Commodities Prices: Speculation Exposed
That was a nice dip yesterday!
We were so well covered that we spent the day in member chat discussing World Hunger as we ho-hummed the sell-off, but we did get a little bullish towards the end of the day and started picking off some callers, looking for at least a bounce in the morning but willing to roll down or add to some of our stronger long positions.
The most exciting thing that happened Tuesday was the testimony of Michael Masters to the Senate Committee on Homeland Security (who have sweeping powers) as he spilled the beans and gave the Senate a very detailed inside view of exactly how speculators are the primary cause of high commodity prices.
Don't look for any commentary on this in the WSJ or most media outlets, you would think this entire investigation isn't going on as you watch CNBC wearing their Oil $130 party hats this evening!
What we are experiencing is a demand shock coming from a new category of participant in the commodities futures markets: Institutional Investors. Specifically, these are Corporate and Government Pension Funds, Sovereign Wealth Funds, University Endowments and other Institutional Investors. Collectively, these investors now account on average for a larger share of outstanding commodities futures contracts than any other market participant.
With very bold categories in his presentation like "Index Speculator Demand is Driving Prices Higher" Masters lays out a simple and compelling case that illustrates how over $250Bn of speculative money has poured into the commodities markets since 2003, driving the average cost of commodities indexed up 183% WITHOUT ANY SIGNIFICANT INCREASE IN ACTUAL DEMAND.
It's not just oil, there is a chart on page 4 of his presentation that shows how on Jan 1st 2003 sugar futures stockpiled totaled 2.3Bn pounds. On March 12th of this year, speculators had stockpiled 48Bn pounds of sugar. Soybean oil went from 163M pounds to 4.5Bn pounds, corn from 242M bushels to 2.4Bn bushels, coffee from 195M pounds to 2.4Bn pounds. wheat from 166M bushels to 1.1Bn bushels. Even cattle and hogs have had 10-fold increases in speculation. This is your "demand," 10 month supplies of commodities removed from the markets over 5 years and held by speculators who point to the "demand" as evidence of a tight supply - A TOTAL CROCK!
Speculators "consumed" as much additional oil as China in the past 5 years (848M barrels) while gasoline stockpiles have risen from 1.1Bn gallons to 3.5Bn gallons and natural gas stored by speculators has gone up from 331M BTUs to an insane 2.3 Billion BTUs. Aluminum - 10x, Nickel - 5x, Zinc - 10x, Copper - 7x, Gold - 10x, Silver - 15x — Madness!
In fact, Index Speculators have now stockpiled, via the futures market, the equivalent of 1.1 billion barrels of petroleum, effectively adding eight times as much oil to their own stockpile as the United States has added to the Strategic Petroleum Reserve over the last five years.
Demand for futures contracts can only come from two sources: Physical Commodity Consumers and Speculators. Speculators include the Traditional Speculators who have always existed in the market, as well as Index speculators. Five years ago, Index Speculators were a tiny fraction of the commodities futures markets. Today, in many commodities futures markets, they are the single largest force. The huge growth in their demand has gone virtually undetected by classically-trained economists who almost never analyze demand in futures markets.
I urge you to set aside the time to read this full report, it is an excellent presentation of pretty much everything I've been "ranting" about for 2 years put together by a guy who trades commodities for a living and is, as I am, totally fed up with the destruction of our economy and the suffering that is being caused by this rampant commodity speculation. In order for Goldman Sacks to make $1Bn, every driver on Earth needs to pay another $1 per gallon for gas this year - is that an efficient market? If all 2Bn of us just send GS a check for .50, THAT would be efficient. Unfortunately, as we discussed last week, Goldman's partners in crime who got together and formed the ICE back in 2003 (when all this started) also want their Billions - no matter what it costs you.
One particularly troubling aspect of Index Speculator demand is that it actually increases the more prices increase. This explains the accelerating rate at which commodity futures prices (and actual commodity prices) are increasing. Rising prices attract more Index Speculators, whose tendency is to increase their allocation as prices rise. So their profit-motivated demand for futures is the inverse of what you would expect from price-sensitive consumer behavior.
When Congress passed the Commodity Exchange Act in 1936, they did so with the understanding that speculators should not be allowed to dominate the commodities futures markets. Unfortunately, the CFTC has taken deliberate steps to allow certain speculators virtually unlimited access to the commodities futures markets.
Masters closes with the key issue, that:
The CFTC has granted Wall Street banks an exemption from speculative position limits when these banks hedge over-the-counter swaps transactions. This has effectively opened a loophole for unlimited speculation. When Index Speculators enter into commodity index swaps, which 85-90% of them do, they face no speculative position limits.
The really shocking thing about the Swaps Loophole is that Speculators of all stripes can use it to access the futures markets. So if a hedge fund wants a $500 million position in Wheat, which is way beyond position limits, they can enter into swap with aWall Street bank and then the bank buys $500 million worth of Wheat futures. In the CFTC's classification scheme all Speculators accessing the futures markets through the Swaps Loophole are categorized as "Commercial" rather than "Non-Commercial." The result is a gross distortion in data that effectively hides the full impact of Index Speculation.
