Watch for Yourself: 60 Minutes Oil Story Was Spot On 61 comments
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Everyone seems to be bashing the 60 Minutes story about speculation causing oil to surge to $147. After reading the articles published here; I felt compelled to see how bad this segment was, so I went to the 60 minutes website to take a look see. I expected to see a chop job; but what I saw was an excellent laymen's explanation of how speculators and investors with fiduciary duties turned speculators contributed to a bubble which helped send billions of Americans' hard earned money to Saudis, Iranians, Venezuelans and others who laughed all the way to the bank.
These CBS bashers here either have no idea how energy markets work or are spinning the truth because they have an axe to grind with CBS. It's a shame, because for people that have a cursory interest, these clowns just effectively made a very enlightening report questionable to those honestly uninformed who would like to understand the issue better. And all they say to support their position is that the EIA has a graph that sort of makes it look like price tracks demand very closely. The truth is EIA estimates change with the wind - if your memory is that short you too should check the record. The EIA makes intermediate and long term energy supply and demand estimates that are awful - they failed to anticipate the CYCLICAL market tightness and failed to anticipate the cyclical downswing.
One of the first lines in the report asserted that the oil price spike was not caused by oil company CEOs or sheiks but speculators and other so called institutional investors like Hedge Funds (like Citadel, Amaranth and Ospraie), Commodity Traders in Chicago and Europe, Morgan Stanley (MS), Goldman Sachs (GS), J.P. Morgan (JPM), Barclays (BCS), Sovereign Wealth Funds, Yale, Harvard, as well as Pension Funds like CALPERS and others. That this is debatable is crazy. It is a FACT that these entities entered the oil market in a big way during the bull market in oil. The story asserted that over a 5 year period the amount of energy futures traded went from $13B to $300B - this too is a fact. It is a fact that Enron lobbied aggressively for changing the rules so they could control the market more and got what they wanted. It is a fact that Morgan Stanley owns more pipeline, storage, production and refined product than most oil & gas companies; this wasn't the case in past cycles.
You don't have to be a forensic scientist to understand they did it because the asset class was going up for a long time. You can delude yourself with rationalizations if you please but this is no different than what pension funds did when they doubled and tripled their allocations to unseasoned and excessively leveraged "alternative investment" strategies. Yale did it first and looked like a genius, everyone else felt either inadequate or couldn't deal with missing out. It really is that simple. Allocations to commodities increased because they did well for a long time. MBAs, CFAs and Quants everywhere fabricated a few correlations graphs and an articulate pitch and presto, the blind followed the blind.
The story mentioned that there is very little physical demand in the futures market relative to the total, and by far more than there has ever been. This too is a fact, bearish oil analysts which had seen a cycle before pointed this out many times. Sell side Wall Street analysts talked about this in research reports, Barron's did stories about it, analysts from Sanford Bernstein, Oppenheimer and ISI pointed this out at congressional hearings on the subject. A J.P. Morgan official denied speculation played any part at the same hearing, claiming it was pure supply and demand while another JPM strategist spoke about speculation taking over the energy markets in an email the same day. 60 Minutes had the email and showed it. It was obvious to anyone who bothered to check.
The 60 Minutes story asserted that there were 27 barrels worth of futures contracts traded for every barrel of physical demand and a fraction of those ever took delivery. This too is a FACT - 60-70% of the futures contracts which were (as the story indicated) initially created to help users hedge were held by either small or large specs - I.e. CTAs, hedge funds commodity day traders. You can look at commercials as a percentage of open interest and see how bullishly involved speculators were. Not unlike the real estate market, easy money (institutions that could borrow easily and lever themselves up 20 to 1) and a market that never seemed to go down sucked the suckers in and they got what they deserved.
People told me I was crazy when I told them that demand destruction was already taking hold and the economy was already slowing so it was a matter of time till oil collapsed. I looked like an idiot as I told my friends that I thought we'd fizzle a little past par; figuring that oil would look like it lost momentum near $100, suck some premature shorts in and then proceed to spank us on a move to $110. So I got cute and shorted some black gold at $109 and covered at $117. I got lucky there as I should have also known that we'd go parabolic before the collapse. I could have easily got smoked. But that's another story. $25/bbl increase in a day on NO significant news? $10 moves in each direction? That's not the sort of volatility you see in the middle of moves but rather at tops and bottoms of speculative exhaustion. It seems to always happen that way. Markets that go parabolic are almost always driven by speculation. Permanent supply and demand shocks are rare.
My message is that if it looks like a duck, quacks like a duck and acts like a duck, don't let some clown who can't or won't deal with the facts tell you different. If you didn't watch the story, go see it for yourself. If we were running out of oil or couldn't produce enough to meet demand, you would see the kind of lines and rationing we saw in the 70s. Anyone who was around back then recalls what shortages look like - people waiting for an hour or more in line at gas stations and couldn't even fill up. To even suggest it was all supply and demand is laughable. The crash is proof in and of itself - markets driven by fundamentals do better to sustain price advances.
Nothing in the 60 Minutes story was news to anyone with a clue. I'm really shocked at how it came across and appalled at how some "professional money managers" writing here spun it - super weak arguments that by and large missed the point. So I felt compelled to try to set the record straight so others less versed wouldn't get bamboozled.
The fact is that no one really knows when the world will run out of oil. Many factors influence energy prices over the long run, including production costs, the dollar, supply, demand and competition from alternatives, etc. But bubbles are usually borne of cyclical (and ALWAYS temporary) supply/demand imbalances exacerbated by analysts and pundits who con otherwise unsuspecting investors and traders with new paradigm type stories. There's a saying in the commodity markets that goes "price cures price", in other words, high prices are the cure for high prices. This has been and always will be true because of the economic sensitivity of commodities and the ability of commodity producers to always race to make hay while the sun shines. OPEC didn't cut production while prices surged, so thankfully we don't have to hear the blame thrusted at OPEC which surely would have been the case. That's all some would need to hear. The laws of supply and demand are called laws for good reason but much more than that affects all markets.
Disclosure: no positions
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This article has 61 comments:
2) References to the volume of futures trades as "evidence" that speculation is driving prices is equally stupid. For every buyer there is a seller. The volume of sells increased at the same rate as the volume of buys.
1. I place a sell order.
2. Oil ticks down.
3. I buy to cover.
4. Oil ticks up.
The Delta between the uptick and downtick is not always equal. Therefore, the market is affected by my order.
