User 5272

Oil Price Speculation Truth Begins to Leak into Mainstream Media

You are a moron

Is This Oil Bubble Going to Deflate?

jjason and others - Phil is a moron on the point of speculation in oil - his article that you refer to are the musings of someone who doesn't know a thing about the oil market - if you're going to read that article, MAKE SURE you read ALL OF the discussion that follows - his theories in the article are totally and completely debunked.

In fact here's the link - go for it.

seekingalpha.com/artic...

Commodities Prices: Speculation Exposed

Yes, you are right for 29.99 days of the month. By the close on expiry all the speculators are gone. Actually they thin out well before that because the brokers are on the phone making sure their spec clients are out well before expiry to ensure that no specs get caught up in the delivery process. But for the sake of argument, they are all out by the close. That's why one of the first points I made was to suggest taking the close on expiry day and plotting that on a graph so you have a year that consists of only 12 data points. That's the true value of a barrel of oil in the real world ex the speculators and funds and ETF's and anyone else who potentially distorts the market for the other 29.9 days of the month. You will find that it doesn't very too much from the current general track of oil prices. Maybe +/- $3-$4?

That's also the reason why that in any futures market that is settled in physical delivery of the goods, there are no trading limits on the final day. This is precisely to allow the true price discovery. The rule makers foresaw that speculators could take over a market without that discipline and implemented that policy so that it would be a true market in the end as it was intended.

So the price of oil could rise or fall by $50 on that day if it needed to in order to bring the "speculative" price in line with the real price. The fact that it doesn't (that's why Rick Santelli said that no expiry days jumped out at him lately - futures speak for this very point) shows there is no huge distortion in the spot month, even before the final day.

To continue the point though of how much of the day to day trading is impacted, if you were to go back say 15 years to a point where oil was in a big bull trend and there weren't all these extra speculators in there, compare the difference between the spot at that time and the spot + 1, or 2 or 5 years at that time and note the difference. Then look at spot +1 or 2 or 5 years today. That's how you would get a decent gauge of how much today is speculation. That method would be nowhere near perfect, as I can see that it's fraught with problems, but it's the best that can be done to quantify a number for the FORWARD months ONLY, NOT THE SPOT as I've said again and again.

Commodities Prices: Speculation Exposed

Wez - It's not as if he couldn't answer, he answered it in futures' speak. I understood perfectly what he was saying as did he. He wasn't being "fed" anything. He just did a poor job of explaining that one point in layman's terms. The rest was well and plainly spoken. Let me try to answer it better.

It was a good question and a subject of significant misunderstanding, just as it's the main crux of Phil's impassioned, but incorrect, argument. The person asked what percentage of the contracts go to delivery. Rick said "all of them," which is technically right, but is not what the guy was asking. All of the contracts that are left open at the end of the expiry day get settled by delivery of oil from the seller to the buyer, but not all of the contracts that have ever been traded go to delivery. In fact, only a fraction of them do, but some certainly do. Let's say that a week before delivery the open interest in the July (the current nearest month) future is 1,000,000 contracts. By the close on expiry day, the final open interest may be 50,000. These 50,000 contracts were bought by legitimate buyers who want oil and sold by legitimate sellers of oil. So obviously 950,000 of those contracts were traded by speculators who had no intention of taking part in the delivery process and may have skewed the price one way or another all the while those contracts were open. Whether it's in the last week, hour or minute, all those speculators get out either by selling their long or buying in their short. Whether they choose to roll forward is irrelevant. That will distort the price of the contract that they roll to, but will amount to true price discovery by the time the open interest gets down to the last 50,000 contracts that WANT to buy or sell the actual oil on the close of expiry day. So at expiry, there is NO speculation in the market in that contract. Now if the market is being distorted upward by speculators, as is commonly believed, then by expiry the futures contract should dive by that amount (let's say $40 for sake of argument) to $90 by the close on expiry day. Since that doesn't happen, that proves that speculators aren't impacting the true cost of oil in the spot market. Don't confuse the spot market with the future months. I have no idea what the real price of oil should be a year or five forward. I'm sure it should be lower than the contracts indicate because that's where the big speculative money flow CAN have an impact. But that DOESN'T affect the spot price on expiry. Since we don't see a huge dive on expiry, that means that the true buyers and sellers are willing to transact in the real world at these prices and that there is NO speculative impact.

It doesn't matter what percentage of the world oil flow is represented by the 1,000,000 contracts or the 50,000 contracts. Not all real oil transactions have to take place by way of the NYMEX delivery process. In fact only a small percentage of them do. But a significant chunk of the transactions in the day to day changing hands of oil uses the nearest WTI Nymex oil contract as a basis for their contract pricing. It's one of the few global benchmarks. Do you really think that the entire global oil industry is being fooled by the speculators? Before you say that OPEC is manipulating it higher, there is also a sophisticated buyer (usually refiners that buy billions of barrels per year) on the other end of that transaction who's interest is in a LOW price. Do you really think that all the buyers of oil who are spending 11 billion dollars per day all around the world are so stupid that they are paying $40 extra per barrel just because of some new ETF's and hedge funds and pension funds who have decided to go into commodities? Puh-lease.