Additionally, the CFTC has recently proposed that Index Speculators be exempt from all position limits, thereby throwing the door open for unlimited Index Speculator "investment." The CFTC has even gone so far as to issue press releases on their website touting studies they commissioned showing that commodities futures make good additions to Institutional Investors' portfolios.
This is how the current administration, through the "Enron Loophole" and other directives to the CTFC, has perverted an organization that is supposed to be CONTROLLING speculation and turned them into more than an enabler, but an actual cheerleader for the commodity markets. You would think this would be news but the same people who are sucking over $2Tn a year out of our pockets (over and above what we paid for the same commodities 5 years ago) are also the people who control the mainstream media and the very government that is listening to this testimony.
In order to put a stop to this YOU have to act. YOU have to get mad, YOU have to tell people what is happening because no one else is doing it are they? Feel free to copy this, Email it, print flyers - whatever - this is something that needs to be talked about and what better time than the day oil hits $130 a barrel while you drive less than you did last year, when it was $51.03 in January!
This article has 69 comments:
alas, ben bernanke and his morons rather print fresh money and hand it over to the big brokers and banks so that they can speculate even more, but at the same time talsk about controlling inflation. yeah right. hand gs, jpm and mer a fresh 2 billion checque and they take it straight to the crude oil pits
it's probably the most inflationary central bank action aver.
ordinary people get robbed blind by the same gangsters and scam artists that drove the country into the housing bubble.
the entire world will be WAY better off without the goldmans. merrilly, morgans, stanleys, deutsche bank etc etc
demand" cole
time and again i've heard the ignorant comments from pundits and armchair economists alike that underlying demand is pushing crude oil prices higher. only the truly gullible swallow this crap. never in the history of man has a staple commodity undertaken the kind of price surge we've seen in oil without being driven there by widespread shortages of supply; and we haven't had a significant supply disruption since the 1973 oil embargo by the arab states.
our federal reserve it feeds this mania by lowering the price of money. the commodities futures trading commission feeds it by maintaining pitiful margin requirements on commodity futures trading. deritive financial instruments render existing limits on futures contracts useless.
the inmates are in charge of the asylum.
The speculators do need a spanking but if they don't eventually the bubble will run out of buyers and it will collapse on itself. I suspect up to a year and another 30% upside is left.
"One particularly troubling aspect of Index Speculator demand is that it
actually increases the more prices increase."
Why is this the case?
ag
speculators rarely take delivery of the commodities they buy in the futures markets. they close out the contract at or before expiration.
Krause
The FED is inflating at an incredible rate to save the banks. If you give everyone a million bucks, how much would it cost to buy a car? This is essentially the problem. The money supply is growing like a weed.
Which would require a SELL order from a long speculator ... but we won't let these pesky facts interfere with the conspiracy theory
let me make it simple for you, as you are having trouble understanding the trade.
absent delivery, every futures buy or sell order eventualy generates another buy or sell down the line. so what? that doesn't mean a bubble can't inflate or deflate depending on the net money flowing into or out of these contracts. if a speculator remains bullish after closing out a long position he will buy another contract dated farther out. oil has been a one way trade, with extreme bullish positions established and maintained, contributing to price pressure. add to it the "me too" effect of new money coming into the market and you get disequilibrium in the market for oil.
How many people are Goldman willing to kill over the next year to satisfy their greed in the ICE exchange. All the airlines are about to go BK. People in Haiti are eating mud "cookies"...
"let me make it simple for you, as you are having trouble understanding the trade."
I have been in the oil markets since 1983. I've seen crude near $10 in 1986 and below $15 or so in the late 1990s.
So let me make it simple for you. I have been trading energy exclusively from the long side since 2005. I think I have a pretty decent "understanding&qu... of the trade.
If I see something that changes my perspective, I'll adjust. But there is nothing in these recent articles that changes my perspective. The first article of this type that I saw was written by Engdahl around May 10th. Crude was at $125/bbl. then. It did not change my perspective. Two weeks later crude is at $135/bbl.
I'll stick with my "understanding&qu... of the trade. You stick with yours.
