There has been nothing short of a monumental flood of money bet in the oil and gas industry over the last two years, and almost all of it has been bet in one direction: LONG.

This is absolutely incorrect. In natural gas, the spec money has been short.

If you're going to blame speculators for expensive oil, you have to also write speculators a thank you note for cheap natural gas.

Also, the fact that the price went up to $148 and then down to $105 doesn't mean that the high price was due to a flood of money from speculators. The real reasons for the high price were the factors that triggered the flood of money from speculators. In my opinion, there were several triggers. One important trigger was that the market is getting information about supply and demand a lot more slowly, probably due to the increase in the length of the effective pipeline to the U.S. markets, due to the decrease in exports from VenMex. The market's also missing a lot of information, or getting it later than it used to, because a lot of the new big players in these markets have no transparency whatsoever. The market is in the position of constantly guessing about China's inventory, the intentions of China's top bureaucrats, the question of whether India is ever going to deal with its power shortages, etc. It's going to take market participants some time to adjust for these factors, and prices will probably never get set as efficiently as they used to.

So, very small changes in the timing of supply and demand make for huge changes in price, and these huge changes are amplified further by the lack of transparency in the markets and the delay in getting info about supply and demand. Even if you take speculators completely out of the picture, we're still going to be seeing really scary volatility in these markets.

A couple of points about Nate's interesting article. First, why don't these hedge funds hire someone who knows how to trade? They need to read up on Kelly betting principles as well. A first-year card counter understands more about bankroll management than these guys. In.ex.cus.a.ble.

Second, although a hedge fund might have enough money to control an amount of oil equal to lost production from Gustav, they're not gonna buy it just for the thrill of owning it. They're buying it because they have some signal that others are going to bid it up, not because they think they can profit by driving up the price themselves. And you don't want the others bidding it up to be ma and pa speculators, because by the time the squares are buying, an entity as large as a hedge fund has to be getting out, otherwise they will get caught without anyone to sell to and lose all their money, a la Ospraie. This is Trading 101.

That essentially means you're buying because you think commercials will be buying. I know Nate knows this, but I want to emphasize the point. There is nothing that any sensible hedge fund manager should fear more than the possibility that money is manhandling energy, rather than following energy.

I completely understand why speculators drive everyone crazy, because they drive me crazy too (even though I'm a speculator). But I'm strongly against position limits because I think they're unenforceable and I think transparency is more important. If we really want prices to be set more efficiently, what it will take is some real diplomatic pressure on China. The last thing I want is masses of spec money running around controlling supply where I can't see it--that would be even worse than what we're dealing with now.

Also, just because the markets drove the oil price up to $148, doesn't mean society was paying $148 for oil. Society never paid anywhere near that much. If you own a royalty trust like Permian Basin Trust (PBT) for example, you frequently see months where the prices you got for your oil or natural gas were pretty far from the headline prices. The June price for Permian Basin Trust oil was $127, even though WTI futures were in the $130s. A month earlier, when the price for natural gas was below $12, Permian Basin shareholders were getting over $14.

So, there are markets and there are markets.