Really? According to the Economist they don’t. http://www.economist.com/opinion/displaystory.cfm?story_id=11454989 I have read the opposite before and that was my initial thought as well. Does someone care to explain this to me? They mention that speculation has increased 20 times over since 2003, wouldn’t that fact alone create a bubble?
Well. Someone does have to take the opposite side of the trade. And there can be physical delivery of oil or any commodity should they not. I have thought for a while though that the ETF’s may cause a commodity bubble. Still I don’t think we’re their yet. This is like NASDAQ 97 or 98…not 99. If I had to guess I would say oil is somewhat overvalued in the short-run, but there are supply issues, so who knows. Either way, I would just stay away from the whol sector until some civility returns ( a la 4, 5 and 6% jumps either way happening like crazy)
George Soros says speculators have their say: http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/05/26/cnsoros126.xml
So does JDV.
You’ve got to define what you mean. Most people think “speculators” and they think pit traders and hedge funds making crazy levered bets with OPM. However, Soros could accurately be referring to anyone who takes a commodity position without a fundamental need to buy or sell the commodity. What this encompasses is people who are now treating commodities as an asset class. In Barron’s two weeks ago (and in his recent book) Mohamed El-Erian proposes a neutral asset allocation mix for a long term investor, and it looks reasonable enough. He proposes 49% in global equities, 14% in global bonds, 8% in “special opportunities” and 22% in real assets, of which he recommends half in commodities. On paper this looks OK. But on second blush, he’s recommending you put nearly as much in bonds as you do into commodities. I don’t know how large the global bond market is, but I guarantee you it’s orders of magnitude larger than the commodity markets. I’ve seen this allocation approach espoused in other areas as well. This secular flow of funds into commodities is responsible for much of the increase, although every other factor you hear of is responsible as well (dollar, EM demand, constraints in global supply).
Without reading the article… How do they account for the fact that outstanding contracts outstrip annual production by over 200:1 and how this doesn’t have any effect on the market.
I didn’t read it either - it’s pretty ridiculous to say that the market that sets the price doesn’t influence them. Edit: I"ll read the article…
“Some $260 billion is invested in commodity funds, 20 times the level of 2003. Surely all that hot money has supercharged the demand for oil? But that is plain wrong. Such speculators do not own real oil. Every barrel they buy in the futures markets they sell back again before the contract ends. That may raise the price of “paper barrels”, but not of the black stuff refiners turn into petrol. It is true that high futures prices could lead someone to hoard oil today in the hope of a higher price tomorrow.” Paper barrels, huh? This guy needs a CFA course on cash-and-carry.
LOL, what an utter failure of an article. The guy writes for The Economist but doesn’t even understand the full problem. They need to sack that guy tomorrow.
Spierce for our benefit could you elaborate? Willy
CFA_Halifax Wrote: ------------------------------------------------------- > Well. Someone does have to take the opposite side > of the trade. And there can be physical delivery > of oil or any commodity should they not. > > I have thought for a while though that the ETF’s > may cause a commodity bubble. > > Still I don’t think we’re their yet. This is like > NASDAQ 97 or 98…not 99. > > If I had to guess I would say oil is somewhat > overvalued in the short-run, but there are supply > issues, so who knows. > > Either way, I would just stay away from the whol > sector until some civility returns ( a la 4, 5 and > 6% jumps either way happening like crazy) The fact that prices are so volatile when the fundamentals are the same is a clear indication that capital flows more then any intrinsic qualities are influencing the market price.
George Soros is more of a politician now than a cutting-edge investor. Take anything he says in front of lawmakers with a grain of salt and consider the context. Even if he is placing bets anymore, does it even matter to his net worth per his remaining days? He probably feels he makes his impact by communicating a message these days. These old guys should retire! Enough of Buffett and his financial WMDs. He owns insurance, and writes S&P puts. These guys look like your grandpas, but they still say whatever suits them best. George Soros even has a name for his influence - “reflexiveness.” Cocky bstrd.
That article misses wide- i read not to long ago even with the deep sea rig technology costs, it still costs around $5 USD to extract a barrel… The peak oil theory is completely non-sensical, I remember an article in bloomberg not that long ago about that either, just before the super run-up- Nobody has any idea how much oil is underneith us, we have enough trouble measuring exactness of how water we have on this earth. The reasons I sight to the run-up 1- speculation is definitely part of it- there is no way the oil companies can take the volatility of pricing nor can they speculate themselves on higher pricing, so they hedge themselves out, hard not to if you can get 130/bb to take off your risk… That said, just because you dont see huge leverage numbers on commodities trading, doesnt mean you should really see any- oil sees over a 1% move/day, no way can you lever that up too far. But its not surprising that someone will continually take off the other side of the trade just to ensure their price… 2- inflation is extremely evident- funny how people point to oil as the driver of inflation, when it really has been the input prices first, chinese labor is spread extremely thin. There are extremely valid points to showing potential overharvesting(especially out of China), especially in periods the crops havent been great due to weather. Some parts of the world really need to grow a little slower right now…So Oil is definitely a safe haven for inflation, which will show somewhat in speculation as well, but not just by funds and dealers, but through normal investors who are trying to ride this, lets not forget the leverage that these investors take as well. 3- overreaction has to be part of this too- market is pulled out way too far just because of expectations, leading to momentum, and its tough to stop the momentum. In terms of the long run, governments havent done enough to promote/subsidize the other non petroleum energies and even running on lower compositions of petro hasnt been done, like methanol. Either way, there has been no evidence that we will not have oil in 2030… which makes this overreaction ridiculous