So, Dick Morris–political consultant/analyst–pointed out this fact over the last few days: Since 1999, money in the oil commodities market has gone from something like $16 billion in 1999 to something like $160 billion today. Apparently, according to Morris, a regulation was removed in 1999 that had vastly limited the ability of big banks and speculators from speculating in the oil markets. This regulation allowed for oil companies to operate in the futures markets, but vastly limited everyone else. In addition, instead of 50 percent margin, oil commodities can be traded with only 5 percent margin. He points out that if you re-institute this regulation and bring margin limits back to 50 percent, you’d probably see $60 and $70 oil again. Compelling.
I traded plenty of crude oil in 1999. Nobody put up 50% margin in 1999 or ever to the best of my knowledge. Who would do that?
I don’t understand the argument that the presence of speculators is what has driven the price of oil up so much. Speculators can push prices down as well as up. Except in the very short term, the price of oil should reflect the underlying fundamentals of supply and demand. Leverage can cause larger shifts, but oil has been above $100 for some time now, and almost everyone is predicting that it will at least stay there for the next year or so. If the rise was due to speculation the price would be pushed down as shorts took the other side of the trade (note, I’m not saying that speculators can’t push prices to irrational levels, just that these levels wouldn’t be sustained for long if not based on fundamental factors). This really isn’t my area, though, just how I understand things, so someone with more knowledge can chime in and tell me if I’m wrong.
Well, if–and I stress IF–Morris is correct about the amount of investment in oil commodities, then we’ve seen an increase of 10 times the amount of liquidity in the futures market since the regulation was removed 9 years ago, which might suggest more ability to speculate. I also am not an oil expert, so I’m just throwin’ this stuff out there.
$60 oil is gone. aint coming back. you remove all the speculation from the market and it still isn’t going to ease prices like people assume. there is a fundamental shift that has happened with supply that has caused this. cheap oil is gone, and the world is only ramping up demand. world production has fallen for the first time in forever last year(180kbpd decrease year over year…pretty much a rounding error, but still) . production = flat. demand = up. what do people expect?
luke77 Wrote: ------------------------------------------------------- > I don’t understand the argument that the presence > of speculators is what has driven the price of oil > up so much. Speculators can push prices down as > well as up. Except in the very short term, the > price of oil should reflect the underlying > fundamentals of supply and demand. Leverage can > cause larger shifts, but oil has been above $100 > for some time now, and almost everyone is > predicting that it will at least stay there for > the next year or so. If the rise was due to > speculation the price would be pushed down as > shorts took the other side of the trade (note, I’m > not saying that speculators can’t push prices to > irrational levels, just that these levels wouldn’t > be sustained for long if not based on fundamental > factors). > > This really isn’t my area, though, just how I > understand things, so someone with more knowledge > can chime in and tell me if I’m wrong. I disagree with that, prices can be out of sync with the fundamentals for a very long time. For example tech stocks in the 90’s, housing in more recent times. I don’t think anything that is designed by or involves human interaction can be rational, we are clearly irrational creatures, save for sociopaths emotions effect the judgement of all of us. While I do believe cheap oil is a thing of the past the extreme day to day volatility of the oil market suggests there are other factors at play here then just pure fundamentals.
Where is the line between speculation and hedging begin? An oil company which “believes” it will have 250,000 barrels for delivery in 3 months shorts these contracts, but it is never entirely sure it may have 245,000 or 255,000…using futures is inherently speculative in the sense that there is always a degree of uncertainty, even for futures. This is CNN populist poppycock, just like saying Budwesieser shouldn’t be allowed to be bought, mexicans are destroying the US, and " em damn rag heads" shouldn’t be allowed to purchase port assets. Don’t worry, every country has it’s fill of populists.
