
So the OVERALL ratio of speculative contracts, across the board, is probably reasonably constant. Generally though, lots goes on on the last couple of days, and I wouldn't be surprised if these are routinely excluded from 'averaged' stats.
1) the SPECULATORS are not really who are being blamed. Actually, the speculators, like Michael Masters who recently testified before Congress, are net short oil, and net long equities, so they want oil to go down. Its the index funds that are net long commodities. ETFs and funds linked to the GSCI or other commodity indexes.
2) Index funds are also very long wheat and gold and other commodities. Yet some of these markets have crashed from where they were a year ago - wheat dropped 50% from its highs of last year. Reason? The actual producers came in because there was plenty of wheat to supply at those high prices and for every index fund/speculator who wanted to buy wheat above $12 per bushel, an actual producer said 'here you go - I am very happy to sell you my wheat at $12". In this case reality caught up with a frothy market... If a large portion (or even a moderate portion) of oils rise is due to speculation (and index funds), the same will happen. Actual oil producers will sell the 'freely available oil' at what are 'too high of prices' and oil will do what wheat did. Hasn't happened yet.
3)By the same logic, those corporations (e.g. airlines) that are buying long term contracts to lock in prices could be swamped by actual oil companies selling them contracts if future oil availability seems adequate (based on their own internal reserve and production estimates. Thus producers will sell forward more contracts than hedgers will in the long dated months and prices will drop into backwardation. We have seen just the opposite.
4)Part of the reason we are this high is that speculators are SHORT the market, e.g each time we rally 10% there is a positive feedback loop where they have to cover their shorts and the market spurts higher again, which then encourages other deep pocketed hedge funds, who don't buy into the general peak oil concept of limited flow rates, to go short. After all, there will be plenty of ethanol and tar sands to make up for the 'possible' decline in crude. This is all changing as firms like Wood Gundy, Goldman, Barclays, etc. have started to publish very realistic research on how dire our oil situation is (though they are writing from a profit/investment perspective as opposed to a social/policy one). So once everyone has gotten oil religion and the large funds stop 'shorting' the market (e.g. no shorts left), then we will be free to drop in price. In this sense speculators ARE influencing the market, but in a very sneaky, self interested way not being discussed 'before Congress'.
5) Finally, oil margins have recently been raised to $8,500 per contract:
Consider we are at midway point of URR and there are 1 trillion barrels left, this is 150 barrels per person living on the planet (and none for any of their children or grandchildren). For $8,500 one can control 1,000 barrels of oil, 8 times ones all time allotment for posterity (assuming that each human had equal rights to oil, which clearly isn't the case). Imagine what $85,000 or $850,000 or $8.5 billion could do. As I've written about often here, there is a paradigm shift coming between abstract wealth (paper currency) and real wealth (commodities, real goods, social, natural capital, etc.) Left to their own devices the deep pocketed institutions could run oil closer to its true value, in the thousands per barrel, but OECD trade and the economic system as we know it grinds to a halt before that time.
Interesting and important times. I agree with Jerome. Lets hope our leaders are mature enough to look beyond the easy scapegoats and make some uncomfortable but necessary planning choices. Its always difficult to admit that its our own fault...
That's enough for everyone currently in the world to drive a car 500 miles (or 800km)*
Write that on your bumper sticker.
That really puts the scale into something people can start to comprehend - and start to realize just how little oil left in the world...
Say what ? 150 barrels lets you drive only 500 miles ?
ok, typing on calculators is dangerous (typed 19.5x25 when I've should've typed 19.5x150)
150 barrels at 19.5 gallons per barrel and 25gpm is
3000 miles per person in the world (or 4700km)
and the common rebuttals to this type of statistic is:
1)but there are so many people in the world that don't use ANY oil that your numbers are meaningless
or
2) ya but your forgot about ethanol and oil shale
(n=5 from personal experience)
To (1), "Virtually nobody uses no oil, it's just that a few people use a lot. For example, Ghanans use about a barrel of oil each a year, and Americans use 25. So those 150 barrels each could keep Ghanans going for 150 years, but Americans only for 6 years. Anyway, put together Europe, Japan, the US - and that's about a billion people using 15 barrels each. Ten years if nobody else gets any."
