The Effects of Oil Speculation

The increase in the oil spot price seems to be mainly driven by the global demand. According to the U.S. Energy Information Administration, in 1999 the global consumption was 76 million barrels a day and today it’s about 86 million barrels. At the same time, the surplus oil capacity decreased from 5 million barrels a day to 2 million barrels a day.

There seems to be a new asset class (long-only commodity index funds and ETFs) which speculates that commodity prices rise, i.e., they are long in these markets. Here I focus on oil and I have simple points:

• There are several ways how the speculation could raise the oil spot price. I’ll discuss these below.
• We don’t necessary need to observe an increase in traditional inventories in order to have an increase in the spot price due to the speculation.

So, for instance, I’m not sure if we need an increase in the inventories in order to have a persistent effect from speculation on oil prices. Or actually what do we mean by inventories? To me, oil business is managing inventories: Oil wells are inventories and the optimal pumping can be solved by stochastic dynamic programming (here we discuss mainly oil wells that are in production). Usually the expected future cash flows in this optimization are calculated by using the oil forward curve (and its volatility). Therefore, we have quite different optimal pumping today if the oil forward curve is downward sloping than a situation where the forward curve is upward sloping: If the forward curve is upward sloping, then waiting is more valuable and, therefore, some pumping is postponed (relative to the downward sloping case). Thus, for instance, if the oil spot price is “high” today and forward curve is downward sloping then I expect oil supply to respond quickly (supply up) or at least much faster than with an upward sloping forward curve.

Since oil speculation can affect the shape of the forward curve, it can also affect today’s oil supply (by the argument above) and, therefore, today’s oil spot price. This oil speculation seems to be significant. First, according to Citigroup, global investments in commodities rose by more than a fifth in the first quarter of 2008 to $400 billion. Investments in commodity indexes were $185 billion, commodity trading advisers accounted for $94 billion, and hedge funds had $75 billion in commodity holdings. Second, according to the US Commodity Futures Trading Commission, so-called commercials are long over 800 million barrels of oil. In the early part of the decade this number was less than 400 million barrels. Supply hasn’t doubled, so it seems that the long-only commodity index funds and ETFs (and other institutional investors) buy oil derivative instruments from investment banks that are classified as commercial investors. As we know, there are position limits for speculators but no for commercials who are “hedging”. So, by buying the oil derivatives from the investment banks, speculators are not bounded by the position limits (this must be a good business for the investment banks).

Counterparties

Below I discuss little more about the effects from oil speculation with different counterparties. First, let’s make the following simplifying assumptions:

• Oil consumption is constant. This is not known by the market participants.
• There is a new asset class: long-only commodity funds. These funds buy oil forwards.
• Oil forwards have physical delivery. If they have cash delivery then we only need arbitrageurs to force the forward and future prices with physical and cash delivery to be (almost) equal. After that the discussion is the same.

As we know, the oil derivative market is by definition a zero-sum game. However, its effect on spot market is not necessarily zero. Those who are taking long forward positions (long-only commodity funds) don’t hedge their positions, so they don’t sell spot or other forwards with different maturity dates. Those who are selling forwards are (i) speculators, (ii) producers and/or (iii) arbitrageurs who just implement the cost-of-carry model. Let’s discuss these different cases and how we can have an increasing spot price:

(i) If the forward sellers are also speculators, then the long-only commodity funds just increase the demand of the forwards. This increases the forward prices and this way also the expected future spot prices that are used in the production optimization. Thus, by the optimization story above, the producers postpone some production and this increases spot price. As long as the forward curve steepens (e.g. the funds get new money), supply can fall (relative to the expected supply under “normal” forward curve) and the spot price can rise.

At the expiration date the long and short speculative positions are closed and this doesn’t change the spot price.

(ii) If the forward sellers are producers, then the long-only commodity funds first increase the forward prices. Then producers start selling more forwards and pump less oil to the spot market (by the above optimization story). This decreases the forward prices and increases the spot.

At the expiration date, the long-only commodity funds close their positions, i.e., sell the oil at the spot market (we assume physical delivery, see above). This decreases the spot price. However, at the same time the long-only funds take new forward positions and this again increases the spot. If the funds get all the time enough new money, the spot price can continue to rise.

(iii) If the forward sellers are arbitrageurs who just use the cost-of-carry model, then they hedge their short forward position by buying the spot and storing the oil. This naturally pushes oil spot price up. Hence, the inventory level above “normal” is a sign of the speculation and its impact on the spot price. The problem here is that we probably don’t have correct inventory data since now e.g. hedge funds are able to rent oil tankers at about $150,000 a week and this is not in the public inventory data.

At the time of the delivery (we assume physical delivery, see above), the long-only commodity funds and the arbitrageurs close their positions. The effect from the arbitrageurs is zero (they just deliver the oil they have) but the long-only funds increase supply in the spot market by selling the oil that is delivered. This decreases the spot price. However, at the same time the long-only commodity funds take new forward positions and this again pushes the oil spot price up. As long as the funds are able to collect enough new money the spot price can continue to rise.

Usually the cost-of-carry model is used as a pricing model for forward prices given the underlying spot price (and the interest rate, the storage cost and the convenience yield). However, it can also be understood as the spot price in terms of a forward price (and the interest rate, the storage cost and the convenience yield), especially in situations where the trading volume of the whole forward market is higher than the spot volume (“commercials” are long in the US derivative market almost 10 times the global daily oil consumption).

Example

Let’s illustrate the case (ii) above with a stylized discrete time model that has times 0, 1, and 2.

There is one consumer who consumes at each time as follows (we need only these cases):

• 6 barrels if the price of a barrel is $80
• 4 barrels if the price of a barrel is $100
• 3 barrels if the price of a barrel is $110
• 2 barrels if the price of a barrel is $120
• 1 barrel if the price of a barrel is $130

There is one producer that has an oil well that is able to produce total 9 barrels over the three times. The minimum and maximum productions at each time are 0 and 9 barrels. The producer doesn’t know exactly the demand curve but initially the plan is to produce 3 barrels at each time. There is a speculator who believes that the demand jumps up significantly (and therefore also the spot price) at time 1 or 2.

Time 0:

Initially the producer plans to sell 3 barrels at $110 each (according to the demand curve). However, the speculator is willing to buy 1 barrel of time 1-maturity forward contract for forward price $120. This changes the production plan: the producer decides to sell 1 barrel in the forward market and sell only 2 barrels at time 0. By the demand curve, this pushes the oil spot price up to $120 at time 0 (thus, the forward price equals the spot price).

