icandoitdon

Playing the One-Armed Bandit at the Gas Pump

crude oil no longer trades on fundamentals of supply and demand. like gold, it is a currency trade and a bet on inflation. in my view, oil is a scarce resource that should not be subject to the whims of armchair speculators. futures trading in oil should be banned for all but those producers or commercial users who are authorized to hedge related commercial activities. oil markets will do fine without speculators, as they did for years prior to the advent of futures trading.

if you want to speculate that's fine....trade orange juice or pork belly futures. if you want to speculate in oil that's ok too....as long as you can take delivery of what you buy and deliver what you sell. if you can't, you don't belong in the game.

On Jun 13 12:04 AM sanvick wrote:

> The object of my trade is to make money.
>
> So go with the flow, crude that is.
>
> Some make it seem like a crime to bet on crude, why?
>
> Stop whining and start buying

It's the Oil Price, Stupid!

it's amusing to me that only one comment addresses the significant speculative element that underlies the recent surge in oil prices off their lows. from everything i've read, the world is swimming in oil as well as natural gas. the distinguishing feature of oil is that an equilibrium price is dependent upon a few unstable countries in an inherently unstable part of the world. it is this unique factor that makes it a particularly attractive commodity for speculative money.

a speculative premium has existed in oil for many years. this premium was once solely attributable to the threat of mideast supply disruption due to war and/or embargo by unfriendly producing countries. but the character of the speculative element now includes the threat of a permanently unstable financial system in the west, accompanied by political instability that threatens to unleash economic horrors in years to come....whether runaway inflation, currency instability or even government default on its obligations. the great irony is that this threat of political, financial and economic instability in the western world will only be exacerbated by an oil price that is unjustified based on fundamentals alone. it is a vicious circle from which there appears to be no escape.

we have met the enemy and he is us.

On May 27 03:17 PM dw57 wrote:

> not sure why the author thinks there was strong demand last year.
> when the amount of gas being used has been collapsing since 2007,
> and the number of miles driven has also been collapsing. and the
> amount of oil being stored has been sky rocketing. all of the price
> for about 2 years has been driven by one thing speculators. and most
> of them were trying to make up for losses in other investments

Political Incompetence Could Drive Up the Price of Oil

oil is the new gold, chased by fearful investors who do not trust governments to manage their economies or world affairs responsibly. given the history of the last 10 years or so, who can blame them?

Crude Reality: How Long Can Oil Stay Down?

this is dead on.

i would add to it that companies maximize profit when the marginal revenue obtained from the last unit sold equals the marginal cost of producing that last unit. companies that insist on covering their fixed costs are hurting themselves and their shareholders.

fixed costs are generally relevant to production and sales decisions only in the long run. variable costs are relevant all the time.

On Jan 14 10:42 AM Chris B wrote:

> Using "production costs" to justify a price for oil without separating
> fixed and marginal expenses will only lead to confusion. Remember
> microeconomics? A firm will continue to produce - at a loss - as
> long as the price is less than or equal to the marginal cost to produce
> that one extra unit, regardless of fixed costs. This is because at
> that level, you lose less money producing that extra unit than you
> would by completely shutting down but still having to pay your fixed
> costs.
>
> Suppose you are paying interest, maintenance, amortization, insurance,
> and other fixed expenses to run an oil platform that was built at
> the height of the oil bubble and can produce oil at a total daily
> cost of $70/barrel. Your fixed costs are sunk costs - you will owe
> them whether you shut down or not. Your variable costs, a few extra
> salaries, parts, energy, etc. add up to maybe $10/barrel, and your
> fixed costs add up to $60/barrel. If you DO produce a barrel of oil
> and sell it at $40/barrel, you will lose $30 ($40 revenue-$60 fixed
> cost-$10 variable cost=$-30 profit). If you DON'T produce that barrel
> of oil, you will lose $60, your fixed cost. Which would you rather
> lose... $30 or $60? Easy decision: keep pumping and wait for prices
> to rise in the future.
>
> At this point, many fields are operating at a loss because that's
> cheaper than not operating at all. It's a waiting game for the oil
> companies - a wait for competitors to go out of business or for prices
> to rise. Considering how flush with cash they are, that wait could
> go on a long time.