But "Crudomania" will not be continuing in 2009 and let's make that call by officially declaring: “It’s over and thank goodness for that!” Now crude oil prices will be allowed to float between $40 and $75 per barrel in 2009 depending on the pace for the recovery of the world and U.S. economies.
The natural world of supply and demand in the petroleum industry will once again rule along with being effected by geopolitical events.
> jack
Speculators influencing spot prices without taking delivery. That's easy, Gary:: speculators influence expectations. But like you I doubt whether it was a particularly big deal. And certainly the point that in the futures market the volume of sells is equal to the volume of buys needs to be appreciated, which isn't always the case.
1. THE DOLLAR! When the dollar was collapsing, it made dollar-denominated assets (oil, gas) go up. The dollar stopped falling early in 2008, built a base, and started rising very sharply, and that coincided with oil's collapse. For the record, back in mid-July I called for the crash in oil, to 90 as an initial target, then lower potential. I also was bullish on the dollar shortly thereafter.
When the dollar started to rise, the opposite effect obviously occurred, so it helped oil to collapse.
2. The $25 dollar rise in oil on Sept. 22nd was horrendous journalism, and it is obvious they have no clue what caused it. I was watching the spot and 2 forward month contracts when that happened. Within 30 seconds, the reason for that rise was quite obvious. The current contract was due to expire that afternoon. Shorts were forced to cover. There was little volume because the real trading was occurring in the next forward month. So a short squeeze occurred. The next day, the oil contract switched months, and the price was back where it was.
How was it so obvious there was something contract-specific going on?
Besides the low volume and wide spreads in the trading, when that contract was up $25, the next 2 forward contracts were only up $4. Those 2 were trading as they should, and did NOT accelerate with the other contract. And gasoline didn't rise to match the oil rise either. They should have known this, or not even brought it up, because that one day spike had ZERO impact at the pump, or anywhere else.
I'm sorry, if one can't see this, as it is so basic, everything else said should be suspect.
Another fact. Bubbles occur, we've seen a number of them. That was a bubble that burst. For every buyer there is a seller. If the volume issues brought up were a reason for the rise, it wouldn't have fallen $112 from its high now would it?
Oh, and the author suggests the $25 move asserts that doesn't happen in the middle of moves, but more at a top or bottom. Wrong. It most certainly did happen in the middle of a move-a down move. Oil had fallen from 147 to 90, and that incident was during the bounce from 90 before the next wave down. News isn't required to move a security. Technical factors matter. The problem is, that the media always has to find a reason for the tiniest move, so people think the only reason something moves is because of news. Rather, news is written to fit the move. That is Elliott Wave territory, which could explain this a lot better than CBS certainly could.
On Jan 13 08:27 AM Bob wrote:
> I read the transcript of the 60 Minutes segment and Allen Phatimer's
> review along with all the other blogs hitting the investment blogs.
> I agree with Allen's viewpoint and he makes excellent points about
> how crude oil price speculation took on a life of its own and created
> a bubble.
>
> But "Crudomania" will not be continuing in 2009 and let's make that
> call by officially declaring: “It’s over and thank goodness for that!”
> Now crude oil prices will be allowed to float between $40 and $75
> per barrel in 2009 depending on the pace for the recovery of the
> world and U.S. economies.
>
> The natural world of supply and demand in the petroleum industry
> will once again rule along with being effected by geopolitical events.
>
Here, I will try to address the comment: "please explain to me how speculators can influence price without taking delivery."
The spot/cash market for crude is directly correlated to the prompt-month futures contract. Therefore, if in today's market the Feb 2009 crude contract goes up $5/bbl today, then today's cash market will follow the same trend and depending on the day and basis expectations might sell at $4.5/bbl, $5.5/bbl or even $5/bbl higher. Therefore, heavy buying in the prompt month by speculators most certainly can affect cash prices in the short run.
Over time, a continued bullish trend (for example) in the futures market will have to be supported by actual demand and supply in the cash market or else inventories will rise, and cause the short-term bulls to be short-term bears and reducing the futures price. So, in the long run, the physical market will determine price . . . but my question is "when does 'long run' ever arrive?"
On Jan 13 07:54 AM Gary Lucido wrote:
> 1) No one has ever been able to explain how speculators can influence
> spot prices without taking delivery. The reason is that they can't.
> It's an absurd assertion.
> 2) References to the volume of futures trades as "evidence" that
> speculation is driving prices is equally stupid. For every buyer
> there is a seller. The volume of sells increased at the same rate
> as the volume of buys.
Once they are done selling at any price to delever and raise cash, where is the real supply-demand price of a barrel of oil?? My guess is somewhere in the middle $80-$90. If that is the case, is this not some type of tremendous buying opportunity ???
On Jan 13 08:16 AM Deflation Rocks wrote:
> I'm not very smart, but I do know this....
>
> 1. I place a sell order.
> 2. Oil ticks down.
> 3. I buy to cover.
> 4. Oil ticks up.
>
> The Delta between the uptick and downtick is not always equal. Therefore,
> the market is affected by my order.
>
2. The tremendous upswing of demand in the rest of the world escapes most Americans, who still believe everything revolves around us.
3. Congress allowed the ban on offshore drilling to expire; they didn't actually do anything. So how many acres have been leased sinced then? The agency responsible for leasing said it needs two years from now just to plan what to lease. How does the Bush Adminstration explain that?
4. There are no crews standing around with equipment ready to respond to "drill, baby,drill". We lack trained manpower, equipment, and capital to respond to that futile cry. What a cruel fraud that cry was.
5. America has reduced consumption of gasoline, probably permanently.
This is one of our best defenses. And way cheaper than the war in Iraq.
6. The Enron Amendment enabled the scoundrels to victimize the American public. Deregulation is not consonant with our national interest.
In this case, slack on the supply side of crude production will provide customers alternatives to buy at lower prices than the "speculator" asks. No slack, the "speculator" ratchets up the price. Seems elementary to me.
Of course a speculator with limitless resources can "corner" the market to achieve his price objective, but I see no evidence (or possibility) that this happened in a market as big as the global oil market.
Misolarman came close to seeing this connection, and I agree with his negative view of the idiots in Washington, but opening new domestic areas to drilling obviously did not instantly increase supply.
When demand dropped (just a little), buyers had alternative supplies and the market price fell. CBS should be ashamed for not getting this point into their report.
"Speculators" BAD; investors GOOD; producers BETTER.
On Jan 13 07:54 AM Gary Lucido wrote:
> 1) No one has ever been able to explain how speculators can influence
> spot prices without taking delivery. The reason is that they can't.