Time 1:

First, the producer plans to produce 3 + 1 barrels (3 for the spot market + 1 for the delivery of the forward contract). Since the speculator sells immediately the delivered oil, this would mean that the spot price falls to $100 (by the demand curve). However, at time 1 the speculator also tries to buy 6 barrels of time 2-maturity forward contracts for forward price $130.This changes the production plan: the producer decides not to sell at the spot market at time 1, it delivers 1 barrel for the forward contract that was sold at time 0 and sells 6 barrels in the forward market. By the demand curve, the realized spot price at time 1 is $130 (the speculator sells 1 barrel at the spot market) and, therefore, the speculator makes $10 profit ($130-$120). Note that again the next forward price equals the current spot price.

Time 2:

The producer has still 6 barrels in the oil well. Due to the forward contracts, it delivers all of them to the speculator who sells them in the spot market. Spot price collapses to $80 and the speculator makes $300 loss (6 * ($80-$130)).

Without speculation in this example the spot price would be flat and equal to $110. However, due to the speculator’s actions, the spot price at time 0 is $120, at time 1 it’s $130, and at the end $80 (note that the forward price moves together with the spot). Thus, if the time difference in this example is e.g. one year then the speculation created a bubble that lasted two years even though the fundamentals (here the demand curve) didn’t change. The speculator finally loses and the producer collects higher profits than without the speculator. This is because the demand didn’t jump as the speculator believed. However, we would have opposite story if the demand had jumped high enough (so, it could be that the speculator is right and the producer wrong). I selected the story above, because it seems that almost everyone today hopes speculators are wrong.

The speculators’ behavior creates a similar impact on the oil spot price as any other information signal on the future oil prices. If the speculators have better information about the future then this should be helpful, i.e., the price impact should help the oil market.

Summary

According to the three cases above, the long-only commodity funds and other institutional investors can increase the oil spot price. This doesn’t necessary require an increase in the traditional oil inventories.

The increase in the spot price discussed here is due to the speculation on the long side (and the actions of the market participants on the other side of the contracts). So, it could be that the oil spot price has got an extra push from the speculation. However, this should be good if the market’s expectation on the future spot price has been too low. Note also that the speculation works on the short side: if there is at some point more speculation on the short side then this can push the spot price down.

I didn’t say anything about (because I don’t know):

• How much has the speculation increased the oil spot price? Oil consumption has increased significantly (it seems faster than was expected) and this has been almost surely the main driver in the spot price (U.S. Energy Information Administration: in 1999 global consumption was 76 million barrels a day and today it’s 86 million barrels. At the same time, the surplus oil capacity decreased from 5 million barrels a day to 2 million barrels a day.).
• Is the oil forward curve now more informative than before? At least, it’s much more liquid (especially long maturity) and this helps market participants to hedge their cash flows.

Comments

[bbzz24:]

NYMEX oil trading covers 7% of global daily consumption. This 7% includes hedging by interested parties and speculation. At London another 4% of global consumption is being traded. So we have 11% which requires margin of 5% to hold ALL positions open, or said another way, global prices benchmarks are established by couterparties who actually hod only 0.55% of the money necessary to purchase oil. Expressed in leverage this is 180:1.

So is it the specs, is it supply & demand or actually it is the leverage that magnifies 180 times any slight disbalance between supply and demand that moves oil up?

2008 Jul 13 08:26 AM

[john s. gordon:]

excess leverage- remember what 10% margin did in 1929.
> jack

2008 Jul 13 08:35 AM

[Retired1:]

If "supply & demand" of oil affects the price of crude, then it stands to reason that "supply & demand" of speculation will ALSO help determine the price of crude (or whatever).
In other words, "speculation", in and of itself, has its own "supply & demand" factor (independent of the "supply & demand" of oil) which will increase or decrease the price. ????

2008 Jul 13 08:56 AM

[NOWHEREMAN:]

The famous words "it is a zero sum game".

If there is a "seller" but no "buyer" the price wanted will go unfilled until the Seller reduces the price to a Level the Buyer is willing to pay.

If there is a Buyer but no Seller, the Buyer will increase the price offered until the Seller agrees.

The actual trades can be speculative, can be hedges by producers to prevent shortfalls in the future like crop insurance or raising money to mine/drill/grow in a program of expansion.

Lets say speculators are driven from the Market. Who will be left to make the Market? Eliminate a category entirely without a replacement mechanism? No one will want to pay more and no one will be willing to sell for less.

Will these Markets disappear here and go overseas where there are mechanisms to take over the reins like The MidEast Oil Market.

If Speculators could move the Markets like everyone presumes, No Commodity would ever go down or up if they so chose.

Commodities go up in price because somewhere along the chain someone takes physical delivery.

Instead of blaming the Speculators in the Oil Pits, Blame the ETF's some of whom take the commodity off the market, like gold for instance. But, guess what, there is NO ETF in OIL which takes delivery.

Oil is traded in a grade which is in very short supply in a world awash with other grades that would be considered ample if anyone could actually use them. Otherwise they could just as easily be left in the ground.

China Is A very forward looking nation which is buying the sour/heavy grades as well as the medium and light. The sour/heavy are going into their Petroleum Reserve for use when they have built refineries capable of handling them.

We are doomed because the Tree Huggers are held in higher regard than the health of our Economy.

2008 Jul 13 09:03 AM

[Brian Pursley:]

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.

www.bloomberg.com/apps...

2008 Jul 13 09:39 AM

[jmcdo94331:]

What would the addition of even 2 more refineries do to the price of oil.
Isn't there an artifical fractional oligopoly in effect with the limits of our refinery capacity (ie; aren't we really being strapped down but not only the OPEC, the Refineries, and then there are those quarterly or semannual fires at different refineries? Sounds like a lot of collusion to me?

2008 Jul 13 10:44 AM

[Paul Killinger:]

I have no problem with regulators reasonably raising the margin requirements for so-called oil speculators, as versus actual USERS of this commodity. One number advanced is 25%, versus 50% for stocks presently. Indeed, an argument can be made to extend such restrictions to all commodities.

Frankly, I was distressed to learn that pension funds like CALPERS have become major players in these markets. The LAST thing we need right now is for taxpayers to get hit with the bill (WHICH THEY WILL!) should there be a sudden implosion in worldwide oil prices.