jeff_s Wrote: ------------------------------------------------------- > $60 oil is gone. aint coming back. you remove > all the speculation from the market and it still > isn’t going to ease prices like people assume. > there is a fundamental shift that has happened > with supply that has caused this. cheap oil is > gone, and the world is only ramping up demand. > > world production has fallen for the first time in > forever last year(180kbpd decrease year over > year…pretty much a rounding error, but still) . > production = flat. demand = up. what do people > expect? So where was the fundamental shift in the last year when oil was at $60? How about 5 months ago when it was at 90? What about 5 years ago when it was $20? How about since the regulation was removed for *ENRON*, prices were $10 a barrel, yet they suddenly skyrocket since? Ohhh, wait, that’s right, Enron or other “investors” would *never* manipulate a market, would they? Since that time we’ve seen new finds (brazil, more bakken and alberta exploration). Not to mention there’s more than a hundred billion barrels off of CA and FL shores. As far as people saying that futures allow for the opposite side to bring down prices. Didn’t you learn anything about tech stocks or housing? Opposite sides can be found but they are usually drowned out by the zealous upward bidding of longs. That’s the very nature of a bubble. Personally, I think this is all a big scam to suck wealth from the whole world and concentrate it into hedge funds, banks, and wealthy investors. They know perfectly well that there’s a lot of oil in this world and that the “fundamentals” don’t support these prices. It wouldn’t be the first, nor last, time that this type of crap happened.
If I were more intelligent and more knowledgeable (and a bit older), I’d have written EXACTLY the same thing as spierce. I’m extremely skeptical that there’s been a major structural shift in supply and demand since December that has caused a 40 to 50 percent increase in crude oil. Think about that–40 to 50 percent. Prima facia, is that structural or speculative?
JoeyDVivre Wrote: ------------------------------------------------------- > I traded plenty of crude oil in 1999. Nobody put > up 50% margin in 1999 or ever to the best of my > knowledge. Who would do that? For the record, Morris wasn’t saying that oil was being trading at 50 percent margin in 1999–he was saying that oil, unlike equity securities, can be traded at 5 percent margin, which makes the fueling of a bubble even easier.
Rememember that demand is much of the emerging world (where demand growth has mostly come from) is very sticky even though prices have skyrocketed due to controlled prices. Thus their governments are the one footing the bill. I’m willing to bet oil prices will drop 25% off of their highs soon after the Olympics.
kkent Wrote: ------------------------------------------------------- > Well, if–and I stress IF–Morris is correct about > the amount of investment in oil commodities, then > we’ve seen an increase of 10 times the amount of > liquidity in the futures market since the > regulation was removed 9 years ago, which might > suggest more ability to speculate. I also am not > an oil expert, so I’m just throwin’ this stuff out > there. What regulation was removed 10 years ago? I don’t recall that.
I don’t know–Morris was saying that a regulation was removed that vastly limited the amount of speculation that could be done by large players.
Why would increased liquidity lead to increased ability to speculate? Wouldn’t a larger and more transparent market make it that much more difficult for a speculator to move the price?
L3, no, not if all or most of the original $16 billion in liquidity was in legitimate price hedging by oil companies. You have to assume that much of the new $144 billion is not coming in the form of legitimate price hedging from oil companies operating as going concerns.
SeanC Wrote: ------------------------------------------------------- > luke77 Wrote: > -------------------------------------------------- > ----- > > I don’t understand the argument that the > presence > > of speculators is what has driven the price of > oil > > up so much. Speculators can push prices down as > > well as up. Except in the very short term, the > > price of oil should reflect the underlying > > fundamentals of supply and demand. Leverage can > > cause larger shifts, but oil has been above > $100 > > for some time now, and almost everyone is > > predicting that it will at least stay there for > > the next year or so. If the rise was due to > > speculation the price would be pushed down as > > shorts took the other side of the trade (note, > I’m > > not saying that speculators can’t push prices > to > > irrational levels, just that these levels > wouldn’t > > be sustained for long if not based on > fundamental > > factors). > > > > This really isn’t my area, though, just how I > > understand things, so someone with more > knowledge > > can chime in and tell me if I’m wrong. > > > I disagree with that, prices can be out of sync > with the fundamentals for a very long time. For > example tech stocks in the 90’s, housing in more > recent times. > > I don’t think anything that is designed by or > involves human interaction can be rational, we