At this point they go silent and look surly and obviously hate me already, so I add, "Maybe you should take the bus."
Since when does 15 barrels per person times 1 billion people times ten years = 1 trillion barrels?
I make 15 x 10 x 1,000,000,000 = 150 billion. Out by an order of magnitude.
You'd be more convincing if you could add up.
Why not just skip the maths and go back to:
We use 30 billion barrels per year.
We have about a trillion left.
That's 30 years supply.
...oh wait that wasn't the answer you wanted. Not dramatic enough. Now you'll have to explain flow rates. Damn.
.
Flow rates are derivative of available supply and demand. The bell curve is simply the normal derivative. So we don't have 30 years of oil left in the ground because supply and demand are not constant.
Actually, we probably have 100 years of oil left in the ground. It's just that 1/3 of it will be used up in the next 15 years or so.
That is the point where the bell curve (assuming we are already past peak) will go into negative curvature, and drop gradually over decades to a point where a tiny number of users can afford the remaining resource. After that point is reached, it will become a niche market commodity.
Prices may begin to fluctuate normally, but only because it will no longer be in mass demand as a consumer application. It would no longer be a question of marginal demand-killing, the price would be high enough that the utilization would drop off as the vast majority of users switched to alternatives and we'd have excess capacity again. As the utilization dropped off, so would demand for unconventional oil.
Unconventional oil will increase total reserves, resulting in a second supply peak or echo peak, further extending the time frame for remaining oil in the ground, possibly indefinitely. But this secondary bell curve for new, higher-price oil will be much lower (in annual output) and wider than the current peak.
So we would never get back to today's flow rates because of the expense (relative to energy and work) needed to replace conventional sources of oil barrel for barrel, so oil would remain available even as the cost of using it goes up and the number of users goes down.
that makes 73000 miles?
The people who actually buy oil, primarily refiners, hedge their purchases on the futures market. They are experts with inside info betting against amateurs with incomplete info. Guess who wins? According to an IMF study in 2005, real oil traders win their bets 75% of the time. If they didn't, futures couldn't be a hedge. Its the hedge funds and index funds that are the net loosers and their money actually helps keep the price down, not up. Keep in mind that there is a winner and looser for every contract, so it's a zero sum game.
And despite your observation you fail to mention how those funds are being invested. For instance, the AMEX president stated that for May that the large speculators (amongst whom are US banks) were short over $50 billion on oil and had to scramble to cover their missed shorts, which in turn drove prices higher. In other words, many of the big speculative players were shorting oil (betting on price declines!!) not going long. And they lost. And they appear to have lost again this last week.
To state again, the big speculative players bet against the fundamentals. And the fundamentals are roughly flat production over 4+ years (maybe 1.5 mbpd max more in certain quarters) now versus a near 8 mbpd increase in consumption by China and India. If we subtract out that 1.5 mbpd occasional bump up in production, that means China and India combined are taking 6.5 mbpd away from someone else who was consuming that oil in 2004. And that doesn't account for increases in consumption elsewhere in the world, which have been documented.
There is no doubt that some small part of the price increase is due to the falling dollar. But measured in other currencies oil is at record highs also. So a larger part is due to something else. You appear to be asserting that this is entirely speculatively driven. I will grant that some portion of the price increase may be speculatively driven but that fundamentals were going to lead to higher prices over time regardless. In other words, without speculation maybe we'd be at $120 or $110 or even $100 per barrel. But it would not have stayed at $80 or gone back to $60 per barrel. The fundamentals, the lack of production increases coupled with the changes in consumption (mostly who is consuming), argue against lower prices and for higher prices.
What no one has yet demonstrated is what proportion of today's price is due to speculation. I don't think you can accurately show that as a specific number, and since a large part of the speculation is in shorts I do not think you can even argue clearly what effect speculation is even having in this market.
Speculation is adding about a 6 dollar premium to the price of oil pretty much independent of the price flucations.
And no I won't tell you how I figured this out. Given that you know its six you can read it off the market charts.
Speculation is only an issue because supply is tight enough to make speculation worthwhile.
When supply was plentiful, it was only a dull futures day-in-day-out-grind.
It's the shortage, stupid!
cfm in Gray, ME