However, this should not be used as an EXCUSE by Congress to end our domestic moratoria on new energy exploration and production initiatives. As the General famously remarked in the movie War Games, "I'd piss on a spark plug right now if I thought it would do any good!"

2008 Jul 13 11:20 AM

[investor 911:]

Iranian's strategy now unmasked. Their aim is to cripple the U.S economy with oil as the weapon. Oil price will never go down..with or without speculations. If it ever did, Iran would just fire another round of sabre- rattling.. a few more missiles and you have a $10 spike. They are having the U.S by the balls and we can do nothing about it.

2008 Jul 13 11:27 AM

[toilet:]

raise the margins to minimum 50% value of the contracts, then we will see realistic value of crude oil.. the 20 to 1 leverage has enabled the speculators, hedgers, gamblers to push this market to 140 level, only because of leverage has this been done. cftc has the authority to do it in heartbeat, tell your congress to have cftc RAISE THE MARGINS.

2008 Jul 13 11:37 AM

[fireball:]

i was reading an article last night that said iraq has massive untapped reserves in the northern region. i wonder what havoc could be loosed if they later flood the market. it does annoy me that these same banks which by all rights should be dead entities (to make way for the few that operated wisely) are still able to have an effect on such an important market sector.

2008 Jul 13 11:57 AM

[jjason:]

Jussi, Thank you for the article.

I sent this article to Congressman Kanjorski, D. PA and Senator Casey, D. PA.

Senator Joe Lieberman has submitted legislation that would prohibit pension funds from speculating in oil futures. Also there are some members of Congress who are going to raise margin requirements. I hope margin requirements go to 50%.

Phil Davis has also pointed out that there is speculation in commodities and it is causing inflation. We are seeing the effect of speculation in our depressed stock market and higher cost of living.

The speculation will have to stop...and it will...and there will be lots of people who will lose money.

2008 Jul 13 12:24 PM

[Paul Killinger:]

Dark,

Yeah, it's amazing what Iran can do to upset worldwide oil prices by just putting a few doctored photographs on TV. But this also speaks to the very tight supply-demand tensions that exist in these markets presently.

However one looks at at it, there is NO EXCUSE for the consumer of 20% of the world's oil (...that's us!) to boycott the use of it's own oil, gas and coal reserves, and devise regulations that make the construction of more nuclear reactors and oil refineries practically impossible.

We're the ONLY nation on earth that condones such governmental idiocy, and we're all going to go "dark" soon if we don't change our ways!

2008 Jul 13 12:29 PM

[Paul Killinger:]

So Obama's latest "energy fix" is to rebate Americans $50 billion to offset the high cost of gasoline. (Seriously, he said that yesterday in a speech on TV.) It's not bad enough we're sending the Chavez and the Arabs $700+ billion a year for oil, now we're going to raid the Treasury for another $50 billion for this stupidity. This guy shouldn't be running for dog catcher, much less President. One can only imagine the rest of his inane economic policies!

2008 Jul 13 12:43 PM

[ArtfulDodger:]

There are many reasons that oil is spiking upward. Some are mentioned above.

Another is that as soon as the Dumborats won the mid-term elections to take over both the Congress and the Senate, lawyers working pro bono for the eco-maniacs began suing refiners every time they asked for permits to increase production. They knew that then the government was on their side, so they went to work trying to get the price of oil higher. This is something they've wanted for years --- to conserve and save the planet, you know.

Most of these suits are still hung up in the courts.

Also, the Economist, the WSt. Journal, et al. have stated that the US has more oil in reserve than the entire Middle East; but it's not doing us any good because the eco-maniacs, the Dumborats, and leftist Republicrats won't allow us to use it.

These things as well as the NYMex showing more long contracts than there really are then cancelling a large percentage of them just before they're due, along with the Israelis threatening Iran every time oil starts to go down, are all reasons besides speculators that oil is high.

Some of these things cause a supply/demand problem, but not all. Certainly you'd have to be ignorant of the current world to claim that supply and demand is the only reason oil is high.

2008 Jul 13 01:02 PM

[Paul Killinger:]

In an interview on TV today, CA Gov. Schwarzenegger said he'd be open to the idea of serving as "Energy Czar" in an Obama Administration. That would be perfect... IN THE MOVIES. This whole U.S. energy NIGHTMARE gets better and better as it goes on, actually.

2008 Jul 13 01:27 PM

[fireball:]

OILMAN i know you will look here eventually. i am taking your advice about being a bull. look at the last post on oil gold and the holy dow. paul8756, paultaut, pockyclips2020, captbob, john s gordon, you probably will be amused too. while we may have different ideas on many points i believe we share many core beliefs.

2008 Jul 13 01:37 PM

[Paul Killinger:]

Arnold did say one smart thing, though, in a movie where he played a Russian army captain. When asked by an American detective what the Russians did with drug dealers he replied, "We shoot them." When the detective responded that drug dealers have lawyers here, Arnold deadpanned, "We shoot them first!"

2008 Jul 13 01:40 PM

[fireball:]

paul8756 that was funny.

2008 Jul 13 01:44 PM

[investor 911:]

paul8756...artfuldodge...
Do you think by denying the use of our own natural resources, our goverment has a strategy of it's own? First, use their's to depletion and then.....I mean what else can you think of the stupidity at our present stage. The greens don't have that much power when national interest is at stake. Do you agree?

2008 Jul 13 01:51 PM

[Paul Killinger:]

Speaking of which, all the Congress needs to do to end the plethora of nuisance lawsuits holding up domestic energy production is immunize the producers from such meritless litigation, like they just did the tellcos. Certainly, our nation's energy crisis deserves to be on the same footing as investigating prospective terrorist attacks. Unfortunately, however, I don't believe they grasp the gravity of this situation in Washington. AS OF YET, that is.

2008 Jul 13 01:55 PM

[Paul Killinger:]

Well, guys, when you count the votes (...esp. in the Senate), the Greens REALLY DO have the power all our posters here accord to them.

The Wilderness Society (...where the D's get their talking points like the nonsensical, "Use it or lose it"), and the Sierra Club (...which files many of the frivolous lawsuits-- now at EVERY STAGE of any type of energy licensing), appear to do much of the heavy lifting.

And that's the REAL STORY that needs to be exposed on talk radio and TV. But, don't worry, it's coming soon!

