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Commodity bubble proponent
44 Comments
Blowing the Bubble Bigger
1. Oil speculators don't borrow money to buy oil futures: WRONG. When you purchase an oil contract, you pay an upfront margin of as little as 5-7% of the price of the commodity. That might not be no money down, but it is damn near close to that. Also, Goldman Sachs, Morgan Stanley and others are counterparties to trillions of dollars of commodity derivatives just like they were with mortgages. Look up the securitization of commodities for more information.
2. "Oil speculators on futures markets NEVER take delivery of oil. If there was a "bubble" we would have people hoarding oil." This assumption is also wrong. Since 2005, Goldman Sachs, Morgan Stanley, and others have been trading and taking delivery of actual barrels of oil, much of it in offshore storage facilities that are not accounted in EIA and IEA inventories.
business.timesonline.c...
online.wsj.com/public/...
online.wsj.com/article...
www.commoditytrader.co...
BOY, THIS SURE LOOKS LIKE HOARDING TO ME.
Here comes the tough part. Since the US and Euro Feds have decided that it's acceptable to backstop troubled banks, a collapse of this bubble would further destabilize an already unstable system. I personally don't think it would even take a huge correction at this point (say 25-35%, which in a resource bull market can and will happen) to expose the fragile underbelly of this and wreak more havoc onto investment banks balance sheets
Oil Bubble: How Speculation May Contribute to Recent Moves in Oil Prices
1. Speculation is clearly involved in this market. As of right now, there is no oil shortage anywhere globally. The guys that predictably tell us there is a shortage are the same ones that are profiting from the same thing.
2. Investment banks now own massive oil storage facilities globally. Morgan Stanley and Goldman Sachs have actually been taking delivery of oil products to sell at a later date. Precisely the definition of "hoarding". This is just a few articles that demonstrate how this activity has taken place since 2004. I'll let you all draw your own conclusions.
business.timesonline.c...
online.wsj.com/public/...
online.wsj.com/article...
www.commoditytrader.co...
Conveniently as the latest Oil Movements report shows, most supply stock building as occured offshore and out of sight (translation: it doesn't show up in EIA reports). I personally think the investment banks learned from what happened the last time oil correct 30% (when they filled up Cushing in 2006) and figured that the best way to deal with it is to store the oil where the EIA can't calculate it.
Why Oil Won't Penetrate $150/Barrel
The world can only produce 85 million barrels per day while it is consuming 87 million barrels per day."
Really now?? Then if Pickens is right, how come inventories are at average/above average levels in almost every single industrialized country in the world?
If you look at his hedge fund, about 95% is in either oil or natural gas. In my book, that is a biased source
Toiling Over Bubble Troubles
www.nymex.com/ewd_marg...
For a 1,000 barrel contract of oil, one needs only to put down between $7,200 and $9,000. That's 7% equity, and 93% leverage.
If oil goes down, you pay the difference between the margin requirement and the price.
The Oil Shortage, and Other Fairy Tales
John Kilduff, of MF Global, is VP of Risk Management for their oil trading team. He is one of CNBC's regular contributors.
In the Australian Herald Sun he is quoted as saying:
"John Kilduff, analyst at MF Global, said the world is consuming 87 million barrels per day of oil while producing only 82.6 million barrels."
www.news.com.au/herald...
Using these stats, if we did this for say, since the beginning of the year, and the US absorbed 25% of this inventory decline since it consumes 25% of the world oil, we should have depleted our oil inventories in the US by 300 million barrels and would have. If you look at the EIA numbers, we didn't do that. The IEA numbers don't confirm this either.
Regardless of the oil fundamentals, these "experts" need to be taken to the woodshed when they "educate" us with flat out inaccurate information.
The Oil Shortage, and Other Fairy Tales
"Peak oil" is a hypothesis that states that oil production will rise until half of the reserves are depleted. Once that happens, production will decline commensurate with the increase. Nothing more, nothing less.
Peak oil has nothing to do with:
1. Speculation in oil futures
2. "Cheap" or easy oil.
