bds231

Yesterday's Crude Spike: Most Cut-and-Dry Case of Speculation Yet

Here's what I don't get: If many of the people who bought yesterday were short with no intention of delivery, what happens to all those longs who bought their contracts with the expectation that they would actually received physical oil?

Sure, some of them would be balanced out by long speculators, but is there really a 1-to-1 match between short and long speculators (I would find that hard to believe)? Or are there people out there trying to use the futures market the old-fashioned way -- to lock in the price for a commodity they must buy -- getting whipped around by heavy speculation?

Oil and the Futures Market

"Umm, yeah": Very intersting thought about oil-producing entities keeping the price up by buying futures. But as "jtk" mentions, it certainly appears as though $140 is causing demand destruction, some of which might be permanent (e.g. major r&d/investment in alternative fuel vehicles).

Then again, oil futures have been traded for about 25 years, so if oil-producing entities are indeed keeping the price up, you have to wonder why they let the price get so low in the late-90s...

Very interesting to think about, although I don't have the expertise to know if this is actually feasible -- has anyone done the analysis to see if this pecils out?

Hey, Congress, Speculators May Not Be the Bad Guys

This data implies the opposite conclusion to me:

Oil producers and consumers use futures to hedge well known and *relatively* constant demand and supply, so for them the number of open contracts should remain *relatively* constant (or at least rise predictably with the global consumption of oil).

On the other hand, when speculators buy futures contracts, they start with a dollar value and work backwards to the number of contracts -- they have $1,000 to spend, so they buy $1,000 worth of contracts. They don't say "give me 100 contracts whatever it costs." So as oil (and oil futures) go up, fewer contracts equal the same dollar value.