2008 Jul 13 02:16 PM

[Stockaccumu...:]

The thing to do is just own PBR (Petrobras) and forget about it for a couple years... see Cramer's article last week "Stop Trading and Just buy Petrobras" great article... also see the total Barron's cover page last week on PBR, and major entire feature article in Barrons, citing dozens of true professional analysts citing PBR as a must own in oil... sort of like owning a slice of Saudi oil/gov oil... a nice thing to own... PBR always goes down about 18% or so then goes up 35% or so... into and after its exponential profit growth shown earnings reports... we have seen this over and over as longs in PBR... best way to not be a "speculator" yet be a smart investor in a large company that is not going anywhere but up and bigger...

2008 Jul 13 02:40 PM

[fireball:]

PAUL8756 the state legislatures were supposed to appoint or elect their federal senators to ptotect states rights and ride herd on the house of (non)representatives who were given the most power in the(defunct) system of checks and balances as being the most accountable to the voters. yes those tax exempt greenies exert all kinds of pressure on the political system but let a pastor or preacher try to give a simple opinion...... seperation of church and state is not in the constitution. it is in letters from jefferson to his constituants assuring them that the catholic church would not takeover the young country. there are protections of religion from government but there are no protections of government from religion at least when it comes to expressing political opinions. perhaps if the senators were still operating as designed they would carry out their proper function without the influence of greenie lobbyists and voting blocks.

2008 Jul 13 02:53 PM

[fireball:]

STOCKACCUMULATER i have been eyeing pbr for quite awhile. lately it seems that they are having union problems and the gov. is looking at the profitability and starting to want a heavier hand in the business. also the labor affiliated president just made some statement about the wealth and success of pbr belongs to brazil not pbr. memory fails me on exact details but it made me jump back a bit. am i in error?

2008 Jul 13 03:03 PM

[Paul Killinger:]

Dark,

I believe that's giving the Congress too much credit. They're worried about getting re-elected THIS YEAR, not what may happen to energy supplies some years away.

Indeed, that's one of the reasons we need to keep the oil in the SPR just where it is. Born out of what was once cheap oil, it was a measure to help secure our NATIONAL DEFENSE, not to be invaded when the price of oil increased inconveniently.

The truth is WE HAVE PLENTY of energy reserves in this country. 60 years of oil and natural gas, and over 200 years of coal and oil shale at present rates of consumption. And that's not counting renewables or nuclear reactors, which can produce energy almost indefinitely.

The problem is the CRAZY GREENS. They're adamently opposed to virtually ANY TYPE of energy production (...including solar panels, windmills, and even replacing electric transmission lines, believe it or not), especially those that emit even the slightest amounts of CO2. That's where the idea of "cap and trade" originates from incidentally.

And the Democrats listen to them for one reason ONLY, they have lots of votes and even more money. And these zanies have been working at this for years, they're not johnny-come-latelies like us who just joined up becasue we figured out they were ruining our economy.

So as it turns out, the battle is enjoined today, but it was destined to happen sooner or later, anyway. Fortunately, 2/3 of Americans are now on our side, and we're going to need them all before this is over if together we're going to save the day.

2008 Jul 13 03:15 PM

[bearfund:]

jjason, so why exactly should pension funds be prohibited from owning oil futures? Is it because their pensioners won't be using any oil during their retirement? Hmm, no, that's not right. In fact, in order to match their holdings to their pensioners' needs, they MUST hold oil. Preventing them from doing so will force them to seek comparable yields elsewhere, which will undoubtedly lead to yet more underpricing of risk. Brilliant plan, Senator.

Raising margins to 50% would be fine, however. Most (all?) of the long-only index funds aren't leveraged anyway. Just don't forget to raise the margins on shorts, too.

2008 Jul 13 03:31 PM

[fireball:]

if obama would appoint hillary as the minister of futures trading (for which she must have a gift of genius magnitude because hillary would not cheat or take a bribe) we could pay off the debt and bank enough to never run a deficit again. then with her leading us to prosperity we could afford $10 gas and $12 diesel.

2008 Jul 13 03:31 PM

[Paul Killinger:]

Fireball,

Don't worry about PBR-- It's Ken Hebner's favorite and already the world's fifth largest oil company. And don't be too concerned about their union problems-- Remember what I told you Arnold said about lawyers ...ha, ha! Check out their chart and consider a sensible stop loss if it helps you sleep at night.

By the way, I read your post quoting Sam Adams. One of his buddies, Patrick Henry said it best, I believe. In a letter similar to Sam's, he ended by saying, "As for me, give me liberty or give me death!" All the more reason for us to do our part in this small skirmish. Indeed, they made it possible in the first place, didn't they?

2008 Jul 13 03:43 PM

[Paul Killinger:]

Fireball,

P.S. It's funny how things come full circle sometimes. In fact, Hillary made her first major financial hit trading orange juice futures as the wife of the then governor of Arkansas. Do you remember that one? As I recall, the trader may have gone to prison for his troubles. Undoubtedly, then, she should at least be made Chairman of the CFTC-- ha, ha!

2008 Jul 13 03:51 PM

[NOWHEREMAN:]

Gadzooks, what a thread! I am truly impressed.

What the Greenies have are attorneys. They do not need anything else.

What we need are Judges that will force the Greens to provide the proof before any work stoppage is allowed. Why doesn't "Innocent until Proven Guilty" apply in their lawsuits.

2008 Jul 13 03:52 PM

[Paul Killinger:]

Bear,

Hold on now, friend. If, as reported, CALPERS has put billions of pensioners moneys at risk trading oil futures, that's not just INVESTING in oil. How about maybe oil, gas, or related ETF's, instead? No one with any sense would leverage 20X with PUBLIC MONEY. Or maybe I'm wrong. After all, I don't have Speaker Pelosi to BAIL ME OUT if it all goes away!

Let me add, if we don't fix this energy problem, and in a hurry, CA pensioners may not be driving anywhere. And the rest of us may not be, either!

2008 Jul 13 04:07 PM

[fireball:]

PAUL8756 pbr sure does look like the one. i even hear rumors of cost effective ethanol production. regarding patrick henry and sam adams we have to keep laughing at the absurdities. i really do think laughter is good for health. these young people do need their gaps in education filled. my girlfriends daughter is brilliant but misguided by government school ideologies. however i have made great headway in clearing out the trash in her pretty little head. she is starting to actually giggle when obama speaks because she sees the game. it is wonderful because her father is an unquestioning idiot. he is still whining about gore democracy and getting his fair share. now his own daughter is trying to help him understand the electoral college and states rights and that what is mine is not his. our backgrounds have many similarities only i was not waiting for anyone to give to me and i had the guidance of a wise father in my youth. dad was a history teacher until ww2. he came out and went into business with his brothers.