> It's an absurd assertion.
> 2) References to the volume of futures trades as "evidence" that
> speculation is driving prices is equally stupid. For every buyer
> there is a seller. The volume of sells increased at the same rate
> as the volume of buys.
In a decade or two, green energy can make some inroads into the energy market and perhaps even pressure the oil market slightly. For anyone to think that this is the beginning of the end for oil is so pharcical it's not funny. Fossil Fuels will be consumed for decades to come, and thank goodness for that. There is no alternative ready to serve the needs of Asia, Russia, America et al yet. Get it?
In the 1970's, when the gas supply issues resolved, we went right back to our comfort zone. We turned our back on alternative fuels, and saw no need to be concerned about miles per gallon if it meant being crammed into a car smaller than our comfort zone allowed. Part of our sense of affluence grew to be based on having a big....sometimes REALLY big....vehicle to ride around in.
I am now hopeful that we are serious about alternative fuels and cost effective renewable sources of energy. I suspect that my hybrid will be "old" technology within the next 2 years. I hope more people will see that it isn't really the cost or availability of the fuel we use, but who we have to buy it from, and what it costs apart from the money.
I NEVER SAID THAT SPECULATORS WERE THE ONLY CAUSE OF THE OIL PRICE SPIKE. I SAID THIS: "The fact is that no one really knows when the world will run out of oil. Many factors influence energy prices over the long run, including production costs, the dollar, supply, demand and competition from alternatives, etc. But bubbles are usually borne of cyclical (and ALWAYS temporary) supply/demand imbalances exacerbated by analysts and pundits who con otherwise unsuspecting investors and traders with new paradigm type stories."
By asserting the naive buyer and seller and delivery crap you are saying that speculators either don't exist or have no effect, which is naive. As pension funds and endowments and CTAs, and Hedge Funds (levered to the hilt) and brokerages and others buy into the madness, the buyers outnumber the sellers in a big way. Pension Funds, Endowments and non-commodity hedge funds should have never been involved - by getting involved to the extent they did, they became SPECULATORS. They talked about a commodity bull market that would last for another ten years. They declared commodities to be a asset class that should be well represented in everyone's portfolio no matter if you were a gunslinger or widow. They were dead wrong. How many of those guys do you suppose are still "holding for the long term" like non-specs do. Commercial and Speculative open interest increased much more than the 2% average increase in end market demand (demand was strong and Chinese were buying and we and everyone else was filling SPRs).
Consumers do NOT buy oil; they buy refined products like gas and heating oil; the demand for which did not increase or fall anywhere near as much as they amount of energy futures did. If prices tracked end market demand alone, then you would never see anything like the parabolic move you saw. Calls for $200 and $300/ bbl oil were as absurd as calling for AMZN to go to $1000/sh. back in the internet bubble immediately before AMZN proceeded to give up 90% and fall back to $10. If that sounds stupid in retrospect its because it was.
On Jan 13 07:54 AM Gary Lucido wrote:
> 1) No one has ever been able to explain how speculators can influence
> spot prices without taking delivery. The reason is that they can't.
> It's an absurd assertion.
> 2) References to the volume of futures trades as "evidence" that
> speculation is driving prices is equally stupid. For every buyer
> there is a seller. The volume of sells increased at the same rate
> as the volume of buys.
On Jan 13 10:47 AM misolarman wrote:
> Speculation is based upon some market reasoning. It is not like
> the days of the tulip bulbs. If it weren't for three billion people
> throughout the world experiencing year after year of double digit
> standard of living increases (increasing their oil consumption in
> the process), and oil production being stagnant, then speculators
> would not have had the motivation to do what they did. It is because
> of them that our extremely inept and inefficient do nothing congress,
> got off their lazy rear ends and started moving towards opening up
> new areas for drilling. This had an immediate reaction taking wind
> out of the sales of the speculators. Combined with the economic
> downturn the oil speculators trade vanished. What I am afraid of
> is with prices down our congress will once again put their brain
> dead heads in the sand. Once this happens and the economy turns
> around, I will be one of those speculators. It is because of them
> that domestic production will eventually increase, saving us from
> an even larger catastropy.
1. roughly 10% of all global oil trade (i mean the physical stuff) is conducted on commodity markets; the remaining 90% is traded in the form of long-term oil contracts... however - most of these contracts do not have a fixed price, but a price that is indexed to the commodity market price. This is certainly true for example with Gazprom natural gas contracts with its european customers. Is it true with Oil???
2. As I understand the no-delivery futures contracts - these are pure bets, gambling. For example - I can buy oil, while I don't receive any physical stuff. I can also sell oil, while i don't need to actually send the physical stuff to anyone. What happens is a cash settlement at the end of the contract (unless I sell it sooner, which in fact is also a cash settlement). Of course this is obvious that this can be useful for those really holding oil and oil related contractual obligations. However - this also opens wide the gates to speculation - i.e. to gambling on the price. It is amazing to me that a substantial part of today's financial system became one large casino. All those quants in hedge funds and investment banks are equivalent to crazy math students, who go to Casion to "trick the system".
3. take point 1 and 2 together, add easy money and no credit standrads (i.e. huge leverage) and you get a bubble-ready environment. A small market (10% or x% of phisical deliveries), with cash-settlement tools (no need to actually bother with the real stuff) and easy money. The guys that have easy money go and start gambling. Some say - oil will go down, other that it will go up - and they place bets on their predictions. If it went up, the losers pay the winners in cash. Now - since there is more that say it will go up, it really goes up. The greater the difference between those that buy (say "go up") and sell (say "go down") the faster it actually goes up... Why demend and suyppy cannot correct it? Why oil doesn;t flood the market? Because the supply needs years of development (research, drilling, etc), because existing oil fields are being depleted, and finally - because the producers are benefiting from the high price. If there was no OPEC and the oil production was a highly fragmanted industry, there would be a relatively fast increase in production in response to higher price. This would be like sliver. But it is not - OPEC does not care that much about keeping price down - on the contrary - it was set up precisely to keep the price at a high level. That's for supply. What about demand? Well - demand is very inelastic in this case. The whole world is addicted to oil and there is no serious alternative to it now. People cannot say - i will not drive to work today, because oil is high. Of course - some adjustments are taking place, but very slowly.