60 Minutes on Oil: Did Anyone Verify Anything?

"There was some speculative excess but to suggest that what happen in 2007-2008 was "speculators" lacks in any basis of fact."

sounds like you're confused. either speculation materially influenced prices during this period or it didn't. i believe it did. when a commodity doubles in a year (after having already doubled from a couple of years prior), then collapses, it's not a leap of faith to suggest that speculative money is involved. i don't know why it is so difficult for some to accept that speculation often drives markets in the short term....but not in the long term.

there is always a trigger for a speculative blow off. the trigger for oil was the emerging markets phenomena...including china....and related demand, coupled with known restrictions on short term supply. traders extrapolated this theme into the "known" future, driving prices into the stratesphere. but the "known" future of endless demand growth in emerging markets and their decoupling from slower-growing, developed economies, wasn't the story that played out. prices collapsed when feared demand destruction from higher prices, coupled with hard evidence of world economic weakness, started to gather steam. nimble traders who were long made their exit on the way up, profits intact, as did short sellers courageous enough to act on their convictions on the way down. latecomers, whether on the long or short side, lost big.

as an investor, i am neither resentful of traders who made money on the way up or sorrowful for traders who lost money on the way down. winners and losers is what makes markets.

Marc Faber, Jim Rogers and Boone Pickens - Bullish on Oil

i'm not familiar with the trading strategy of USO, and whether they use hedging techniques to nullify spot vs. futures differences. i do know that it is common in commodities futures markets for futures prices to exceed spot prices.

if you look at any reasonable period of performance of USO it closely tracks the performance of spot oil. that's exactly what it is intended to do. if price disparity of different contract months was an issue that could not be managed, you would see it in the performance of the fund. that hasn't been the case.

if i'm missing something here feel free to set me straight.

On Jan 11 03:00 PM mkreisel wrote:

> I'm bullish on oil for the long term, but I'm utterly bearish on
> USO.
>
> It's a trap for retail investors who cannot venture into the futures
> trading and do not understand the monthly roll of future contracts.
>
>
> Right now, oil of March expiration stands at 46.07, while oil of
> February expiration stands only at 40.83. If the USO has to roll
> from the Feb to Mar oil today, it will have to pay a ghastly 14-15%
> premium. Now repeat that 12 time during a year, you can see how much
> left will be there for USO holders.
>
> At this point, I would rather invest in oil related stocks than this
> USO trap.
>

Oil Won't Stay Down for Long

no, everyone is not a little bit right.

sperculation drove the bubble in technology stocks, one of the biggest bubbles of modern times, and there was obviously never a supply/demand imbalance in technology stocks. neither was it elasticity of demand that drove this bubble.

housing is another, though less dramatic, example of speculation having an undue influence on prices. buyers ignored fundamentals that historically helped contain home prices, e.g. rent equalivancy, cost/income ratios, etc. the "ignition" for this shift may have been exogenous influences on the market, e.g. relaxation of credit requirements, government mandate of more broad ownership in housing, lower mortgage rates, more financing options (e.g. adjustable rate and negative amortization mortgages), etc., but it was all designed for the same purpose: to stimuilate investment in housing which, by definition, attracted speculative money.

the bottom line: a bubble is created by speculation, whether the trigger is misguided public policy or fear and greed. it has nothing to do with market fundamentals.

Oil Won't Stay Down for Long

production did increase...no more or less than required to meet demand. name one spot in the world during this period in which there were any significant and repeated shortages or crude oil or gasoline...just one. aside from the occasional hurricane-caused disruptions, you can't do it. lack of product had nothing to do with the explosion in oil prices.

nobody was hoarding the oil because production/consumption was not driving the price. it was the marginal financial buyer who was trading the product that drove the price. consumers had to pay it, given the inelastic nature of short term demand; and producers were glad to accept it, however disbelieving they were of its sustainabiility. the financial buyer never took delivery of the product because he didn't want or need it...he rolled over his contract, riding the price higher until the bubble burst, as did thousands of others. that's called speculation, my friend.

even the saudis dismissed the relentless rise in oil as financial driven speculation. but the true believers....the "we're running out of oil!!" crowd....wouldn't hear it.

what's laughable is they still don't.







On Dec 12 08:20 AM Andy1234 wrote:

> If oil was such a speculative bubble.....why didn't production increase
> over this mania?
>
> And where were these people hoarding the oil? it sure wasn't in inventory
> or the SPR.
>
> In order to kil 1% of demand.....price needs to rise 8-20% (depends
> on how high the price is to begin with).
>
> So things do go parabolic if a perceived shortage might exist in
> the near future.
>
> But at the same token.....once you start gaining back a supply cushion....things
> go just as fast in the opposite direction.
>
> It still comes back to supply and demand.......the downside is limited
> to the cost of production for new supplies.....and the upside is
> limited to the price that a certain amount of consumers can afford
> at the current rate of production.
>
>
> I don't know what the upside is on oil.....but the cost for most
> of the new oil coming online is between $40-80/barrel depending on
> where the oil is coming from (deep sea or oil sands). Given a 6%
> decline rate on conventional low cost oil fields....and a production
> of 74MBPD.....in 10 yrs thats roughly at 40MBPD........oil is going
> up long term.
>
> The icing on the cake is the printing press......more dollers = inflation.....we
> might even see hyperinflation in the future......that is if people
> go back to the normal spending habits.

