Gary Lucido

Watch for Yourself: 60 Minutes Oil Story Was Spot On

Nope don't buy it. First, demand is clearly much lower now than it was when oil was 147. Opec is cutting back and inventories are building. It doesn't take much demand change to move the price a lot when the supply and demand curves are fairly inelastic. Second, let's walk through the mechanism in detail that must occur in order for speculators to drive up spot prices. It doesn't make sense. Let's say demand is stable and suddenly speculators start buying futures contracts that they never take delivery on. If the demand is not there spot prices will not rise because no one is taking delivery on those contracts. You would end up with significant contango but as soon as the front month settled the prices on those contracts would crash to the spot price. The spot price is only going to be affected by real demand - unless people start to store oil for future delivery in which case inventories would rise. However, there was not contango at the time of 147 oil and inventories did not rise. There is no mechanism by which speculation can move spot prices unless that speculation reflects real demand - in which case it's the demand influencing speculation and not vice versa.


On Jan 14 01:17 PM Allen Phatimer wrote:

> One more time Gary, and don't take this personally. Although I'm
> not an "oil expert", I've followed oil and other commodities closely
> for 10 years now and traded commodities more often than most over
> that time. I've had the fortune to learn a lot the energy markets
> directly from many analysts you've seen and still see on CNBC in
> that time. I'm on this again because I think it would be a shame
> if people believed what you say because you are dead wrong in saying
> "But the only way that the spot market can follow the front month
> price is if the demand is there to justify the price." and use that
> as a point to support the idea that it was purely supply and demand
> or the value of the dollar (which I agree is a critical factor as
> I said) which caused oil to run the way it did and specs had nothing
> to do with it.
>
> The spot market does follow the front month price because it is almost
> the front month price. Real demand does not pay a crapload more
> for oil a month out because it can wait or buy spot and store. And
> its not about 'EVIL" speculators - I never said a bad thing about
> speculators. It was about 3 writers on the front page of seekingalpha
> knocking a fair characterization of what added fuel to the fire of
> the oil bubble without dealing with many facts that proved beyond
> a reasonable doubt that speculation was a key factor. Oil went from
> 80 to 147 and back to 35 in a few months. Please tell me exactly
> how much supply or demand changed in that time. The answer is not
> at all. By the way, a similar thing is happening right now but interestingly
> not having as positive an effect in the short run as one might suspect
> - speculators in the physical markets, like the Morgan Stanley's
> of the world are chartering as many tankers as they can and buying
> spot which they are arbing against a steep contango out to June or
> so. The numbers work because the contango is steep and tanker day
> rates have declined dramatically. The spread is actually quite wide
> and this dynamic would normally close that gap by lifting spot and
> near months. Whats interesting to me about this is I think it suggests
> that the market will be more awash in oil by June that most think,
> and the price might not bounce back as much as most think.
>
> Although I've always been a big fan of Byron Wien's, I suspect his
> and many others calls for $80 oil by year end will look like a very
> tall order when we are still in the mid forties in June. And that's
> not to say I don't think oil is probably a good value here; but a
> return to $80 anytime soon is probably going to require a collapse
> in the dollar WITH stability or improvement in the global economy.
> The article I posted last week on '09 explains why I doubt very much
> the economy improves anytime soon; in fact I think it gets a lot
> worse.

Watch for Yourself: 60 Minutes Oil Story Was Spot On

The reason we brought up the fact that buyers are offset by sellers is that you referenced the increase in volume as evidence that speculators were driving the price up. But volume could be driven just as easily by people selling. If evil speculators were artificially driving up the price and the demand wasn't there then inventories would have risen. But they didn't.