2008 Jul 13 04:08 PM

[fireball:]

PAUL8756 that is what i was refering to. her illustrious past genius. would it not be nice to see some of these clowns forced to get a real job? PAULTAUT it would be wonderful to close that loophole and force them to abide by the law. i can hear the wailing of ,that is not fair to make us play by the rules. we have a higher mission. then we could say i feel your pain do it anyway.

2008 Jul 13 04:18 PM

[Tmalan:]

"If the speculators have better information about the future then this should be helpful, i.e., the price impact should help the oil market."

That is exactly the problem. Demand data can be measured very accurately, however actual real supply can be ambiguous.
The supply chain has to many hands in the pot making the data inaccurate and left to opinion.

"if there is at some point more speculation on the short side then this can push the spot price down."

As soon as this starts to happen, a fresh new round of BS propaganda comes from the Middle East to bait investors back. There is no doubt in my mind that the Axis of Oil are cashing in on the over valued price and will do everything they can to keep that extra money coming in.

2008 Jul 13 04:33 PM

[Paul Killinger:]

Excuse me, guys, but I tend to get worked up about this. (How could you guess... ha, ha!)

You know, the Greens and their millionaire friends in the Congress couldn't really care less about what happens to us one way or the other, so long as we keep e-mailing them checks and they get re-elected.

You'll note they're heading out on vacation without even bringing our energy emergency up for a vote. I hope they're just waiting to take meaningful action until we get closer to election day, so it looks like they took care of us at the eleventh hour.

But I'm not at all convinced of that, unfortunately. I remember what a rich banker was quoted as saying about the depression that developed here in the oil patch the last time oil crashed in the 1980's. "It's really not so bad, it cut my commuting time in half," he remarked.

As this goes on, it's sounding more and more eerily like a re-run of what that banker said to me.

2008 Jul 13 04:52 PM

[ArtfulDodger:]

Dear Dark Age:

Thanks for the comment and question. No, the "Greens" don't really have that much power over our government. It's that many of our officials and elected leaders agree with what they're doing: shutting down America's economy and helping to transfer wealth to other nations.

Forget for a second about "green power" in Congress.

What we have in Congress on the Dumborat side are a huge amount of revolutionary Marxists. Even so-called moderate Devilrats are hard-line statists—they believe that every problem from hang nails to constipation the government should have a program to solve. Many Republicrats are also statists. This, of course, includes McCrazy and to Baby Boy Bush to a slightly lesser degree.

Take the "Black Caucus," for example. Most of them attend churches where "Black Liberation Theology" is taught. If they don't attend, they fully understand it, and agree with it. Most of them have never read any of Marx's many articles, much less "Das Kapital" or the "Communist Manifesto," but they're Marxists anyway.

Black Liberation Theology is essentially revolutionary Marxism—Catholic priests in South America deserted Christianity, but kept their frocks and took up cultural and economic Marxism about sixty years ago. Their doctrines spread across South America, the Islands, Mexco, and then on to the US where perhaps 90% of all Black preachers have taken hold of that philosophy.

This is the root of Black Liberation Theology—there is no real religion in their teaching, only cultural and economic revolution, where Darks take over where Lights once ruled, where capitalism once ruled, socialistic wealth and property transfers take over via government taxation and bureaucratic regulation.

This is what Michelle and Barack Hussein Obamba listened to in their "church" for over twenty years, yet claim to know nothing about! What else?

And Marxism is at the root of all the vengeful things they've written and said in the past, but are now trying to hide so they can deceive the American public this fall and take over the government.

That said about the Congress (and there are other groups with similar views and goals), what you have in the environmental movement are two groups: the deceived and the deceivers.

The deceivers don't care about the environment (of course, they don't want to destroy it, as no one does); they are one-world socialists and their main agenda is to hold the US down economically and build other nations up. They're using phony enviromental issues, such as the "global warming" hoax for that purpose.

They do this because they know that the American people will never agree to currency or political mergers with Third World nations (or even Europe) as long as America has a $15 trillion economy and they have a $1 trillion one or as long as America has a strong currency. (You don't see Congress worried about the crashing dollar, do you?)

The deceived are the many foot soldiers that the deceivers (phony environmentalists who're really one-world socialists) have convinced that oil, coal, gas, nuclear and all else are evil; and if the usage of them is not stopped, the world will soon roast to smithereens. These are the eco-maniacs, who're much more fanatical than even the deceivers are.

Now, most government officials don't fall into the latter category, but many of them (as stated) are Marxists and socialists, and have what I call the disease of one-world merger mania.

So, there's a consensus among the groups because their their ultimate goals are the same: do anything to slow America's economy down; do anything to transfer as much of America's wealth as possible to poorer and mostly darker nations; do anything to get more of the same-thinking-type elected to and appointed to office.

Their consensus world-view makes the government seem as if it's doing the bidding of the eco-maniacs, when in fact they're simply going along with them because they like the methods they're using to halt America's progress. And their ultimate goals are the same: one-world socialism and state mergers.

Does that satisfy you, sir?

Artful Dodger

2008 Jul 13 05:00 PM

[Paul Killinger:]

And for those of you who haven't seen a real American DEPRESSION up close and personal yet, just wait. There was a new subdivision near where I lived with for 400 homes in it. Every one was sold with a family living in it, and by the time it was over it was COMPLETELY EMPTY. We called recently built glass office buildings SEE- THROUGHS, because you could look in the front and see out the back at the same time.

The longer it takes us to repair our energy dependent economy, the more of you are going to get to see these kinds of things coming to neighborhoods near you. And even the feds don't have the money to bail the whole country out of this coming malaise..

2008 Jul 13 05:19 PM

[fireball:]

ARTFUL DODGER wellsaid. and again we come full circle to the words of sam adams and patrick henry.

2008 Jul 13 05:25 PM

[Paul Killinger:]

Dodger,

Wow, fella, you make me sound like a middle-of-the-road slacker! I'm not saying your conclusions are wrong, but maybe you're giving them all a little too much credit for their ability to pull this mutli-hundred trillion dollar conspiracy off right in front of everybody.
We'll see.

2008 Jul 13 05:33 PM

[safariman:]

Maybe I'm missing something? If I go long futures contracts because I think the price is going higher, and it does, well I'm happy. But I have to offset my position (sell it) to recognize that profit. In fact, I have to offset it before delivery unless I'm prepared to take delivery and store it.