What about the remaining 90% of deliveries that take place off-market? Well - as long as the prices are fixed or at least semi-fixed, they will be lowering the price at the pump. However, since (as I suspect) many of them have an indexed price to the price on the exchange, they berly passively follow the market. If there was a true bidding market for all physical oil (and no funny cash-settled instruments), we would then be able to discover the real price. Of course the way in wich those long-term contracts are structured is in some way informative about buyers' and sellers' preferences. I am sure that for those contracts that were signed 15 years ago, some negotiation has been taking place (Especially if the price was fixed then). However - the most important that it tells is that people are ready to accept a wide range of prices (as set by our gambling boys) because the supply and demand are both so inelastic.
Now - the bubble may form or may not. All depends on psychology and easy money. Once it starts it will grow to some extent. Nobody can say how much and how long. Tulips in Holland were the same as oil now. Back then there was a genuine demend for tulips and people were ready to pay quite a high price for them. This was however a basis for the bubble. From psychological perspective bubbles form because people have a tendency to ascribe value to assets, while the real value is only with utility that the end user perceives. From financial perspective bubbles form, because there is easy money (thank you, Mr Greenspan).
On Jan 13 08:53 AM User 273178 wrote:
> Sorry, but there is a lot wrong with this article, and the 60 minutes
> article. In the interest of time, I'll mention 2 things that anyone
> who's ever spent 20 seconds following an energy market should know,
> but have been ignored.
>
> 1. THE DOLLAR! When the dollar was collapsing, it made dollar-denominated
> assets (oil, gas) go up. The dollar stopped falling early in 2008,
> built a base, and started rising very sharply, and that coincided
> with oil's collapse. For the record, back in mid-July I called for
> the crash in oil, to 90 as an initial target, then lower potential.
> I also was bullish on the dollar shortly thereafter.
> When the dollar started to rise, the opposite effect obviously occurred,
> so it helped oil to collapse.
>
> 2. The $25 dollar rise in oil on Sept. 22nd was horrendous journalism,
> and it is obvious they have no clue what caused it. I was watching
> the spot and 2 forward month contracts when that happened. Within
> 30 seconds, the reason for that rise was quite obvious. The current
> contract was due to expire that afternoon. Shorts were forced to
> cover. There was little volume because the real trading was occurring
> in the next forward month. So a short squeeze occurred. The next
> day, the oil contract switched months, and the price was back where
> it was.
>
> How was it so obvious there was something contract-specific going
> on?
> Besides the low volume and wide spreads in the trading, when that
> contract was up $25, the next 2 forward contracts were only up $4.
> Those 2 were trading as they should, and did NOT accelerate with
> the other contract. And gasoline didn't rise to match the oil rise
> either. They should have known this, or not even brought it up, because
> that one day spike had ZERO impact at the pump, or anywhere else.
>
> I'm sorry, if one can't see this, as it is so basic, everything else
> said should be suspect.
>
> Another fact. Bubbles occur, we've seen a number of them. That was
> a bubble that burst. For every buyer there is a seller. If the volume
> issues brought up were a reason for the rise, it wouldn't have fallen
> $112 from its high now would it?
>
> Oh, and the author suggests the $25 move asserts that doesn't happen
> in the middle of moves, but more at a top or bottom. Wrong. It most
> certainly did happen in the middle of a move-a down move. Oil had
> fallen from 147 to 90, and that incident was during the bounce from
> 90 before the next wave down. News isn't required to move a security.
> Technical factors matter. The problem is, that the media always has
> to find a reason for the tiniest move, so people think the only reason
> something moves is because of news. Rather, news is written to fit
> the move. That is Elliott Wave territory, which could explain this
> a lot better than CBS certainly could.
On Jan 13 10:25 AM Viking King wrote:
> This whole discussion, I believe, is very useful and informative.
> I need to go and watch the 60 minutes piece before making comments
> specifically related to that piece.
>
> Here, I will try to address the comment: "please explain to me how
> speculators can influence price without taking delivery."
>
> The spot/cash market for crude is directly correlated to the prompt-month
> futures contract. Therefore, if in today's market the Feb 2009 crude
> contract goes up $5/bbl today, then today's cash market will follow
> the same trend and depending on the day and basis expectations might
> sell at $4.5/bbl, $5.5/bbl or even $5/bbl higher. Therefore, heavy
> buying in the prompt month by speculators most certainly can affect
> cash prices in the short run.
>
> Over time, a continued bullish trend (for example) in the futures
> market will have to be supported by actual demand and supply in the
> cash market or else inventories will rise, and cause the short-term
> bulls to be short-term bears and reducing the futures price. So,
> in the long run, the physical market will determine price . . . but
> my question is "when does 'long run' ever arrive?"
On Jan 13 04:10 PM Isnt_It_Just_Money wrote:
> A steep contango in the futures strip causes supply to be stored
> rather than available to the spot market, driving spot prices up.
>
On Jan 13 11:10 PM Allen Phatimer wrote:
> 60 minutes explained it pretty well. The arguments of there's always
> a seller for every buyer and they never take delivery are so amateur
> that you guys embarrass yourselves when you spew that crap. Think
> about what you're saying before you regurgitate what you heard another
> fool say. Let me make it really simple for you - SPECULATIVE ELEMENTS
> THAT BUY AND SELL A NEW PARADIGM TYPE LINE OF CRAP ARE KEY CONTRIBUTORS
> TO BUBBLES. Your buyer and seller for every transaction line suggests
> that buyers don't move prices higher and sellers don't push prices
> lower.
>
> I NEVER SAID THAT SPECULATORS WERE THE ONLY CAUSE OF THE OIL PRICE
> SPIKE. I SAID THIS: "The fact is that no one really knows when the
> world will run out of oil. Many factors influence energy prices over
> the long run, including production costs, the dollar, supply, demand
> and competition from alternatives, etc. But bubbles are usually borne
> of cyclical (and ALWAYS temporary) supply/demand imbalances exacerbated
> by analysts and pundits who con otherwise unsuspecting investors
> and traders with new paradigm type stories."
>
> By asserting the naive buyer and seller and delivery crap you are
> saying that speculators either don't exist or have no effect, which
> is naive. As pension funds and endowments and CTAs, and Hedge Funds
> (levered to the hilt) and brokerages and others buy into the madness,
> the buyers outnumber the sellers in a big way. Pension Funds, Endowments
> and non-commodity hedge funds should have never been involved - by
> getting involved to the extent they did, they became SPECULATORS.