3. Oil demand fundamentals.
4. The coming end of the world that Matt Simmons, Hirsch, Boone Pickens, and others state.
Plain and simple this is a gigantic bubble created by the same forces that the tech and housing bubble had:
Three major things clearly have supplied the gasoline for this fire (no pun intended).
1. Negative Real Interest Rates
2. Lax regulation: Regardless of what you think about the fundamentals of oil prices, peak oil, etc., the lack of knowledge that the CFTC has is very clear. They have zero data on ICE trading, and we have had at least 5 major scandals with respect to energy trading in the last 6 years. If these markets were transparent, I would be ok with the rise in prices. But they're not.
If you don't think commodity prices in general have been manipulated, go ask any farmer about their experiences with trying to hedge their food production on the futures markets in the past year. Remember that for the last 80 YEARS until the past 12 months these markets did not have these problems.
3. Creation of new investment products to attract investors into arenas that they weren't in previously.
Since I haven't yet given up CNBC, let me walk you through a typical exchange on oil.
Oil Analyst: "The world is producing 2 million barrels/day less than it is consuming. We are out of oil. Oil will go to $150 and the airlines will go bankrupt."
Greasy Haired CNBC goon: "So how do we play this?"
Oil Analyst: "Well, not to worry, we've just created a new ETF that you as a lucky investor can buy. For every dollar crude goes up, the ETF goes up 10x."
CNBC Goon: "But what if oil goes down?"
Oil Analyst: "It never will, except for a small correction. Any dips are a buying opportunity. There's no end in sight. Oil will sell for $25,000 a barrel in 2015 and the fed will cut the interest rate to 0%."
CNBC Goon: "Wow, I'm convinced that there's no speculation in the market."
Speculation does not mean that the prices are being manipulated by any one person or entity. Rather it is a herd mentality where people chase high returns b/c their friends/neighbors/comp... had them from the same investment.
Sophisse: Did you know that Goldman Sachs,Morgan Stanley, and other hedge funds actually trade/distribute the commodity as well as gamble in the futures markets? See below for details. I'll let you all draw the conclusions.
business.timesonline.c...
online.wsj.com/public/...
online.wsj.com/article...
www.commoditytrader.co...
Crude Oil: Congress Acts, Iran Hoards, RTX Soars
1. This is clearly a bubble.
2. I used to agree with this author on the issue of trying to raise margin requirements, etc. These things aren't going to work.
Goldman Sachs, Morgan Stanley, etc. are commercial hedgers b/c they own oil storage facilities around the world. So, we're stuck with them whether we like it or not.
What is going to change this is if the Federal Reserve decides to turn off the easy money spigot and start tightening up to combat inflation, like they should have been doing for the last year instead of trying to save some dumbasses on Wall Street from feeling pain.
This tightening will cause the recession the world so desperately needs to clear out all of the junk debt, overinflated asset prices, etc. out of the system and return to something that actually is based upon reality
Oil to $200? Fundamentals Don't Support It
1. Increased spare capacity: Up from a little over 1 million b/day to 2.3 million.
2. Iran situation: The dopehead traders on the NYMEX apparently didn't get the memo that Iran has 28 million barrels of oil sitting in tankers off of their coast that they can't sell. They've paid oil tankers to basically idle daily with the oil. In any business, when you have unsold excess inventory that you want to unload, the first thing you need to do is cut production to tighten the supply line. This further demonstrates that the market has too much oil, not too little. And oh btw...guess what happens when the shutter the 500,000 barrels of oil production capacity? MORE SPARE OIL.
www.guardian.co.uk/bus...
I know this concept is so outlandish to the perma oil bulls that there would actually be an oil surplus, so I gave you guys a link from a credible news source, just so you guys don't think I'm blowing smoke.
3. Oil price subsidies are coming down in Indonesia and eventually may happen elsewhere.
4. Demand growth has basically been cut in half from the original forecast for the year according to the IEA (and they tend to be on the aggressive side of demand forecasts). The call on OPEC crude for the year is now 300,000 to 500,000 LESS than what is actually being produced.
So what is fueling the oil market you may ask?
1. Cheap money from the major economies. Even the ECB is too accomodative with their interest rates right now. The Fed is a joke with their liquidity injections to the investment banks that got us in the mess were are in right now.