Good luck.
if you've been "trading energy exclusively from the long side since 2005" you should understand the potential effects of speculation on commodity pricing.
nobody mentioned the word "cospiracy" here. that's your word, and it's the wrong one. neither did anyone claim that speculation is the sole reason for price increases for oil. the issue at hand is whether speculation contributes materially to the current price of oil. it can and it does.
oil has tripled in price in about 3 years, during which time we haven't had a single material disruption in supply. demand (i.e. consumption) alone cannot explain the magnitude of that rise. neither do currency effects. each of these effects can be quantified by tracking actual world consumption and using constant dollars.
what can contribute heavily to commodity pricing is fear and greed. that's the domain of the speculator.
imagine for one moment this scenario:
futures trading in oil does not exist except for those businesses licensed to hedge consumption. that would mean that any armchair trader who wanted to speculate in oil would have to actually purchase and store the product. no margin trading for them. put up the cash, rent a warehouse and pay for delivery. how many armchair speculators would that knock out? 99.9 percent i suspect.
question:
where do you think the price of oil would be under this scenario?
answer: a lot lower than it is now.
if you can bring yourself to acknowledge this, welcome to the club of "conspirators.&qu...
if you believe the price of oil would be unchanged, maybe in your next post you should defend your belief that specuation in futures markets have no effect on underlying commodity prices. i wish you luck if you want to try.
e
www.investorslive.com/.../
4 additional points
1) This is only true for futures contracts that don't allow cash settlement - oil is NOT one of those, so it's true price discovery on expiry day.
2) The argument is that speculators just roll their contracts forward and never take delivery. True, but then the (alleged, in the example above) $40 premium that those speculators created by buying all those contracts would evaporate by the end of expiry day as they would have to sell and there are no willing buyers to take crude at $126 when it's true value is $86. Since this doesn't happen, that means there are true buyers and sellers (i.e. supply/demand) that transact at $126, or whatever.
3) The impact that the "new" speculators do have on the market is by skewing the forward contracts. In a market like we have now, where strong demand and limited supply is driving up the spot price, the normal relationship might be (again the numbers are just for example) July crude $132, Dec 2106 crude $115. Instead, Dec 2116 crude is priced at $139. No arguing that that is purely the impact of these index speculators that Mr. Masters talks about. But it has no impact on the spot price at the close on expiry day. If it weren't for that futures/physical connection, these markets would have been manipulated decades ago.
4) If you don't understand how futures markets work, then either go find out so you can understand the facts, or ignore it and keep pointing to conspiracies and speculators when you curse at the $4+ it costs you at the pump.
The $100+ dollar/barrel oil prices are a blessing in disguise, because they make alternatives economically possible. But they will kill us (potentially literally) if there is no organization around developing the alternatives.
This is coupled with a collapse of our financial system. That is the 1, 2 double punch and you are out.
We need, in addition to the above energy scenarios, to TakeBackTheFed.com
If we do not get off our duffs, we will truly be in trouble. NOW IS THE TIME TO ACT.
To your point 3: "But it has no impact on the spot price at the close on expiry day."
You have got to be kidding! The Futures market also signals to the Spot Market. In the end, everything only has the value determined by the Market - and the Spot market is influenced by the Futures market. If most participants think the Futures market is pricing things correctly (remember, it's about the HUGE Chinese demand and PLUNGING supply), the Spot will follow suit.
forgive my saying so, but i think this misses the entire argument. nobody is arguing that the spot price of oil does not reflect market rates that buyers are willing to pay and sellers are willing to take. but that is not the point.
specultion affects both futures prices and spot prices. we've had speculation-driven manias throughout history, in markets from tulips to gold, silver, technology stocks, real estate, land and...sorry to say....oil.
let's say a strong rumor circulates that the u.s. has made a decision to bomb iran, which would no doubt cause a momentary price spike in both the spot and futures markets for oil because it threatens supply. but if iran isn't bombed there is no supply disruption. since the threat has passed, the price would ordinarily recede to prior levels. but if traders....whose job it is to set both spot and futures prices of oil...believe that the threat of a future bombing exists, these prices might well stay at the elevated levels. it is the mere threat of a supply disruption...a psychological fear...that keeps prices higher than they would otherwise be, despite little or no change in underlying demand (save for hoarding, which might occur to some extent but not to great extent because it is very costly to buy and store the underlying product and most speculators do not have those resources).
the fallacious argument is that the higher price of oil reflects an increase in the underlying demand for the product. it does not. oil is comparatively inelastic, i.e. those who buy it lack substitutes and they are willing to pay nearly any price to get it in the short run. the premium priced in has to come from those who set the price. that is not OPEC...it is traders throughout the world in the world's energy pits who fill orders from anywhere...including those from armchair speculators who are betting on still higher prices tomorrow....for whatever reason. OPEC can only influence the price by increasing or decreasing supply, which they might choose to do if they feel the price is either too low today or will be higher tomorrow. but that isn't what is happening in today's market.
there is another aspect of the prior argument that i find troubling, which is that demand for a product always reflects it's true value, real or perceived, and never has a speculative element. there are countless examples to the contrary. the stock and commodities markets in particular, not to mention real estate markets, are filled with momentum players...speculators.... buy or sell based on the belief that "the trend is your friend." they can be short or long...it doesn't matter. to deny their influence on market prices of individual securities or commodities is ludicrous.
i don't know how much of an impact market speculators have on the price of oil and neither does anyone else. but history suggests to me that the kind of price run we've seen likely incudes a significant speculative element. at some point, such speculative blow offs collapse of their own weight. look for it to happen here...