On Jan 13 11:10 PM Allen Phatimer wrote:

> 60 minutes explained it pretty well. The arguments of there's always
> a seller for every buyer and they never take delivery are so amateur
> that you guys embarrass yourselves when you spew that crap. Think
> about what you're saying before you regurgitate what you heard another
> fool say. Let me make it really simple for you - SPECULATIVE ELEMENTS
> THAT BUY AND SELL A NEW PARADIGM TYPE LINE OF CRAP ARE KEY CONTRIBUTORS
> TO BUBBLES. Your buyer and seller for every transaction line suggests
> that buyers don't move prices higher and sellers don't push prices
> lower.
>
> I NEVER SAID THAT SPECULATORS WERE THE ONLY CAUSE OF THE OIL PRICE
> SPIKE. I SAID THIS: "The fact is that no one really knows when the
> world will run out of oil. Many factors influence energy prices over
> the long run, including production costs, the dollar, supply, demand
> and competition from alternatives, etc. But bubbles are usually borne
> of cyclical (and ALWAYS temporary) supply/demand imbalances exacerbated
> by analysts and pundits who con otherwise unsuspecting investors
> and traders with new paradigm type stories."
>
> By asserting the naive buyer and seller and delivery crap you are
> saying that speculators either don't exist or have no effect, which
> is naive. As pension funds and endowments and CTAs, and Hedge Funds
> (levered to the hilt) and brokerages and others buy into the madness,
> the buyers outnumber the sellers in a big way. Pension Funds, Endowments
> and non-commodity hedge funds should have never been involved - by
> getting involved to the extent they did, they became SPECULATORS.
> They talked about a commodity bull market that would last for another
> ten years. They declared commodities to be a asset class that should
> be well represented in everyone's portfolio no matter if you were
> a gunslinger or widow. They were dead wrong. How many of those
> guys do you suppose are still "holding for the long term" like non-specs
> do. Commercial and Speculative open interest increased much more
> than the 2% average increase in end market demand (demand was strong
> and Chinese were buying and we and everyone else was filling SPRs).
>
>
> Consumers do NOT buy oil; they buy refined products like gas and
> heating oil; the demand for which did not increase or fall anywhere
> near as much as they amount of energy futures did. If prices tracked
> end market demand alone, then you would never see anything like the
> parabolic move you saw. Calls for $200 and $300/ bbl oil were as
> absurd as calling for AMZN to go to $1000/sh. back in the internet
> bubble immediately before AMZN proceeded to give up 90% and fall
> back to $10. If that sounds stupid in retrospect its because it
> was.

Watch for Yourself: 60 Minutes Oil Story Was Spot On

OK. This is a really good answer except that inventories did not rise during the oil price increase and the market was not in steep contango.


On Jan 13 04:10 PM Isnt_It_Just_Money wrote:

> A steep contango in the futures strip causes supply to be stored
> rather than available to the spot market, driving spot prices up.
>

Watch for Yourself: 60 Minutes Oil Story Was Spot On

But the only way that the spot market can follow the front month price is if the demand is there to justify the price. If evil speculators are artificially driving up the price then there is no real demand to keep the two in sync.


On Jan 13 10:25 AM Viking King wrote:

> This whole discussion, I believe, is very useful and informative.
> I need to go and watch the 60 minutes piece before making comments
> specifically related to that piece.
>
> Here, I will try to address the comment: "please explain to me how
> speculators can influence price without taking delivery."
>
> The spot/cash market for crude is directly correlated to the prompt-month
> futures contract. Therefore, if in today's market the Feb 2009 crude
> contract goes up $5/bbl today, then today's cash market will follow
> the same trend and depending on the day and basis expectations might
> sell at $4.5/bbl, $5.5/bbl or even $5/bbl higher. Therefore, heavy
> buying in the prompt month by speculators most certainly can affect
> cash prices in the short run.
>
> Over time, a continued bullish trend (for example) in the futures
> market will have to be supported by actual demand and supply in the
> cash market or else inventories will rise, and cause the short-term
> bulls to be short-term bears and reducing the futures price. So,
> in the long run, the physical market will determine price . . . but
> my question is "when does 'long run' ever arrive?"

Watch for Yourself: 60 Minutes Oil Story Was Spot On

1) No one has ever been able to explain how speculators can influence spot prices without taking delivery. The reason is that they can't. It's an absurd assertion.
2) References to the volume of futures trades as "evidence" that speculation is driving prices is equally stupid. For every buyer there is a seller. The volume of sells increased at the same rate as the volume of buys.