are > clearly irrational creatures, save for sociopaths > emotions effect the judgement of all of us. > > While I do believe cheap oil is a thing of the > past the extreme day to day volatility of the oil > market suggests there are other factors at play > here then just pure fundamentals. Right, but the difference is that oil is a commodity that actually has to be delivered and consumed. With stocks prices people could keep saying, ok, pets.com is going to be making $5 bil 5 years from know so these outrageous prices are justified. This made sense for a while until those profits didn’t materialize. With oil, it’s going to be consumed in the near future (and needs to be delivered), so the same argument can’t be made. Same deal with housing - since it’s not a consumable good, it’s much easier for irrational prices to be sustained, since a house or land is essentially equal to whatever someone is willing to pay for it…
The market will work itself out: Fear of slipping supply and rising demand will be met by cash rich oil companies going on vast exploration campaigns to further capture the relatively higher prices. Hopefully, for the good of mankind and our further growth as a world economy, they find some, if not, the next set of campaigns will be launched by the still cash rich oil companies towards other, more probable means. Why speculate on whether there is manipulation or speculation or what… our job is to become the ones who are either 1) manipulating - well within “ethical means” so we don’t lose our charters or 2) make the right guess about speculation after we have enough information to back that guess. My bottom line is that right now I couldn’t be happier that oil is at all time highs. I don’t have a car and my rent includes energy so I’m smooth sailing. I live in Canada, which is the second most wasteful country in the world/capita in terms of energy usage, behind the US of course. I believe that if the US and Canada want to keep their positions in the world economy, then its time for a paradigm shift in the North American way of life, and thats where the demand side of the equation begins to slow down - when people choose to make it so. If we spend less on oil over here, and oil supply is the problem, then its other oil hungry economies that we get to exploit while we develop of sustainable, renewable systems.
MattLikesAnalysis Wrote: ------------------------------------------------------- > Why speculate on whether there is manipulation or > speculation or what… our job is to become the > ones who are either 1) manipulating - well within > “ethical means” so we don’t lose our charters or > 2) make the right guess about speculation after we > have enough information to back that guess. This is why we will probably be stuck with a bunch of over-reaching laws and regulations at the end of this. Adam Smith had it correct that unrestrained capitalism actually hinders capitalism and society. It’s because if given the ability capitalists will manipulate society to as an extreme extent as society will tolerate. This pendulum is certainly swinging wider each time capitalists create a bubble. Personally, I think that it’s pretty disgusting that anybody would participate in this market. This isn’t some tech weenie or a housing flipper. THis is *EVERY* person in this world that speculators are fvcking with. This is *EVERY* person’s life, their livelihood, their money, and their ability to support their families. THis isn’t some fvcking game where we can ignore our impact upon the world. This type of stupidity is certainly unethical. I am sorry for being a bit of a softy, but these people are really screwing up the world. Inflation is going high because of energy http://news.yahoo.com/s/ap/20080613/ap_on_bi_go_ec_fi/economy;_ylt=AsmgQXqHE2_VLn.CUmVe_Qms0NUE While wages are falling, they’re falling because yet another problem with unregulated markets, housing. Yet, Congress and others are already moving. http://www.nationalpost.com/todays_paper/story.html?id=583236 http://www.reuters.com/article/reutersComService_3_MOLT/idUSN1237657320080612 Personally, I hope they find that this was Enron-esqe and hammer this asses with prison time, then close this up quickly. I hope it crashes so quickly that every person who holds a long contract loses almost all of their money. I am vindictive prick. Just the same as Enron, I am sure we’ll get stuck with SarbOx-ish rules, all because jack@sses can’t restrain themselves.
MattLikesAnalysis Wrote: ------------------------------------------------------- > The market will work itself out: > > Fear of slipping supply and rising demand will be > met by cash rich oil companies Just wishful thinking …but if prices are rising , demand should decrease as people try to reduce their consumption. Oil is a non-renewable resource so the current price reflects the PV of future expected prices. If oil has a high cross elasticity there will be new substitutes that are available cheaply. Consumers will not reduce their consumption but will search for other alternatives. High oil prices are actually a great impetus for the development of alternative sources. Net result == Low oil prices -> as demand is low :: more use of alternative fuel technology
That must have came right from econ 101 textbook…