> They talked about a commodity bull market that would last for another
> ten years. They declared commodities to be a asset class that should
> be well represented in everyone's portfolio no matter if you were
> a gunslinger or widow. They were dead wrong. How many of those
> guys do you suppose are still "holding for the long term" like non-specs
> do. Commercial and Speculative open interest increased much more
> than the 2% average increase in end market demand (demand was strong
> and Chinese were buying and we and everyone else was filling SPRs).
>
>
> Consumers do NOT buy oil; they buy refined products like gas and
> heating oil; the demand for which did not increase or fall anywhere
> near as much as they amount of energy futures did. If prices tracked
> end market demand alone, then you would never see anything like the
> parabolic move you saw. Calls for $200 and $300/ bbl oil were as
> absurd as calling for AMZN to go to $1000/sh. back in the internet
> bubble immediately before AMZN proceeded to give up 90% and fall
> back to $10. If that sounds stupid in retrospect its because it
> was.
similarly, the high oil prices in 2008 were due to the inability of worldwide oil supply to keep up with worldwide oil demand. despite $145/barrel oil and $4.50/gallon gasoline, production at XOM, COP, and CVX was down year over year as it was at many other international oil companies. did speculation and the falling dollar have something to do with $145/barrel? of course. was it the main cause? absolutely not. commodities still trade on fundamentals, especially a commodity like oil, which has many private and governmental players, and is a very liquid worldwide market.
1. Fiat Currency - Money chasing money creates bubbles since not much of any value is created in our country now. The money must chase the next great thing. Internet boom, realestate, stocks, oil, etc. Get yourself some gold and silver.
2. Depletion Rate - The depletion rate of the worlds largest oil fields will eventually overwhelm us. This is a much larger factor than supply destruction, economic health, futures markets, etc.
On Jan 14 07:29 AM romerjt wrote:
> romerjt - Are you explaining this or defending it - the market that
> produces these wild swings?
On Jan 13 11:10 PM Allen Phatimer wrote:
> 60 minutes explained it pretty well. The arguments of there's always
> a seller for every buyer and they never take delivery are so amateur
> that you guys embarrass yourselves when you spew that crap. Think
> about what you're saying before you regurgitate what you heard another
> fool say. Let me make it really simple for you - SPECULATIVE ELEMENTS
> THAT BUY AND SELL A NEW PARADIGM TYPE LINE OF CRAP ARE KEY CONTRIBUTORS
> TO BUBBLES. Your buyer and seller for every transaction line suggests
> that buyers don't move prices higher and sellers don't push prices
> lower.
>
> I NEVER SAID THAT SPECULATORS WERE THE ONLY CAUSE OF THE OIL PRICE
> SPIKE. I SAID THIS: "The fact is that no one really knows when the
> world will run out of oil. Many factors influence energy prices over
> the long run, including production costs, the dollar, supply, demand
> and competition from alternatives, etc. But bubbles are usually borne
> of cyclical (and ALWAYS temporary) supply/demand imbalances exacerbated
> by analysts and pundits who con otherwise unsuspecting investors
> and traders with new paradigm type stories."
>
> By asserting the naive buyer and seller and delivery crap you are
> saying that speculators either don't exist or have no effect, which
> is naive. As pension funds and endowments and CTAs, and Hedge Funds
> (levered to the hilt) and brokerages and others buy into the madness,
> the buyers outnumber the sellers in a big way. Pension Funds, Endowments
> and non-commodity hedge funds should have never been involved - by
> getting involved to the extent they did, they became SPECULATORS.
> They talked about a commodity bull market that would last for another
> ten years. They declared commodities to be a asset class that should
> be well represented in everyone's portfolio no matter if you were
> a gunslinger or widow. They were dead wrong. How many of those
> guys do you suppose are still "holding for the long term" like non-specs
> do. Commercial and Speculative open interest increased much more
> than the 2% average increase in end market demand (demand was strong
> and Chinese were buying and we and everyone else was filling SPRs).
>
>
> Consumers do NOT buy oil; they buy refined products like gas and
> heating oil; the demand for which did not increase or fall anywhere
> near as much as they amount of energy futures did. If prices tracked
> end market demand alone, then you would never see anything like the
> parabolic move you saw. Calls for $200 and $300/ bbl oil were as
> absurd as calling for AMZN to go to $1000/sh. back in the internet
> bubble immediately before AMZN proceeded to give up 90% and fall
> back to $10. If that sounds stupid in retrospect its because it
> was.
The price of oil will recover with the economy. The bigger problem, as I see it, is that the entire energy sector collapsed with oil.
On Jan 14 12:26 PM Geoff Considine wrote:
> This article and the following discussion shows how much misinformation
> is floating around about what drives commodity prices. Perhaps the
> saddest thing is how many people weight in on commodities markets
> without really understanding them--including politicians. As is so
> often the case, the dialog/comments are even more interesting than
> the article.
On Jan 13 08:27 AM Bob wrote:
> I read the transcript of the 60 Minutes segment and Allen Phatimer's
> review along with all the other blogs hitting the investment blogs.
> I agree with Allen's viewpoint and he makes excellent points about
> how crude oil price speculation took on a life of its own and created
> a bubble.
>
> But "Crudomania" will not be continuing in 2009 and let's make that
> call by officially declaring: “It’s over and thank goodness for that!”
> Now crude oil prices will be allowed to float between $40 and $75
> per barrel in 2009 depending on the pace for the recovery of the
> world and U.S. economies.
>
> The natural world of supply and demand in the petroleum industry
> will once again rule along with being effected by geopolitical events.
>
The spot market does follow the front month price because it is almost the front month price. Real demand does not pay a crapload more for oil a month out because it can wait or buy spot and store. And its not about 'EVIL" speculators - I never said a bad thing about speculators. It was about 3 writers on the front page of seekingalpha knocking a fair characterization of what added fuel to the fire of the oil bubble without dealing with many facts that proved beyond a reasonable doubt that speculation was a key factor. Oil went from 80 to 147 and back to 35 in a few months. Please tell me exactly how much supply or demand changed in that time. The answer is not at all. By the way, a similar thing is happening right now but interestingly not having as positive an effect in the short run as one might suspect - speculators in the physical markets, like the Morgan Stanley's of the world are chartering as many tankers as they can and buying spot which they are arbing against a steep contango out to June or so. The numbers work because the contango is steep and tanker day rates have declined dramatically. The spread is actually quite wide and this dynamic would normally close that gap by lifting spot and near months. Whats interesting to me about this is I think it suggests that the market will be more awash in oil by June that most think, and the price might not bounce back as much as most think.