1/ the excess supply of paper dollars must have a bubble to inflate.be it real estate ,oil,donkeys whatever.hence we have the speculators.
2/ despite the speculation the fundamentals supply/demand for oil and other commodities are well supported particularly with a view to the supply of dollars.
3/ what we have ladies and gentleman is a "DOLLAR BUBBLE" being inflated by the central bankers for many years .strip out the dollar bubble and other fiat currency bubbles and you will find there is no commodities bubble.
the answer is to buy real currency (work that out for yourself.)and protect your money before the fed photocopies it out of existence.
ps i think the oil bubble is one of those you blew as kid but it landed on the ground and wouldnt burst
What the Fed likes to say is that it is creating "liquidity", not real money. Rather than directly creating new money, the Fed has essentially exchanged good money (its Treasuries) for bad money (all that junk the banks created). Theoretically, these are temporary loans or swaps (repos) that should be reversed at some point in the future. I wouldn't hold my breath waiting for those to stop being rolled over, but supposedly the banks will eventually return those nice shiny Treasury bonds and take back all that yucky CDO/MBS junk. According to theory, that garbage will have been turned back into good stuff by the passage of time. All those emergency loans (hundreds of billions, I seem to recall) will be paid back and net-net there won't be any "extra" money running around.
In other words, the Fed has "temporarily"... inflated the money supply (actually, they kept the debt bubble from popping), but when these loans get paid back, there will be no net growth. That would imply a deflationary effect (don't forget the interest on those loans) equal to the inflationary effect we have been seeing in recent times.
I wonder how all that will play out. I keep seeing the Fed as someone trying to blow air into a leaky balloon. You can never stop.
"Index speculators buy futures then roll their positions by buying calendar spreads. They never sell...they consume liquidity and provide zero benefit to the futures markets."
I have a fair grasp on equity options spreads and i assume futures spreads would be the same premise. so how can they be implementing a spread strategy without selling? also, how is never selling profitable anyways?
Oddly enough though, there is a situation going on right now that is contributing to the price escalation. Though this is only temporary and can't last for reasons that are obvious. The Iranians lately have been dissatisfied with the discount that their heavier (and much harder to refine) crude grades have been getting in the market, so lately they've been renting oil tankers, loading them with oil and parking (literally) them in the Gulf, unsold, rather than sell them at the steep discount to light crude that the refiners are bidding at. This can't last because as more tankers come off the market, the cost of renting them will escalate to the point where Iran will be losing more money in tanker rental than in the price discount. But besides that, this also shows (to anyone who doesn't know it already) that there simply is no dial-a-storage system that exists for the speculators to use to manipulate the spot market. When Iran wants to "park" some oil, they literally have to rent oil tankers to do it. This can't last, and it doesn't happen very often. Besides, I don't think they're doing it to be manipulative, they're just being pig-headed, IMO.
Say What:
Let me simplify it for you. Lets assume the current contract runs for 30 more days. Of course, speculators affect the spot price. For 29.9 days. By the 29.99th day, i.e. at expiry, all of the speculators will have sold (or bought back if they're short) their contracts because they have no intention of filling their swimming pools with oil. So if there are 43 real buyers (say refiners) for 895 contracts of oil and 43 sellers (say independent drillers) of 895 contracts, the price won't move. If there are 264 contracts to buy and accept delivery and 895 contracts for sale to be delivered, then the price at the end of the day will plummet to find that equilibrium price that will attract buyers at a steep enough discount to recent prices. That's why there's so much volatility on the last day and especially in the last few minutes of a contract's life. Then the speculators can come in on the next contract and have their way for another 29.9 days. If this were the case, then you would have a huge drop on expiry day every month. Because there's not, it shows there are true buyers and sellers at the contract's closing price.
And by the way, nobody has ever said anything about plunging supply. Supply is plateauing. It's been about 85-86mm bbls for the past 3 years, while global demand has been increasing relentlessly a few percent per year for a long time. It's just that those two lines have now crossed.
Icandoitdon: You talk about speculation-driven manias. Let's just call them bubbles, ok? None of the examples you cited are what we have in the oil market today. Oil is a commodity that is consumed as it's produced, cannot be hoarded or stored (unlike precious metals) due to physical constraints except for short periods of time (though there is the SPR which is a different animal, but is a constant) and market participants, both hedgers and speculators alike, are free to go long or short in an unbiased way (unlike say real estate, tulips or tech stocks), in fact they must do so equally. This is one of the purest price discovery markets that exists. I'M sorry to say this is no bubble. It may get too high or too low at times, but the days of $30, $40 or even $50 or $60 are long, long gone.
arwerth: the weak dollar argument is a spurious one - the price of oil and many commodities have increased by far, far more than what the dollar has decreased. It's had an influence, no doubt. But it's a small portion of the story. The supply/demand balance has tipped - that's the real story and it's a simple one. But I know, I know; it's really the fault of the speculators.............. (yes, I'm being sarcastic)
t they? and what about the ICE? since this exchange is not covered by the cftc (which has been looking the other way anyway ever since) you can accomplish a lot by artfully trading these two exchanges in combination, isn't it?