Oil Won't Stay Down for Long

"It took nothing less than a Depression-like global financial crisis to humble the energy bull, not the deflation of a speculative mania."

what nonsense....

there is always a trigger to the bursting of a speculative bubble. i would also argue, as a bit of irony as well as poetic justice, that it was the parabolic rise in oil that helped burst speculative bubbles in real estate, emerging markets and credit markets. but i suppose you don't think there was speculation there either....

Is the Global Economy Drowning in a Sea of Black Gold?

beans......

i've been investing since you were a gleam in your daddy's eye and i've heard and seen it all including the idiotic notion that "this time it's different." gold bugs thought gold was going to the moon in the 1980s until it crashed and flatlined for about 20 years. same with silver. same with tech stocks in the 90s. same with real estate for about the last 20 years. and yes, the same with oil, which boomed in the 70s into the 80s before crashing hard.

there are only 3 constants in the markets...fear, greed and amatuers who buy into the notion that "this time it's different."

Is the Global Economy Drowning in a Sea of Black Gold?

i have read with amusement the idiotic view put forth by many that speculation has nothing to do with the price of oil...it's all world supply and demand and the next stop in this insatiable thirst would be $200/bbl. there are many reasons for this price run and underlying world demand is about 4th down on the list.

as for the "era of cheap energy" being over, i think i'd wait to see the effects of the next world wide recession before making such a stark judgment. i wouldn't bet the house on it.

John Hussman: Is There a Possibility of $60 Oil?

why stop at $170/bbl? why not $200? $300?

i'll tell you why....

because the world economy would cease to function. no economic activity = falling demand for oil = lower oil prices. that's how it works, peak oil or no peak oil.

you're in no position to call anyone a jackass.

The Reverse Wealth Effect

johngonole...

"Spend your money or we'll spend it for you."

very perceptive comment and absolutely true. the bastards punish savers and reward debtors. it's been that way for 40 years and it's getting worse.

The Reverse Wealth Effect

chris:

"If speculation was pushing prices significantly higher than what the fundamental market demands, wouldn’t stockpiles of oil be building up?"

you conclude that speculation cannot be causing the increase in oil prices, because oil inventories would build if speculation pushed the price of oil beyond the natural equilibrium price. this might be true in the long run but it is not true in the short run. oil has a very inelastic demand curve, i.e. short term demand is not price-sensitive

gasoline is a good example we can all relate to. it is only after doubling of price in the last couple of years that consumers are starting respond to the price by cutting back on consumption. cigarettes are another example. demand for cigarettes is notoriously insensitive to price and for decades has been the classic example of an inelastic demand curve taught in economics classes in universities through the world.

in two years if the price of oil remains at current levels i will throw in the towel and agree that speculation has not influced the price of oil. but it's far too early to draw that conclusion...i believe that financial speculation is a significant driver of the doubling we've seen over the last year.

"there are speculative forces in every asset market."

this is true, with a big BUT

BUT nothing comparable to today's market.

speculative activity is every market far greater today than in the past,made easier by futures exchanges that didn't exist 30 years ago, and by the emergence of trading entities that either didn't exist or didn't stray from their traditional domains of stocks and bonds. today hedge funds, mutual funds, soverign funds, pension funds and my grandmother can trade virtually any kind of futures for which a market exists. the cost of trading, in terms of exchange costs, margin and opportunity costs (i.e. cost of short term money) are lower than they've ever been. trading volume has exploded...and speculators far outnumber those who trade these futures for the purpose of hedging their production or consumption activities.

there is good reason to speculate in oil today. we have a wreck of a financial system, a declining currency, a runaway national debt, wars we can't win....and people are afraid of a crash. seems like an intelligent bet for turbulent times, but for those who haven't laid the bet long before now they're a little late to the party...

i would bet my mother in law that speculation accounts for at least 1/3 of the cost of a barrel of oil today. matter of fact you can have her even if i lose the bet.

Boone and Baum on Scapegoats and Speculators

what the hell would you expect boone pickins to say? is he an objective source? christ, that's like asking bush to give his real view on the iraq war.

oil has not tripled in 4 years and doubled in one becaue of demand. it has tripled because of demand, currency effects and rapidly growing speculation in futures markets by people and funds who are neither in oil or related businesses, and who NEVER take delivery of the product. they trade for financial gain only and that is, by definition, speculation. sellers emerge as prices push higher because they're afraid of missing the top. buyers support the price because they are afraid of missing the bottom. fear and greed of missing the top or bottom keeps buyers and sellers active as the prices push higher. as some point fundamentals become irrelevant. if you don't want to call it speculation then call it a bubble...but normal it ain't.

the futures markets in oil and other commodities were created for hedging purposes but they've become casinos. of course they should be heavily regulated starting with substantially higher margin requirements. want to play, that's fine....cough up.