Although I've always been a big fan of Byron Wien's, I suspect his and many others calls for $80 oil by year end will look like a very tall order when we are still in the mid forties in June. And that's not to say I don't think oil is probably a good value here; but a return to $80 anytime soon is probably going to require a collapse in the dollar WITH stability or improvement in the global economy. The article I posted last week on '09 explains why I doubt very much the economy improves anytime soon; in fact I think it gets a lot worse.
On Jan 14 07:49 AM Gary Lucido wrote:
> But the only way that the spot market can follow the front month
> price is if the demand is there to justify the price. If evil speculators
> are artificially driving up the price then there is no real demand
> to keep the two in sync.
On Jan 14 11:16 AM kingaj wrote:
> Steep price movements are pretty standard for energy as soon as you
> get close to capacity. Look at electricity spot on a hot day. The
> problem is lack of ability to switch between alternatives, and the
> low slope of the demand curve relative to price.
I sure would like to see the rate of increase in gov't manipulation of the above or unregulated manipulation of prices and demand/supply by industry over the past 50 years. I am so very sure that all manipulation is increasing exponentially, and the awareness of that point would be a real eye-opener and perhaps be the clue as to what is truly harming our 230 year old American experiment to the point where it may no longer work as it was originally intended.
There was also a confirmatory bias pushing oil higher. Real US Oil demand had been dropping for months, miles driven were falling for the first time ever, but investors ignored this news and only looked at tension in the mideast-type information.
I may have a simplistic view of this argument, but I believe that the run up in CL was a result of commodities and more specifically, energy , being regarded as an asset class. As such, funds, investors, speculators, whatever you want to call them bought futures contracts in anticipation of a price increase, exactly like a stock equity position. As the demand for these futures contracts grew, the price grew along with it. There was ample demand for the futures contracts being rolled over by funds, etc., that new demand back filled the positions in the front month and out months along the way.
As with any chart of any product that you look at that has went parabolic like CL did, the “ring around the rosey” game has to come to an end at some point. The holders of all of these bought up futures contracts decided that they wanted to start selling them. As the price dropped, people started getting nervous about the run up and the demand started dropping off for the futures contracts, and the price of them dropped more. This process continued and continues, as the buyers of the futures contracts are willing to pay less and less for them.
Note that I never mentioned the fundamentals of the product here. As a day trader I try not to pay attention to the underlying sentiment or fundamentals of the product but just trade by what the chart tells me. I am sure that there is a fundamental argument about all this, but in my opinion it is very simply a supply and demand issue. Not the supply and demand of the underlying, but the supply and demand of the futures.
So yes, speculators created the run up, just as they run up the price of a companies stock as well. At some point market forces come to bear and the buyers dry up and the sellers take over. Maybe the speculators in CL, as in the funds, etc. who regarded it as an asset class will go away and play somewhere else. If all the speculators, like myself, were not allowed to trade CL, then I guess the only players would be the suppliers and the end users and you might see a “true” value of the product. But until such time that our commodity markets are restricted some how in such a way, the “speculators” will be involved in influencing price.
I really don’t understand what all the fuss is about. It is really very simple.
I may have a simplistic view of this argument, but I believe that the run up in CL was a result of commodities and more specifically, energy , being regarded as an asset class. As such, funds, investors, speculators, whatever you want to call them bought futures contracts in anticipation of a price increase, exactly like a stock equity position. As the demand for these futures contracts grew, the price grew along with it. There was ample demand for the futures contracts being rolled over by funds, etc., that new demand back filled the positions in the front month and out months along the way.
As with any chart of any product that you look at that has went parabolic like CL did, the “ring around the rosey” game has to come to an end at some point. The holders of all of these bought up futures contracts decided that they wanted to start selling them. As the price dropped, people started getting nervous about the run up and the demand started dropping off for the futures contracts, and the price of them dropped more. This process continued and continues, as the buyers of the futures contracts are willing to pay less and less for them.
Note that I never mentioned the fundamentals of the product here. As a day trader I try not to pay attention to the underlying sentiment or fundamentals of the product but just trade by what the chart tells me. I am sure that there is a fundamental argument about all this, but in my opinion it is very simply a supply and demand issue. Not the supply and demand of the underlying, but the supply and demand of the futures.
So yes, speculators created the run up, just as they run up the price of a companies stock as well. At some point market forces come to bear and the buyers dry up and the sellers take over. Maybe the speculators in CL, as in the funds, etc. who regarded it as an asset class will go away and play somewhere else. If all the speculators, like myself, were not allowed to trade CL, then I guess the only players would be the suppliers and the end users and you might see a “true” value of the product. But until such time that our commodity markets are restricted some how in such a way, the “speculators” will be involved in influencing price.
I really don’t understand what all the fuss is about. It is really very simple.
In truth, these markets were all extremely tight, with the incremental demand driven in every case at least 50%--and up to 80% including indirect effects--by China. Supply couldn't keep up with demand. Consider: oil consumption increases with GDP. Global GDP increased 18% from Oct. 2004 to July 2008. Allowing for efficiency gains, we would have expected oil production to have been about 12% higher; instead, it was 1.5% higher. That is, by early 2008, the world was missing the equivalent of a Saudi Arabia in production compared to the supply-demand balance of 2004.
In such a situation, scarcity pricing overcame marginal cost pricing. Speculators, of course, piled on, but they were symptomatic of the fundamentals, rather than the cause.
For anyone thinking that this is 1998 and the oil supply problem is solved, well, forget it. It's not.
On Jan 14 01:17 PM Allen Phatimer wrote:
> One more time Gary, and don't take this personally. Although I'm
> not an "oil expert", I've followed oil and other commodities closely
> for 10 years now and traded commodities more often than most over
> that time. I've had the fortune to learn a lot the energy markets
> directly from many analysts you've seen and still see on CNBC in
> that time. I'm on this again because I think it would be a shame
> if people believed what you say because you are dead wrong in saying
> "But the only way that the spot market can follow the front month
> price is if the demand is there to justify the price." and use that
> as a point to support the idea that it was purely supply and demand
> or the value of the dollar (which I agree is a critical factor as
> I said) which caused oil to run the way it did and specs had nothing
> to do with it.