I won't be able to convince most people of these facts and that's fine. Actually that's good, because it allows me to get longer at prices which wouldn't exist otherwise. But I've had these exact same discussions when oil was at $50 for the first time and going to $60. This guy Phil who wrote this article that we're replying to has been wailing and gnashing his teeth about speculators and conspiracies for the last $100 since oil was at $30. He was wrong then and he's wrong now. I heard all the same faulty arguments and finger pointing then and I'm hearing them again now. We'll do it all over again when we get to $200 because it's a hell of a lot easier to point the finger and blame "they" or "them" and demand that someone change things than it is to look inwardly, face the truth and realize we need to have a massive change in our society/lifestyle to stave off disaster, if in fact it isn't too late. We need to (among countless other things) get off our collective asses and walk a mile to the corner store rather than jump in the Escalade or the Yukon every time we need a gallon of milk or a loaf of bread. Only by significantly reducing consumption will we keep prices from spiraling out of control. The sad truth is that this won't happen voluntarily or even soon. Instead, that discipline will be imposed upon us through far higher prices of everything, not just direct energy costs, because the impact of energy prices is felt in almost every aspect of daily life.
Change at this stage of the game is almost impossible. The people as a whole need to come together and stop it. But how?
Historically, we do nothing because: Price is up 183% and we're all angry about it. Someone (gov.) steps in and rattles a few cages and slaps a wrist or two and the price drops a meaningless % and we all wipe our brow and say "that was a tough year" and settle back into being happy with a 175% (for example) increase.
I find it all repulsive and on the borderline of criminal. I agree with the author, I'd rather just write a check for .50 and go on with life.
MB
CLUE: Markets are not efficient. Note the period. Got a theory based on efficient markets? It is junk.
If I was working at an Oil Company, I would go out TODAY and 100% hedge myself out as far as I could go. This is a bubble, and while prices might go higher in the short term, in the long term they will benefit greatly from locking in today's prices.
"If there are 264 contracts to buy and accept delivery and 895 contracts for sale to be delivered, (and especially this point) ** then the price at the end of the day will plummet to find that equilibrium price ** that will attract buyers at a steep enough discount to recent prices. That's why there's so much volatility on the last day.."
Now consider this. What if an interested party did not wish to leave the market to determine a new equilibrium price? What if this party stepped in to purchase from all the sellers at the prevailing price on the 29.985th day. Would this not give the impression that there is strong demand and not show up especially if they give an address outside the Western Hemisphere for delivery? And then they do take delivery for future resell. I do not believe that there are no external (ex US and ex West Europe) storage facilities available that are also off the radar. A syndicate large enough is certainly capable of existing and 'hoarding' oil. I have looked at the numbers required. And it is easy to see how this huge scam would be attractive and easy to sustain with the usual BS that most swallow without question. It is because it takes at least a year for significant oil supply to be brought out of the ground and on to the market. Whoever wishes to do this is easily treading safe waters. For example Canada has got proven shale crude reserves of 1.75 trillion barrels that costs US$ 16 to bring to market. If they could bring this to market immediately then merely bringing our 1 trillion barrels on to the market at a profit of only US$ 100 per barrel would enable them to realise a net profit of $3 million for every single man, woman and child in Canada. None of them would ever have to work again in this lifetime and still have 0.75 billion barrels underground for 200 years or more of consumption. This is to illustrate that it is difficult to increase supplies otherwise the Canadians would have done it already (wouldn't they?). If currently there is only 10 million barrels of excess supply as a result of the high price then this is easily purchasable and storable. Such storing is not impossible and that is where we disagree. Sure they are not dial-up. But with the investment in this scam they are easily constructed in some remote off the radar locations where they are not reported. Eventually some one will have to take quite a loss and that could be where their maths goes all wrong but in the meantime they are raking in out-of-this-world huge profits even after storage costs.
This may not even be possible; but, If I were speculating in oil, I would have gone out last week and bought a July contract for 1,000 bls @ $125. This week I would have sold a contract for 1,000 bls @ $130 - effectively closing my position and negating my need to take delivery of 1,000 bls of oil.
In this scenario, I walk away with $5K. If I had more money to throw around it could have easily been $5M. Obviously, if oil had actually gone down this week I would of had to make a decision to either stick it out or execute a stop loss by by selling at say $122.
So here's the question - How many of the future contracts floating around actually represent real barrels of oil from an actual supplier versus a contract on top of a contract on top of a contract etc?
If this scenario was executed on a larger scale (more people and more money) wouldn't having all these "middle men" trying to make a buck between the supplier and the buyer drive prices up?
Thanks!
