The Oil Speculator Myth

On the television, lately, there has been a lot of talk on oil speculators – oil traders who participate in the oil market with no intent on using any barrels of oil. While the television is never wrong and everyone on it a genius, I would like to take the opportunity to present a few counter arguments.

My first argument is with the idea that speculators do not use oil. Unless you are some aboriginal on the savanna, you use oil. It’s in your car, it’s the key to plastics, and thanks to the chemistry council, it’s in everything. How dare people hedge their costs for this most valuable commodity; only (and only) Southwest Airlines (LUV) can do this.

This leads me to the dictionary’s definition:

 

Speculate Origin: 1590–1600; L speculātus, ptp. of speculārī to watch over, explore, reconnoiter, deriv. of specula watch tower, n. deriv. of specere to look,
—Synonyms 1. think, reflect, cogitate. 2. conjecture, guess, surmise, suppose, theorize.

 

Let’s take a step back and see how these commoners, as defined above, think. This smells like we have ourselves an easy scapegoat, and in support I am going to list some quantitative and REAL reasons for oil to rise.

• The lake of faith in the American dollar (faith, according to the IRS, is the official backing of our fiat currency). As the value of our currency drops, our purchasing power of goods (oil) drops.
• The Republicans shoot and spend government’s policy. Whatever happened to small government? I do not think adding 1.5 billion in dept per day counts.
• 4X time growth in demand from the Asian sector. Demand curves generally are longer lasting, and lack the 1970s crunch in supply and delivery.
• Our delinquent 1970 trade packs with O.P.E.C. that required all oil to be transverse in us dollars. In short, all nations are dumping their dollars and exclusively dollars in favor of oil .. which they needs.
• The diminishing supply in light sweet crude. Down 70% from the 70s, production of the $20 to get $20 to refine oil is diminishing. Even the latest supply from the Saudis was heavy sour stuff.
• A reflection of real refining / drilling costs for Canadian oil sand / American shale / deep sea rig oil supplies. This extraction costs for the above mentioned is $45-$60 dollars per barrel, this does not include refining costs. Go Oil Independence.
• The rampage of global inflation.

Nope it’s none of those things; it’s thinking, people. No child left behind isn’t enough. We need Arnold the Govenator as president. He was able to move 500 million for California schools to the state prison – COOL!

 

 

 

 

 

 

 

 

 

 

The figure often cited in support of this speculator lie is that 70% of the current volume of oil contracts is held by speculators. Little do most people care that this number doesn’t mean a damn thing, they got a number. Here is another number: 3:2 the ratio of puts to calls on the USO (Oil Index) . Even another taboo fact is that 90% of all speculation is for the very near term, and not pushing oil for the long term. And lastly, a little known trading fact about options trading is that for every contract purchased, someone (often a speculator without a barrel of oil) wrote the contract. You can toss the long term thesis (above) on oil prices out the window; we got ourselves a bogyman second only to hedge funds.

The truth about speculators is that they are actually a stabilizing factor in the market, bringing the highs down and lows higher through an increase in volume. Our evil speculators are front of the board day traders, buying at low support level and sell / short after a pop: a pattern which insulates the price of oil from market making events. Speculators chase markets, not make markets. Here is a PowerPoint from the University of Nevada which demonstrates this principle.

The real deception comes from our accusers who met at an O.P.E.C. conference held at Saudi King Abdullah’s house on Sunday, the 22nd of June 2008. At this conference, they smoked a little opium, watched belly dancers, and complained how they were drowning in worthless American dollars. The problem as they saw it was that oil, while a global market, was difficult to regulate by any one nation due to time constraints. When trading closed in Europe, trading began in America; when trading closed in America; it began in Asia; and so on. This leaves congress, parliament, and the commies powerless to stop our phantom speculators.

The solution and motive to this scheme is to strip nations (and their people) from the right to their own destinies. The grand intercontinental oil exchange of Abu Dhabi! Right next door to the Halliburton (HAL) super store and complete with Blackwater security, and no democratically elected government or their pesky regulations. Welcome to the age of Aquarius everyone. In this age, the only vote that counts is the vote that comes from preferred stock (ICE: 127.78).

Comments

[Ax]

This article has absolutely no added value.

[squashnut]

What's a "Chemistry counsel"?

[Douglasheld]

I actually googled "chemistry counsel" before realizing it is a spelling mistake:-)

[Douglasheld]

Wow, bases loaded! The author actually spelled all of "Council", "cited" and "principle" wrong.

[Brian Pursley]

www.bloomberg.com/apps...

"June 2 (Bloomberg) -- Hedge-fund managers and speculators reduced bets on higher oil prices by 80 percent since July as crude futures rose to records and U.S. regulators started investigating trading, government data show.