2. Securitization of commodities.
3. Rampant speculation in the oil market. This is not created by any one party, but rather a herd mentality. The investment community PR machine is in and has been in full gear about how the impending oil shortage for the past 3 years to the point where everyone just accepts it as fact.
JREwing- If the price goes down in the future, oil companies may not shutter their expensive fields. When a market contracts, companies are forced to do whatever they can wherever they can to generate cash. And that means pumping oil from unprofitable fields. This is why low prices don't always cure low prices. Why do you think GM puts Hummers on sale?
My analysis- This oil market will crash horribly once the credit mess alleviates and the fed can raise interest rates.
Oil to $200? Fundamentals Don't Support It
NYMEX: Speculators Aren't Driving Oil Market
They don't give a rats-ass about the price (high or low), all they care about is the volume of these ridiculous paper oil contracts. If margin requirements were doubled, tripled, whatever, that would mean less oil futures trading and less PROFIT for the NYMEX.
It's in NYMEX's interest to have everyone DO NOTHING. That means lower interest rates, more commodity contracts, and more net profits.
Goldman Sachs: Gasoline Not Driving Oil Price
I almost choked on my coffee when I read that
How Much Worse Can It Get For Oil?
This is an unregulated game for Wall Street that will eventually negatively impact the real economy and even Asian demand.
5 Reasons Oil Was Thrown Off Track
1. Iran has 20 million barrels of oil sitting in oil tankers they can't sell. www.bloomberg.com/apps...
If demand was truly outstripping supply, do you think this would happen? NO
2. Saudi Arabia just LOWERED the prices on their benchmark crude for delivery to Europe and North America.
www.bloomberg.com/apps...
If demand was truly outstripping supply, do you think this would happen? NO
Oil, gasoline, and distillate inventories are at the upper half of the 5 year average range.
In reality, three things have distorted this market.
1. Negative real interest rates in every major currency around the world. Inflation is hotter than 4% in Euros, contrary to the ECB argument, making even interest rates in that currency negative.
2. Dollar weakness
3. The securitization of commodities: We clearly need more transparency in the market. It'll be interesting to see what happens to these ETFs, commodity speculators once Congress closes the Enron loophole with the next farm bill
OPEC still has between 2-3 mbd of spare capacity according to the EIA and IEA, a big increase from the .5mbd spare capacity in 2004.
A special message for gale: I expect better out of a seeking alpha commet. Even if you're right, you can't stop it and you're just as screwed as the rest of us if society crashes. Maybe you should go hide under a rock on a tropical island with your little Hubbert curve graph instead of annoying people with your alarmist bs. You are really a wuss of the worst kind. Back up your rhetoric with some action.
What US Stagflation Means for Asian Markets
U.S. Recovery Could Push Oil Much Higher
We currently have a negative real interest rate, which stimulates demand for commodity related investment.
There is no supply shortage, Iran has tankers sitting at a port with millions of barrels of oil they can't sell, Saudi Arabia is increasing the discount for ALL of it's grades of crude oil relative to WTI, and inventories are at comfortable levels.
Peak oil is an amorphous concept that nobody can accurately predict. Will it happen at some point? Probably. Can anyone say for certain that it is now? No.
I think that the debt bubble collapsing and the resulting fear has more to do with this commodity run up than anything else. The US Fed has mismanaged the world reserve currency and keeps pouring more gasoline on the fire with more cheap money.
Nobody really knows who's speculating in what in the energy markets because nobody monitors the ICE exchange and the derivative trading outside of the NYMEX.
Everyone uses peak oil as an excuse to explain this away when really this commodity boom is a function of excess money and low interest rates. The thing that should make you suspicious is the fact that EVERY SINGLE COMMODITY IS GOING THROUGH THE ROOF AND EVERY INVESTMENT BANK IS PREDICTING AN IMMINENT SHORTAGE OF EVERYTHING. For example, sugar has climbed up ridiculously even though there's a hideous surplus of it around the world.
In 10 years, I'm sure everyone will be screaming about commodity derivatives, ETFs, and horrible risk management at investment banks because of this