At the peak of June trading there were close to 450,000 open contracts but the NYMEX allows traders to "roll" open contracts to longer months WITHOUT PENALTY and by the close of the June contracts, less than 30,000 contracts (30M barrels) were actually finalized for delivery. The other 420M barrels that were, at some point, contracted to be delivered in June, were "rolled" into July, August, Sept.. contracts.
You can track this nonsense here on a daily basis:
futures.tradingcharts....
Notice how there are 378,974 barrels "ordered" for July and 91,509 for Aug and 94,177 for Sept and 49,177 for Oct. I will tell you for a fact, right now, that on June 24th (close of July trading) there will be LESS than 40,000 contracts accepted for delivery. All but 40M of the now 378M barrels that could be delivered to the US PER THE EXISTING CONTRACTS will be cancelled by these evil manipulative bastards in oder to create an artificial shortage of oil each month while driving up the apparent demand for the next month by rolling the contracts forward.
That's how the scam works.
Also, note that the "front month" contracts, the one they print on CNBC etc. rose $1.38 today but longer contracts were negative, with the Dec 2015 contracts that they couldn't stop talking about and pointing to just 2 days ago when they crossed $140, have quickly and quietly dropped to $132.77 just 48 hours later.
futures.tradingcharts....
It's very easy for the oil apologists to point to all sorts of abberant statistics to try to confuse you. China demand is a classic example - it's up 40% in the past 5 years. What they don't tell you is that that 40% was a rise from 5Mbd to 7Mbd but Chinese production went from 1.6Mbd to 4.1Mbd during the same amount of time causing them to import 500Kbd LESS than they did in 2003.
No, it's much better to scare you by saying 40% even though that 40% is about how much fuel we would save in America if we simply inflated our tires properly (10% x 20Mbd).
Mark Twain said "There are three types of lies: Lies, damn lies and statistics." Always be wary of people who throw them around without letting you take a look at the sources for yourself. It's hard to pick up in the text on Seeking Alpha but I try very hard to have links to all my stats. When CNBC shows you the Dec 2015 contract one day to "prove a point" and then doesn't show it again, you need to be suspicious.
Just ponder that those 378,974 contracts were traded on the NYMEX today 425,099 times. That's a churn rate of 115%! The net change in price was 1% and the net change in open interest was less than 1%. What would you think of a stock or option contract where the entire float turned over in one day? This is what goes on EVERY SINGLE DAY at the NYMEX.
425,099,000 barrels of oil were traded today, readily available to any trader who wants them delivered in July, with another 136,725,000 August barrels traded and another 73,297,000 September delivery contracts written yet in not one of those months will more than 42M barrels ever be delivered because that is the transfer capacity at Cushing, OK.
So the ENTIRE thing is a joke. People are ordering barrels they don't want with contracts written for a place that will never accept deliver AND, if anything actually happens to disrupt supply, there is a loophole called "Force Majeure" which allows the contracts to be cancelled by the shipper due to "supply distruptions" so they are not even buying insurance.
The only thing they are insuring is that they will bleed you dry by forcing you to pay $130 a barrel for something that has a global average production cost of $42 a barrel. This is nothing less than the single largest con in human history and your "reliable sources" are a government that was elected thanks to hundreds of millions of Petrodollars of campaign contributions and a media that is owned by companies that either are energy companies or accept millions of dollars from energy companies.
The 30M barrels of oil that were actually accepted for delivery in July set someone back $4Bn, that sounds like a lot until you realize that that $4Bn locked in a price increase of $25 a barrel during the month of May x 85Mb a day worldwide or $65Bn bonus dollars paid to the same people who are churning oil contracts in the pits.
What if you had 15 shares of IBM at $100 and the price of the last trade on June 24th will set the price you can sell IBM for in July. What if you could buy that last contract for $150 and that would let you sell the ones you are already holding for $150. You would spend $50 extra for a single contract but would collect $50 more on the 15 you have for a net profit of $7,450!
Would you do it? Do you know anyone who would? Do you think no one would?
That's how the NYMEX works. Those 30M barrels that are "accepted" at the contract close determine the price of the 85M barrels PER day that are delivered for the 31 days of May. That's 2,635 barrels over 30 or 1/87th.
This is how you are being ripped off, this is how the manipulation operates, this is the only reason that oil is over $70. There is no shortage, there is no great demand, there is just a greedy cadre of immoral people who manipulate a system that costs the American people $500Bn a year (the premium we're paying over $70) just so they can skim a few million for themselves.
Have a happy Memorial Day weekend folks!
there is no predicting the top of this oil market but i suspect we're near it. in the end oil is a commodity that the world economy needs to function and suppliers need to sell. $200 oil would crash the world economy and i just don't see it happening. if it does climb to that level it is likely to crash. that's what happends to parabolic climbs. don't take my word for it...history says so.
i dont believe that "this time it's different."