So for every contract bought, the ultimate outcome is that it will be sold unless it is in fact used.

So isn't the law of supply and demand driving the price all the time? And how is the speculator possibly affecting the long term price, since he is soon forced to sell because of the nature of the market?

What am I missing?

2008 Jul 13 06:35 PM

[fireball:]

PAUL8756 i have always loved history. i have been studying this aspect for 20 years. it seems fantastic but much evidence points to what artful is saying. it would have to be generational. i look at myself and must say i am my fathers son. consider every day we move closer to a cashless trackable society, the results of government education, the destruction of our currency since the creation of the federal reserve, the assassination of a president in front of a nation 30 days after he took back our currency and began issueing united states notes(from what i can tell johnsons first act was to restore control to the fed) these are just a handful of historical factors that point to what dodger is saying. now consider the apparent ineptitude of our public servants. (you pointed out that obama and hillary are not ignorant.) it is as if they could not do more harm if they were trying, look at the insane mantras of the mainstream media, how many americans even realize that after law passes through the 3 branches that the ultimate check comes back to the people in the form of a jury of 12. any jury has the power to give a verdict of guilty then say that law is bad strike it from the books and release this man, consider the usurpation of the bill of rights. the deeper you dig the worse it looks. i am not there yet but the more i study the more artful makes sense. how can the great nation of my youth have fallen so far so fast? if it is all coincidence there are many coinkydinks. oh and the destruction of our borders, it would be easy to close them and secure them. i had the figures worked out a few years ago. a sniper team every 500 yds working an 8 hr. shift would stop it in a day. when you do the math it would be pretty easy. protection of the borders is a legitamate function of the federal gov. and our military. dodger every day i lean closer to what you are saying. another disturbing factor is that in my mind we have socialist party A and socialist partyB. no matter who gets elected we continue down a path of self destruction. it is a scary concept. dodger applause for voicing it.

2008 Jul 13 06:36 PM

[Paul Killinger:]

Fireball,

I'd like to comment on one thing you said about Brazil...

It's no "rumor" about their cost-effective ethanol production, it's a fact. You see, they produce their ethanol from sugar, which contains 6X the energy of corn. They run their entire country's vehicle fleet on it instead of gasoline. And they would export it here, except for the high TARIFFS adopted by (...you guessed it!) OUR CONGRESS to keep it out. (It costs Brazilians less than $2 a gallon at the pump incidentally.)

We could make sugar ethanol here, by the way. Unlike corn, it's not central to the worldwide food chain. We have the acerage in Florida and Louisiana, and already plant a large sugar crop, which farmers have a tough time giving away. And that's not to mention all the sugar grown throughout central America, which could also be imported here inexpensively.

So when the Democrats tell you they want to do renewables in lieu of domestic oil and gas exploration, don't believe them. They have no intention of doing either one. It's all just more smoke, mirrors and talking points from the lying mouths of the Greens.

P.S. And you know what ethanol really is, don't you? It's simply alcohol made from sugar (Rum) or corn (Bourbon). Besides being a great beverage, it runs fuel dragsters and funny cars at the drag strip quite effectively. Using it as a fuel would add about $200 to the cost of a car, but we'd need to add new pumps at gas stations to utilize it here nationally.

2008 Jul 13 07:01 PM

[Paul Killinger:]

Fuel, fuel everywhere. But not a drop that doesn't cost an arm and a leg in our gas tanks thanks to the politicians in Washington!

2008 Jul 13 07:43 PM

[Paul Killinger:]

Fireball,

I said Obama and Hillary weren't stupid, I didn't say anything about their ignorance and vanity. Members of the media on the other hand are not the brightest lights in the room-- look at their pay compared to other educated professionals. There are exceptions, of course. Rush Limbaugh and Dick Morris, for example, really have it all pretty much figured out (...especially Morris, I can't wait to get his new book).

2008 Jul 13 07:58 PM

[fireball:]

paul8756 sorry the cruelest totalitarian tyrant of all(a beautiful latin woman) warned me if i did not get of the computer it would be a long cold lonely night. pbr is getting into that fuel too i read. if you and STOCKACCUMULATOR have a recomended entry price i would be grateful for your ideas. i will check here in the morning. some big brown eyes are flashing a little lightening at me. a good evening to you all and good luck tomorrow.

2008 Jul 13 09:18 PM

[ArtfulDodger:]

Dear Paulk8756:

With all due respect to what you wrote: "maybe you [the Dodger] are giving them all a little too much credit for their ability to pull this mutli-hundred trillion dollar conspiracy off right in front of everybody"

I did not say there was a conspiracy. A conspiracy is far different from a consensus. In a conspiracy there must be a union of willing participants who converse and decide on a plan to deceive or cheat. In a consensus varied groups must only tacitly agree on an ultimate goal(s) and they need not converse or have a specific plan that they all agree on carrying out to deceive or cheat to get to that goal. It's simply that they all work toward the same end: in this case, to slow America's economic growth; to transfer our wealth to Third World nations; to change the leadership of this nation from light to dark, from a neo-capitalist society to a purely socialist one.

Have you noticed that nightly news broadcasts from the major networks oftentimes lead with the same story. Well, they’ve not conversed with one another; they simply have a consensus mind to filter the same stories to the people to get their agenda across. And surely if you're to the right of Charlie Wrangle you know they have an agenda. They even use the same words in their stories.

A consensus along these lines is even more dangerous than a conspiracy, because it's harder to figure out what's going on, who's behind it, and how it's coming about.

That's all I'm saying, to clarify my points.

Thanks for your comment.

The best to you: Dodger

2008 Jul 13 10:55 PM

[investor 911:]

Artfuldodger,

Wow..i'm awe by your response. So much to know..so much to learn. I love my country, unfortunately politics is really out of my line. I'm just hoping for the best for now. It saddens me that a great country like America is being brought to it's knees by a bunch of fanatical bastards and ordinay citizens like us are still wondering whether our leaders can counter punch.
Thank you, artfuldodger...god bless you, sir.

2008 Jul 13 11:58 PM

[Paul Killinger:]

Dodger,

Fair enough. A "consensus," then. Point well made and taken.

Thanks!

2008 Jul 14 12:45 AM

[Paul Killinger:]

Fireball,

You may want to read and/or watch Jim Cramer for good ideas on how to best enter/exit individual stocks. He is a REAL expert, having been a rising star at Goldman before making millions in the market himself.