>
> The spot market does follow the front month price because it is almost
> the front month price. Real demand does not pay a crapload more
> for oil a month out because it can wait or buy spot and store. And
> its not about 'EVIL" speculators - I never said a bad thing about
> speculators. It was about 3 writers on the front page of seekingalpha
> knocking a fair characterization of what added fuel to the fire of
> the oil bubble without dealing with many facts that proved beyond
> a reasonable doubt that speculation was a key factor. Oil went from
> 80 to 147 and back to 35 in a few months. Please tell me exactly
> how much supply or demand changed in that time. The answer is not
> at all. By the way, a similar thing is happening right now but interestingly
> not having as positive an effect in the short run as one might suspect
> - speculators in the physical markets, like the Morgan Stanley's
> of the world are chartering as many tankers as they can and buying
> spot which they are arbing against a steep contango out to June or
> so. The numbers work because the contango is steep and tanker day
> rates have declined dramatically. The spread is actually quite wide
> and this dynamic would normally close that gap by lifting spot and
> near months. Whats interesting to me about this is I think it suggests
> that the market will be more awash in oil by June that most think,
> and the price might not bounce back as much as most think.
>
> Although I've always been a big fan of Byron Wien's, I suspect his
> and many others calls for $80 oil by year end will look like a very
> tall order when we are still in the mid forties in June. And that's
> not to say I don't think oil is probably a good value here; but a
> return to $80 anytime soon is probably going to require a collapse
> in the dollar WITH stability or improvement in the global economy.
> The article I posted last week on '09 explains why I doubt very much
> the economy improves anytime soon; in fact I think it gets a lot
> worse.
But, what I wonder, are statements like this:
" Let's say demand is stable and suddenly speculators start buying futures contracts that they never take delivery on."
Isn't MS a speculator who DOES take delivery ? They have the infrastructure to store the stuff? When did they buy all that?
Seem like if someone goes and buys a gun, then someone shoots a duck...maybe not provable, but I smell orange sauce...
I saw the piece when broadcast, thought it was worth my time. You made some good points. It looked and quacked like a duck, and $147/bbl oil in no way was based purely on a sound supply/demand equation.
What was going on in the run-up to the bubble's formation? Lots and lots of money worldwide, searching desperately for some avenue to a reasonable return. Enter securitized mortgage-backed instruments, CDSs, the petroleum market. These all ballooned once the big players went in.
Manipulation? Probably no more so than in any functioning market, which at its core stands on investor psychology and emotion. We like to think that psychology is founded on rational thinking and application of sound data, like the fact that worldwide demand for petroleum was bumping up against available supply, in the backdrop of production declines in many of the big fields as many of you have mentioned. That rational psychology provided the basis for the bubble to start; once the big money began to flow in, the bubble grew. Then emotion in the market starts to become a big player, and anyone would jump in without the sound rational basis.
There are plenty of reasons to be fearful of the petroleum supply/demand picture looking forward. A big one, and one which contributed mightily to the bubble, is the shear demand potential of China and India. While their comsumption is far less than the US currently, the scale of consumption increase potential given their population and growth rates look pretty scary.
Are hedge funds buying admissions to harvard? Is there excess trading in Yale futures?
With all due respect to seekingalpha, they need a proofreader and someone with a Bachelors degree..in ANYTHING...even underwater basketweaving....to weed out the CRAP.
cyclingscholar
Oil was part of an increase in commodities in general and also was likely overstated in the futures arena.
But the bottom line is......dictated by spot prices where actual deliveries are taking place. The answer is to show that Oil futures were completely out of line with the trend in spot prices. Comparatively we are all just venting and blowing smoke.
1) Suppose I'm a speculator and it's January when I buy a contract for $40/bbl for March delivery. Then, price goes up 50% to where the spot price of oil is $60/bbl in February. Now because I don't want to take delivery, I can sell the March contract for $50/bbl in February and still make a profit. Wouldn't I be exerting downward rather than upward pressure on the price?
Some may ask, why would you sell for $50 when you can get $60? Well, okay, let's say I sell at $60 -- then I'm merely responding to the market as opposed to influencing it.
2) Despite my previous question I do believe generally that speculation can be unhealthy for the economy as a whole -- I don't want anyone to think I'm defending speculators -- I'm just not clear as to how they can exert such influence over one commodity while remaining entirely within that commodity.
But, I think there's something that many people seem to be missing...What about the role currency speculation played in the oil spike? If we look at the commodities boom, the dollar depreciated rather quickly while the euro gained against it. It seems to me that if one regards this boom as both a cause/effect of a depreciating dollar, one would eventually ask: why was the euro gaining? Wouldn't European companies need to change their currency into dollars in order to buy oil, copper, grain etc. -- thereby depreciating that currency as well?
It seems a likely hypothesis that dollars were converted to euros (perhaps as an inflation hedge) in such great quantities so as to buoy the currency against price fluctuations in the commodity markets. Does anyone know if this has been investigated?
Bahrain needs to fetch $75 a barrel for its oil
Saudi Arabia needs $49 a barrel
U.A.E. just $23 a barrel
The marginal cost for oil production in Venezuela and Iran is said to
be $70 per barrel.
Russia's state budget remains balanced only when oil prices stay at or
above $70 per barrel.
Of the new extraction projects planned by state-owned companies in
deep-sea areas, the lowest break-even oil price was about $60 a barrel
and the highest about $90 per barrel.
Deep water oil drilling like in the Gulf of Mexico (where we get 25%
of domestic production) is around $95 per barrel.
Have you noticed lately that Chavez is now quietly asking Western Oil companies to come back into Venezuela to help develope new oil projects? Venezuela's heavy crude, particularly expensive to extract, was not a problem when prices were sky-high, but now shrinking profit margins from the price collapse make it harder to finance production.
Price below production cost destroys future oil projects and supply.
A price band of $75-100 would be useful to prevent the creation of a supply-demand mismatch that will result in soaring prices again once the global econpmy recovers.
On Jan 14 09:48 PM Gary Lucido wrote:
> Nope don't buy it. First, demand is clearly much lower now than it
> was when oil was 147. Opec is cutting back and inventories are building.
> It doesn't take much demand change to move the price a lot when the
> supply and demand curves are fairly inelastic. Second, let's walk
> through the mechanism in detail that must occur in order for speculators
> to drive up spot prices. It doesn't make sense. Let's say demand
> is stable and suddenly speculators start buying futures contracts
> that they never take delivery on. If the demand is not there spot
> prices will not rise because no one is taking delivery on those contracts.
> You would end up with significant contango but as soon as the front
> month settled the prices on those contracts would crash to the spot
> price. The spot price is only going to be affected by real demand
> - unless people start to store oil for future delivery in which case
> inventories would rise. However, there was not contango at the time
> of 147 oil and inventories did not rise. There is no mechanism by
> which speculation can move spot prices unless that speculation reflects
> real demand - in which case it's the demand influencing speculation
> and not vice versa.