Several posters have commented that the runup in commodities cannot be explained simply by the drop in the USD. Perhaps, but it CAN be explained by a combination of:
1. the "explicit" drop in USD to date
2. certainty of continuation of USD debasement going forward
3. prospects for a drop in general faith in paper currencies
4. a destructive ME war that goes on without end
5. the growing prospects for a substantial broadening of that war
6. growth in demand for food and energy, and the prospects for continued growth in demand
Frankly, given this backdrop, I am shocked that oil isn't much higher already. Anyone remember the 70's?
Let's also not forget the other elephant in the room: there is a massive credit bubble being deflated, and there are losers all over the place looking for cover. This bubble was blown in large part by new math investment bankers, quants and hedgies and their new alphabet soup: SIV, CDO, CDO squared, ABX, CDS, blah blah blah. "Financial Services"? More like funny money. Imagine a mathematically modeled financial system that considered foreclosures an "outlyer". Stupid is as stupid does.
I am deeply suspicious of any hedgie that gets religion and goes to Congress to plead for regulation. All you math whiz golden boys who raised cash to keep your faling hedge funds floating by naked shorting are now gettting your ass*s reamed, and I don't feel one bit sorry for you. Sew the wind, reap the whirlwind.
Krause
Look at the percentage of income spent on food in India and China per capita. The real population driven energy demand drivers can not simply afford *unsubsidized* product in the long run with current CPI/consumption balances taken into consideration.
The whole Chinese and Indian labor/export model (which is the foundation of their rampant growth) does not work if the governments stop picking up the tab.
For examples, look at Indonesia. They just raised the price of gasoline (it is subsidized) to the equivalent of $2.45/gal. At a long run breakeven for refiners of $7-8 on the crack spreads (of $3.33 avg product price at $133 crude +$7 crack), that is still 27% below market clearing price.
And even with that, there are bloody riots.
The Urban consumer in China in 2006 has about $1469 of income annually. How much unsubsidized oil (at $3.33) can he afford with food already consuming probably in excess of 26% of his expenses (imagine these #s with the price increases in commodities/inflation) ?
The Chinese rural peasant (most of the population) has $448 of income. He spends 34% of his income on food in 06 (probably a lot more right now). How much $3.33/gallon product can he afford to be economically competitive in the rest of the world [only justified by his willingness to work for rock bottom labor rates]?
If you are the average Chinese or Indian, this is not the time to buy your first car. Any new buyer is on the margin, a very very slim margin.
www.ers.usda.gov/Data/...
You China+India demand pipe dreamers need to get over it. This is an Olympics diesel stockpiling blowoff top and will not be sustainable in the long run.
As long as Arab oil princes are running AC to 50 degrees F in their 5 million square foot palaces 365 days a year off oil fired power plants, they are quickly sowing the seeds of demand destruction and eventual replacement of energy sources (nuclear, wind, solar, etc).
g
As far as I'm concerned you've completely refuted Michael Masters Senate Presentation.
It seems some people aren't willing to face the reality of the situation and instead would prefer to look for a scape goat.
jcrash - that's exactly the point. Speculators are throwing off the futures and the relationship between the futures and spot. Absolutely. Especially with all the position-limit loopholes that the big funds use. But the futures price doesn't impact what price Valero pays today to Hugo Chavez to buy a carrier full of crude that they refine at their Aruba refinery. If there was some grand scam going on and there were bucketsful of oil sloshing around the world, do you think a huge company like Valero, which has no oil of it's own and is a huge buyer of crude, would be paying even a dollar more then they needed to? Nevermind $10 or $20 or $50.
CJ-49 - there are so many controls and regulations on the delivery procedures from the futures exchanges that prevents situations like that from happening or even being contemplated. I can't go into the details, but go through the rules and regulations of the exchanges concerning deliveries and you'll see why. And about your scam theory, think about the fact that this "scam" would have to be happening every month for the last, what, 3-4 years? That's quite the stretch. It's like the "man never landed on the moon" conspiracy. There would have had to have been thousands of people in on it that it would have been exposed by now if it really didn't happen, not just circumstantial evidence twisted to fit a pre-conceived theory. 10mm barrels of excess supply? Are you kidding me? If you mean 10mm barrels in total, then that gets consumed by the world in about 3 hours, so it's meaningless. If you mean 10mm barrels per day, Just think about the logistics of storing that as it piles up. Even using all the known facilities on the planet, they would be full in a matter of months, even if they started from bone dry (which they are not). So you would need about triple the known storage facilities in these "easily constructed, off the radar locations" to perpetuate the scam for a year? I don't even know why I'm responding to this line of "reasoning," but it's already typed, I'm not going to erase it.
TomS - The futures contracts dwarf the actual barrels of oils moving. But there are no middle men. All the buyers must become sellers and close out, or roll forward their contract before delivery. When it comes time for the oil to actually change hands, it's one buyer and one seller directly.