So-called speculative net long positions fell to 25,867 contracts on the New York Mercantile Exchange in the week ended May 27 from a record 127,491 on July 31, according to a U.S. Commodity Futures Trading Commission report on May 30."

[mangolfer]

Apparently this guy has not read this. Go to and read for yourselves:

hsgac.senate.gov/publi...

[User 204040]

This guy is an idiot.

[jtbold]

what a waste of an electronic tree, sounds like somebody got told to go write 2000 words

[User 216882]

Where the hell did this young boy
come from, is he crazy?

[carlos1k]

He should try some opium and watch some belly dancers to get other cultures values instead of thinking his own is best... What a waste of an article.

[markehayes]

Hi Nicholas Ventimiglia,

Your last name is a difficult for a westerner to master. Anyway, thanks for a succinct article with a touch of humor. You speak the truth: oil prices are largely driven by supply and demand. Taken to extremes, if the world was wading in oil, it would be free. Various grades of petroleum would be a value added product because of refining and distribution costs.

Political posturing in the USA and the rest of the world distorts free trade and distribution; but it always has. The dearth of refineries that are able to process sour crude are a reflection of the negative consequences of locating a refinery in anyone's back yard.

My most irksome position regarding petroleum follows. Several international firms are drilling for oil in the Gulf of Mexico beyond the 200 mile coastal limit while the legacy of politics disallows US firms to tap into the pools of oil. Environmental considerations from the states of California and states fronting the Gulf of Mexico are a barrier to development of the fields.

The world's easily accessible oil fields are diminishing rapidly. Since US public transportation is severely lacking and will be in the short term, the relatively quick US solution is in alternative fuels. I especially like concept cars with hydrogen and electric power.

Hey, I don't like paying nearly $100 to fill up my gas tank, but I do like the returns from my investments in the energy consortium. That is one ray of monetary sunshine that filters through the oily haze on the horizon.

[Eric Fox]

Why is it so hard for people to accept that financial players (speculators) are bidding up the price of oil? Every day you hear on CNBC or Bloomberg oil traders on the floor explaining price moves. One of the most frequent refrains is "investors buying oil as a hedge against the dollar." This is not the only explanation given, but clearly investors who buy oil or commodities for this reason are not buying for fundamental reasons.

[john s. gordon]

markehayes - - ventimiglia ('twenty miles') is a city in italy.
> jack

[User 216976]

Proof Read your work please and spelling. I agree.. Yes supplies are tight but we are off over a million barrels of use per day in the US of last years numbers. The Indian and China demand while rising was is also 1/20 per person of the US. The money ran from the Real Estate bubble to the oil and commodities. I do not know why I bother reading these articals from Seaking Alpha.

[ammerer]

This article hits one nail on its head that is almost always neglected by US citizens - the devaluation of the dollar that everyone who trades in oil has to take into account - and the fact that this devaluation is only due to American politics and no one else's fault. But in complaining the US has recently taken the world leadership as well - like all the people who think they are entitled to some priviledge for no reasons whatsoever - one can see this fact from the majority of the above responses

[LiquidSoapDispenser]

Michael Levy, are you going to copy and paste your "10 Reasons" on every discussion today? Do you really think it's that great? I'm getting really tired of repeatedly scrolling past it.

[GH]

user 216976,

I'm afraid you don't have a lot of room for criticizing others' spelling or proofreading, I count 2 grammatical/structural errors and two spelling errors in your tiny post.

The fact is, the term "speculation"... is being (intentionally, I suspect) conflated with "manipulation&quo... The latter is going on at two levels:
- direct, via dominance of trading on ICE by several i-banks and their proxies
- indirect, by creating and pumping ETFs tied to the long side of commodities futures

Thanks for the great link, ManGolfer.

[YogiG]

There is a $ 50 Spec preminum at $135. The $80 residual price does express a true supply/demand premium over last years $72...in line with global fundamentals...it is all there in the numbers and testimonies from all sources...just have to do the scratching....

Simply put, there has been a huge infusion of dollars into oil futures...by large Institutionals and CIFs...a factor of 13x Non-Commercials to Commercials at present....any way you slice it up - "Inflation --- is when they are Too Many Dollars Chasing Too Few Goods and Services"....and we have too many dollars chaisng too few Options Futures Contracts...
as to the shorts...these are the "FUND MANAGERS" GS, JPM, MS, etc. who are covering their own in-house positions...(Why does GS now have facitilies to take in oil...?? Hmmm...)

Many things are contributing...it is the WS Firms mentioned above WHO NOW OWN The OIL MARKET....wake up!
G

[nakedjaybird]

Want to get a handle on speculation: No Leverage; Mandatory delivery; 100@ Margins.