A sloppy 60 Minutes segment on oil prices
Submitted By Tim Iacono
I happened to catch this 60 Minutes segment last night on the subject
of the role speculation played in oil prices over the last year and
kept waiting for them to tell something other than the Michael Masters
version of the story.
They never did.
In what was just an awful omission of critical elements of a major
story (including the fact that their key "expert" has a major conflict
of interest), this is just one more example of how the mainstream
media has utterly failed to provide anything of real value in their
reporting and why, increasingly, those seeking information are turning
to alternate news sources.
At The Big Picture, a dismantling of the report has already been
completed by the ever-alert Barry Ritholtz, in whose estimation, about
90 percent of the story remained untold.
Here's what was left out:
1.) Oil is priced in US Dollars. Since 2001, the Dollar fell 40% (from
120 to 72); Oil rise nearly 5 fold over the same period. And Oil’s
collapse occurred over a period when the dollar formed a short term
bottom; it has certainly had its most significant rally in years (72
to 88).
2.) Over the same period that Oil prices were rising, the US was
fighting two major wars in the Middle East, Iraq and Afghanistan.
These impact prices via psychology and risk of supply disruption —
especially at a time when producers were running flat out.
3.) Energy prices rose during an economic expansion (fueled by low
rates and cheap money); Oil fell during a period of US recession and a
global slowdown.
4.) Since 2001, Commodities of all sorts rose significantly: Steel,
aluminum, cement, foodstuffs, precious metals, etc. Were they all
driven by speculation, or was something else going on?
5.) Since the 1% Fed funds rate of 2003, inflation has had a dramatic
impact on ALL prices — from medical costs to insurance to education to
health care to housing to food and energy. That 60 Minutes failed to
even mention inflation in a piece on Oil prices is a terrible
oversight on their part.
6.) Throughout the 1990s and 2000s, cars were increasingly replaced
with SUVs and trucks. These got appreciably worse gas mileage, as the
total US miles driven rose. Hence, increased US demand for energy
accompanied increasing prices.
7.) Since gas prices hit $4 a gallon and the recession began, total US
miles driven fell significantly, by several billion miles. As
expected,t he drop in driving was followed by a fall in prices.
8.) 60 Minutes interviewed Mike Masters, a hedge fund manager who had
testified before Congress that speculation was driving prices. They
omitted to mention he was talking his book. His holdings in energy
sensitive stocks — with large positions, the vast majority in call
options, in AMR Corp (AMR), the parent of American Airlines, Delta Air
Lines (DAL), General Motors (GM), UAL Corp (UAUA) and US Airways (LCC)
— were responsible for his fund losing 35% of its value before the
Fall 2008 market collapse.
9.) China boomed, they also spent a ton of money building out the
nation leading up to the Olympics. (India boomed too). China, like the
US, also began filling its Strategic Petroleum Reserves.
10.) The rise of extremist terrorist groups like al-Quada, the
hostility of Iran towards the West, supply and political disruptions
in places like Nigeria, and overt hostility to the US by oil producers
like Venezuela President Hugo Chavez also contributed to drive prices
up. The poltiical factors were also omitted.
To this could be added the very real supply/demand picture of
early-2008 in which, every day, world-wide inventories were being
drawn down by two million barrels a day because the world was
consuming more than it could produce.
The 60 Minutes segment kept saying that there was no "fundamental"
reason for rising prices, but, until the wheels fell off the global
economy, there was a major fundamental reason.
Steve Kroft might also have consulted with the International Energy
Agency, the Paris-based energy watchdog group, that recently issued
their 2008 World Energy Outlook in which they "sounded the alarm",
characterizing current production trends as "unsustainable" and called
for action in the form of an "energy revolution" to offset the
expected declines in output.
The group predicted that the oil price will quickly "shoot back
through $100" when the world economy returns to normal, going on to
note that the "era of cheap oil" is over.
How could the 60 Minutes crew have missed all of these things?
The Atlanta Journal-Constitution
Wednesday, January 21, 2009
No commodity elicits more conspiracy theories than oil. When it goes
up, and even when it goes down.
Last year, as the price soared toward its eventual high of $147 a
barrel, conspiracists were pitching conniption fits.
So Congress held hearings, since hearings are apparently our senators’
and representatives’ main gig when they aren’t soliciting money from
lobbyists.
Of course, the hearings — more than 40 by last count — focused on
speculators’ role in oil’s historic rise. Could be no other reason.
Certainly supply and demand couldn’t account for the price of oil.
It won’t surprise anyone that most congressmen are lawyers. But
there’s also a smattering of other professions: 16 medical doctors,
four ministers, two professional musicians and even a riverboat
captain. But none is an economist. And it shows.
The lack of basic economic understanding exhibited during the oil
hearings particularly upset Philip K. Verleger Jr. He had warned
Congress in December 2007 that oil would hit $120 a barrel in 2008 (at
the time, it was hovering around $50).
Verleger helped create the futures market for crude oil in the early
1980s, after serving in the Ford and Carter administrations. What he
warned Congress about was something far less glamorous than
speculators.
Don’t bother inviting the media to a hearing on light sweet crude oil.
You can’t get a sound bite on the subject of low-sulfur diesel or
gasoline.
Verleger’s explanation:
The U.S. in 2007 and Europe last year put in new, lower-sulfur
standards on diesel. This came on top of the U.S. move to remove
sulfur from gasoline.
It’s easier and cheaper to achieve low-sulfur standards with light
sweet crude than other types of oil. The supply of sweet crude was
disrupted by civil unrest in Nigeria, its largest producer. In August
2007, the Department of Energy further reduced the supply of sweet
crude by resuming regular additions to our Strategic Reserve.
Throw in, at the time, a weak dollar vs. the euro, and you got the
makings of $120-plus barrel of oil.
What brought it down? Supplies improved and demand lessened.
Nigeria settled down. The high price of diesel lessened European
demand just as the high price of gasoline curbed our usage.
The DOE finally came to its senses and stopped putting sweet crude in
the Strategic Reserve. Russia invaded Georgia, and the euro tanked vs.
the dollar.
The recession kicked in.
Was any of the $147 pure speculation? Perhaps, but not significantly,
according to a lengthy investigation by the Commodity Futures Trading
Commission.
But clearly, strong economic forces were at work.
Our roller-coaster ride on the oil rig should remind us how little
Congress adds to our understanding whenever it attempts to examine
anything economic — like our current crisis.