As for me, I buy as much of a position as I can afford, usually use stop losses, and try to get out with some of their money. Cramer makes a lot of sense, though, when he talks about things like "diversity" in individual potfolios... I should work harder at that.

RESEARCH is all important in my opinion. I find I get my best ideas from blogs like these, rather than the mainstream financial press-- they're usually TOO LATE. Then I track a stock for awhile, read the company's posts, try to get some independent concurrence, and then invest. Then I stay nervous until I sell out... ha, ha!

This method works well for me. But I used to consistently LOSE money in the market. I was always trying to be a hero, trying to call the turn and make big hits on out of favor stocks.

That was a BIG mistake I found. Now the biggest risk I'll take is in an undiscovered company in one of the hottest current sectors in the market. Like I said, blogs, Cramer and IBD help me to identify these.

That's how I found out about PBR and some small oil companies in the Bakkens (...namely BEXP and NOG) that have all doubled several months ago.

I don't know if that qualifies as a "strategy," but it works for me. Good luck to you, Fireball.

2008 Jul 14 01:27 AM

[Paul Killinger:]

P.S. The hottest sectors in the market the past year have been some natural resources, energy related companies and their cousins, the utilities. The coldest (...if you like shorts and/or puts) have been financials, the airlines and auto companies. Some of what they call ROTATION is probably overdue, but only God knows when.

2008 Jul 14 01:43 AM

[Paul Killinger:]

P.P.S. And as they like to say in sports betting, don't bet any more than you can afford to lose... ha, ha!

2008 Jul 14 01:46 AM

[fireball:]

paul8756 thanx. actually i find these blogs very informative too. i have nog and bqi. i am learning about options. not ready to try it yet.ARTFUL DODGER the consensus ideais easier to swallow. the jury is still out for me. in 1996 i was on a cruise with my dad and my nephews. late one night i was having a few drinks with 2 english girls. their comments to me made me really start wondering what the hell was going on. some time if u wish i will relay it to you. they were just so matter of fact and kind of like are you just ignarant or stupid.

2008 Jul 14 09:36 AM

[Paul Killinger:]

So, I'm dying to hear... What did the English girls tell you?

2008 Jul 14 11:09 AM

[fireball:]

PAUL8756 hey bud. well we were just shooting the bull and out of the blue one of them said. you are not one of those militia nuts are you? i said yes and no. by law every able bodied american male between 18 and 50 is. do i belong to a group no. then one said. do you own a gun. i laughed and said a couple of target rifles, a couple of revolvers and one ar15 in case someone decides i cannot. they whispered for a moment then one said you americans need to be disarmed. i said uh why is that? the other one said as if i should already know, because when europe is firmly consolidated and it is time to bring the u.s. into the new global socialist govrernment some of you might resist. i almost choked on my beer. then said over my dead body. they said see. i thought for a moment and said, do you know what happened to the last government that tried that? they said no what? i answered they found their dead soldiers all over the countryside. both were shocked. one asked what government was that? i laughed and said yours. they changed the subject and before long they had had enough of my company. there were some other interesting points in our earlier conversation about ideologies but that summed it up.

2008 Jul 14 12:44 PM

[Paul Killinger:]

Yes, after the British made the world safe for over a century, they tired of it. In more modern times, except for a break during the Reagan-Thatcher years, they have had this continued romance with socialism. The French, too, although Sarcosi is obviously a throwback to a bygone era. The Germans are still trying to find their way after a succession of bad breaks and poor choices. Although regrettable, it's looking more and more like it may be our turn to lead the Fabian movement once again.

2008 Jul 14 01:12 PM

[fireball:]

PAUL8756 i read both of rushs books. thouroughly enjoyed them. i was in houston when i first heard him on the radio. i think it was mid 80s. had never heard of him then. i was like who is this guy this is great. he was just starting the snowball roll to fame i believe. he was the one who gave conservatives a voice in my reckoning. a guy i catch sometimes if i am out at night that i like is mark levine. not sure if ispelled his name right.

2008 Jul 14 01:17 PM

[Paul Killinger:]

I know... I like Mark alot, too.

Speaking of which, this years presidential race is fascinating. Looks something like Harry Truman (McCain) versus Jimmy Carter (Obama) to me, which doesn't bode particularly well for our prospects either way. Indeed, sometimes I think if we elect Obama at least we'd get it over with, and we could start picking up the pieces four years from now. But then I remember it took Reagan another few years to right the ship after the previous debacle, and I don't see another Reagan waiting in the wings right now.

2008 Jul 14 01:31 PM

[fireball:]

PAUL i saw a special the other night on the happiest people in the world. i think it was denmark but it might have been sweden. i am not sure. anyway they interviewed some young twenty year olds who basically extoled the virtues of socialism. with things like if i do not work o.k.. if i go to school they pay. if i do my art no worry. if i do not make money so what. in a few moments they began to criticize americans. they have to high of expectations, they work to hard, their goals are to high,they want to much, ad nauseum. they did make me nauseous. before i changed the channel it came out that they keep (i think) 14% of their income if they have one. my deduction was that the lazy and umambitious embrace socialism at the expense of the ambitious and productive. of course i came to that conclusion long ago. it only works in the very primitive tribal societies where hunters are forced to band together and agriculture is such backbreaking work the same applies. orwell wrote his book as a warning. he had first hand experience. actually animal farm was also a warning of the evolution of socialism.

2008 Jul 14 01:41 PM

[fireball:]

PAUL arnie sure aint a regan. i was in europe one summer of the reagan administration. talk about respect for a nation and a president.... one night on a train passing through a corner of east germany the military stopped the train out in the middle of nowhere. they pulled everyone off the train lined them all up questioned and searched who and where they pleased. the girl i was with and i sat on the train watching out the window. i think we were the only ones left on the train. when they were rousting everyone the soldiers took one look at the u.s. passports and actually smiled at us and one said in english no no sit down you are o.k.. then he shouted down the car at the others AMERICAN and pointed at our compartment. they left us alone. they sure harassed the hell out of everyone else. that was 1981. i am just glad that mister indestructable is from austria and inelligable.

2008 Jul 14 01:56 PM

[fireball:]

PAUL until hillary finally gave it up it was just like the tug o war mountain dew commercial. 3 flavors one brand. oh i think operation chaos kept hillary scratching and hoping. but looking at the pile of bodies around bubba and she devil i have not yet discounted her. the clintons know no limits when seeking power.