Phil - I don't know why you keep throwing people off by using the term "cancelled." There's no way to "cancel" a futures contract. Even in force majeur you can't cancel a futures contract, you can only renege on the delivery. You can't just declare force majeure just because you feel like it and don't want to deliver, it's a serious thing. And it doesn't happen very often anyways. Everyone who bought a contract who doesn't intend to take delivery (yes, the vast majority) must sooner or later sell it. They can then buy another one in the future (roll it), but they can't just "cancel" it. The markets would have seized up within days of their creation if that were possible. All the big fund money and all the rolling are skewing the spot/forward relationships, for sure. I've covered that already. But if there was an artificial shortage in the world (that is, a paper one) on a daily basis, the Valeros of the world would be sitting back and waiting until the sellers who are sitting with their full tankers (real ones, not paper ones) in the mouth of the Gulf begging for a port to offload their crude as more comes in behind it every day. They would then keep lowering their price until Valero buys it. Your comparison of futures to stocks is spurious. They are different animals, so the comparisons don't hold water. It sounds good to people who don't know any better, but it's jibberish. I don't have time to refute every one of your points because it would go on for pages, but they are easily refutable. And don't even talk about CNBC. That's not news, that's just entertainment, and dubious entertainment at that.
If you or anyone else want to believe all that, that's your right. I'm not going to convince you otherwise. You just keep denying and pointing fingers at the conspiratorialists and "manipulative bastards" and I'll stay long energy and we'll both be happy. No problem there.
But I want to close with one important (long) point to put this in a different perspective that most people will understand. Icandoitdon made the most important point when he said "in the end oil is a commodity that the world economy needs to function."
That is the key if you step back and take a broader look and not just at oil. For everything else I'm saying now, I'm referring to the world in aggregate, not just one city, country, continent or region.
A "functioning"... world economy is believed to mean a growing one. The world is now growing, and has been growing for many decades if not most of industrial history, at an aggregate rate of (ballpark) 2% per annum over all these years. This is rooted in population growth. By definition, economic growth must approximate population growth over time.
2% annual growth in humanity, whether it's economic or population growth, is exponential growth. (I'm not going to have this discussion with anyone - talk to a math professor if you don't believe it). Exponential growth in a closed system (the earth) is IMPOSSIBLE in perpetuity. If you don't believe this then stop reading. You are in denial and nothing will change your beliefs. But to give you an example, take a lone bacteria (people) in a test tube (earth-a closed system) full of bacteria food. Let's say the bacteria doubles every minute (exponential growth), so at one minute you have 2 bacteria, at 2 minutes you have 4 bacteria, etc. In about 60 minutes, the test tube is full and there's no food left. Now go backwards. At 59 minutes, it's 50% full, at 58 minutes, it's 25% full. Go to minute 55 of a 60 minute cycle and the test tube is only 3% full. Let's say that at minute 55 one of the bacteria wakes up and says "we have a problem." The other bacteria say he's crazy. They've been there 55 minutes and there's still 97% free space. Then at 59 minutes they realize that the first bacteria was right and there is indeed a problem. So they turn the problem over to engineers and bio-chemists and in one minute they create three more test tubes full of bacteria food (call it technology figuring out ways to stretch our resources, though there's no way it can quadruple them as the bacteria do in this example, it can't even increase it by a significant fraction). That still buys them just 2 more minutes.
This is a hyper-accelerated and simplified example of where we are and biologists agree that humanity is past the 59th minute, though I don't know what the cycle-time (60 minute bacteria test tube equivalent) for humans is, so I don't know how long that minute will last, though it's probably multiple decades at least.
But the point of this all is that we (as a species) are simply exceeding the carrying capacity of the planet, both in terms of sources (resources) and sinks (wastes). Oil is the one commodity that is used globally for almost everything in one way or another and can't be replaced by anything for some applications; and in many ways that it can be substituted for, it will take many decades to get to anything approaching global scale. So it stands to reason that evidence of these limits being approached and surpassed is being manifested in the supply/demand balance of the one commodity that is universally required in size. Now you may or may not believe that, but don't stop there. Energy of all types, food, air, water, soil erosion, deforestation etc etc. Strains are appearing in the quantity and quality of all of these things world-wide. These strains manifest as higher prices and shortages in the tangible goods such as energy and food; and decreased quality of things like air and water due to the pollution, waste and by-product streams. You may be able to take a few facts and twist them to your liking and present them as proof of conspiracies and manipulators and Machiavellian schemes in the oil market and have the un-initiated believe it, but to deny all the other limits to growth that we are bumping up against is to have a very active imagination for it would take the imagination of an ostrich with it's head stuck in the sand to deny all that. And if anyone thinks that seeing what is all around us every day are not symptoms of the ultimately suicidal path of "growth at all costs" that industrial society has embarked upon is someone who is either in denial or doesn't care. And to think that the price rise in oil is artificial when all these other limits are being surpassed is to truly have an active imagination, because it's all linked, seeing as it's one closed system with now too many "bacteria" demanding too many resources.
Krause
What does that have to do with short term (next 10 years) oil price? Economies also cycle, viruses happen, famines, storms and wars destroy large swaths of populations every once in a