2008 Jul 14 02:03 PM

[WIcked Lad:]

Many thanks for your thought-provoking post, Jussi. That's the first time I've seen a cogent explanation of how speculation could raise the spot price of oil, even if you define speculators as those who take only long positions and never take delivery.

If I understood you right, though, it would take significant upward slope (contango?) in the oil futures for speculation to drive producers to reduce their production, thus raising the spot price. Oil futures aren't downward-sloping (backwardated?), but the curve is pretty flat, is it? Doesn't that refute the idea that speculation is driving oil prices up, at least by the mechanism you propose?

2008 Jul 14 02:06 PM

[Paul Killinger:]

Makes you a little nervous then that she's willing to settle for VICE president, does it... ha, ha! (Indeed, I'll bet Obama's still looking over HIS shoulder, as well.)

2008 Jul 14 02:41 PM

[Paul Killinger:]

No, Arnold's CERTAINLY no Ronnie. But don't you think even we deserve to get a break every ONCE in awhile, Fireball?

2008 Jul 14 02:45 PM

[fireball:]

PAUL8756 yes i think we are overdue.

2008 Jul 14 03:15 PM

[brokerinbir...:]

Pualk - Obabma isn't planning to raid the treasury. He's planning to raid the public at large via much higher tax rates. Forget rolling back Bush tax cuts. He's rolling back Regan cuts. With the Useful Idiots (they call themselves "Progressive", but Marx called the "useful Idiots") in charge of Congress, he's almost got it. Next remains the supression of the middle class - which raising the tax rates might go a way to accomplish. Sure, it'll cause an economic catastrophe, but what of that? For Leftists, all exist to serve the State. Yes, US already has one Dr. Phil. But we need one with economic sense, not vapid rock star sentiments, so give me the other Dr Phil (Gramm) please.

2008 Jul 14 04:58 PM

[Cash_and_Fetal:]

You want to see PROOF that Oil pricing is a "SCAM".....

Take a look at some of the futures prices of a barrel of oil.

futures.tradingcharts....

Do you see a pattern there?

Look at the 2012 future prices for a barrel of oil...they are trading in the $70's

2012 will be "election season"....

Speculators don't want to touch buying it...if we were really living in a "tight" market....and $150/$200 a barrel is here to stay...That's the BEST deal OF THE CENTURY you could find, you could TRIPLE your investment in 4 short years...what other investment exists with that kind of "guarantee"...A 300% return in 4 years....?!

Why are people not buying up those futures contracts as fast as
they can?

Because the price is FALSELY inflated....and Oil Pricing is a SCAM manipulated on the ICE markets.

Has EVERYONE completely forgotten (or IGNORED) history? We've seen this EXACT SAME THING when Enron was around.
They were the Market makers and they manipulated the market to their whim......Anyone remember Dick Cheney saying "we can't pull anymore kilowatts", yet Enron was shutting down Power plants to close grids and falsely increase demands on the rest of the grid...


it is the EXACT same thing ICE is doing.

Eliminate the Graham/Enron loophole, put more transparency on ICE Markets, and a price of a barrel falls in HALF, OVERNIGHT

I'll bet EVERYTHING I OWN on it.

2008 Jul 14 05:40 PM

[fireball:]

USER AND USER you are both right. do you not understand that as long as you defend one side the demicans or the other the repubrats that they are laughing and living large at the public expense while the public expends its energy on the staged wwf wrestling match. what is bipartisanship but a way to get together to scam the public again. o.k. this side won, public pay up. o.k. that side won, public pay up. o.k. bipartisan victory, public pay up. we have a beautiful system but it is mired in the filth and double speak of lawyers. time to clean out the trash. sorry but it is frustrating to see intelligent americans wasting their energies on these undeserving politicos that do nothing but screw you. tomorrow they will not send you flowers, they will not even call you. i guess i got a little carried away there but i am tired of seeing good americans get the shaft with no lubrication. you want to blame little george for the housing disastor. do some but blame clinton who first cut the credit cords. stop defending your side. turn around and take a good look at what you are defending. if you are a decent person they will make you sick. yes blame the speculators and supply and demand and opec and big oil but at least give the stewards of your country the contempt they deserve. i mean all of them. time to clean house of every federal incumbent. not just once but every election. let them serve a term then go home and try to live and work with what they have wrought. these scum stay and live on your money and never are forced to function in what you are supposed to deal with. o.k. got to go my very beautiful personal tyrant calls. at least when she is done with me she talks to me.

2008 Jul 14 07:53 PM

[alajac:]

Beware of "peak oil" lies and the lying liars who tell them & you can thank Texas Phil Gramm for the high oil prices (see below)
1. there is no oil shortage
2. oil is being stored in tankers off-shore so the oil doesn't show up in inventories
3. Thank Phil("Yall r jest a bunch of whiners")&Wen... Gramm for the legal loophole that lets commodities get bid up like a stock price
Proven in 2006 Senate hearings: how could our idiot representatives not know the Senate already went over all of this? read it here in 2 parts:
www.star-telegram.com/...
www.star-telegram.com/...

ps, we went into Iraq to curtail supply not obtain it, and that is just what we have done: kept the violence stirred up so that oil didn't get pumped and drive down the price. Oil is on it's last legs and they need to wring every last dollar out of existing inventory. XOM is buying stock and raising dividends; nothing is going toward exploration even at these prices because they know they already have all the product they will ever need sitting on the shelf.

2008 Jul 15 01:45 AM

[alajac:]

the first link doesn't work but you can get to the first part from the second part or click here:
www.star-telegram.com/...

2008 Jul 15 01:48 AM

[Jussi Keppo:]

Glenn Hyatt,
Thanks for the comments. The forward curve used to be significantly downward sloping but not any more and now the long maturity forwards are much more liquid (this is good for the market participants). So, we could also start the example with a downward sloping forward curve if the initial forward curve reflects the producer’s expectation on the future spot price. Then the changes in the forward curve (less downward sloping) drive the same results.

Note also that in case (iii), inventory rises and this increases the spot price. The problem in analyzing this effect is that global inventory data is “noisy”.


Safariman,
Thanks for the comments. The speculation (how I defined that) can affect the oil supply (producers delay some production) and oil inventories that take oil away from the spot market. As you indicated, at some point in the future the oil should come back to the market but this can be far in the future. If the oil demand increases rapidly in the future the effect from the speculation is positive (and then there is no bubble).

2008 Jul 15 08:36 AM