Commodities Prices: Speculation Exposed

Here are the links:

www.cnbc.com/id/158402...

www.cnbc.com/id/158402...

Commodities Prices: Speculation Exposed

Phil and all - This discussion is now over. Game, set, match. If anyone was watching CNBC right now (8:05 am on Tuesday), they would have heard Rick Santelli. He is the smartest guy on that network and the one guy that I keep that channel on for - the rest is mostly jibberish. I'm not jumping on the Rick Santelli bandwagon, I've said that to my friends before what he said right now. I've been trading stocks and options and futures for longer than Rick, but you don't have to take my word for it. Even an inexperienced trader can tell that he knows his stuff by listening to him.

I just heard out of his mouth almost word for word what I've been telling you here about how the oil market works on expiry and can't be manipulated. Only he used 29.5 days in his explanation where I used 29.9. So don't take my word for it or make me type anymore. I HIGHLY, HIGHLY, HIGHLY RECOMMEND that you go to the CNBC website and look up the video clip of the discussion that took place at 8:05ish, Tuesday May 27. Especially you Phil. I would provide a link but there's a delay and it won't be up for a couple hours. And they just said he'll be on again in a few minutes, though I don't know exactly what he'll say, but I think the topic is oil, so watch a few clips from this morning when they're up.

Commodities Prices: Speculation Exposed

Phil - you are so wrong. I'll get to that in a minute.

jcrash - that's exactly the point. Speculators are throwing off the futures and the relationship between the futures and spot. Absolutely. Especially with all the position-limit loopholes that the big funds use. But the futures price doesn't impact what price Valero pays today to Hugo Chavez to buy a carrier full of crude that they refine at their Aruba refinery. If there was some grand scam going on and there were bucketsful of oil sloshing around the world, do you think a huge company like Valero, which has no oil of it's own and is a huge buyer of crude, would be paying even a dollar more then they needed to? Nevermind $10 or $20 or $50.

CJ-49 - there are so many controls and regulations on the delivery procedures from the futures exchanges that prevents situations like that from happening or even being contemplated. I can't go into the details, but go through the rules and regulations of the exchanges concerning deliveries and you'll see why. And about your scam theory, think about the fact that this "scam" would have to be happening every month for the last, what, 3-4 years? That's quite the stretch. It's like the "man never landed on the moon" conspiracy. There would have had to have been thousands of people in on it that it would have been exposed by now if it really didn't happen, not just circumstantial evidence twisted to fit a pre-conceived theory. 10mm barrels of excess supply? Are you kidding me? If you mean 10mm barrels in total, then that gets consumed by the world in about 3 hours, so it's meaningless. If you mean 10mm barrels per day, Just think about the logistics of storing that as it piles up. Even using all the known facilities on the planet, they would be full in a matter of months, even if they started from bone dry (which they are not). So you would need about triple the known storage facilities in these "easily constructed, off the radar locations" to perpetuate the scam for a year? I don't even know why I'm responding to this line of "reasoning," but it's already typed, I'm not going to erase it.

TomS - The futures contracts dwarf the actual barrels of oils moving. But there are no middle men. All the buyers must become sellers and close out, or roll forward their contract before delivery. When it comes time for the oil to actually change hands, it's one buyer and one seller directly.

Phil - I don't know why you keep throwing people off by using the term "cancelled." There's no way to "cancel" a futures contract. Even in force majeur you can't cancel a futures contract, you can only renege on the delivery. You can't just declare force majeure just because you feel like it and don't want to deliver, it's a serious thing. And it doesn't happen very often anyways. Everyone who bought a contract who doesn't intend to take delivery (yes, the vast majority) must sooner or later sell it. They can then buy another one in the future (roll it), but they can't just "cancel" it. The markets would have seized up within days of their creation if that were possible. All the big fund money and all the rolling are skewing the spot/forward relationships, for sure. I've covered that already. But if there was an artificial shortage in the world (that is, a paper one) on a daily basis, the Valeros of the world would be sitting back and waiting until the sellers who are sitting with their full tankers (real ones, not paper ones) in the mouth of the Gulf begging for a port to offload their crude as more comes in behind it every day. They would then keep lowering their price until Valero buys it. Your comparison of futures to stocks is spurious. They are different animals, so the comparisons don't hold water. It sounds good to people who don't know any better, but it's jibberish. I don't have time to refute every one of your points because it would go on for pages, but they are easily refutable. And don't even talk about CNBC. That's not news, that's just entertainment, and dubious entertainment at that.

If you or anyone else want to believe all that, that's your right. I'm not going to convince you otherwise. You just keep denying and pointing fingers at the conspiratorialists and "manipulative bastards" and I'll stay long energy and we'll both be happy. No problem there.

But I want to close with one important (long) point to put this in a different perspective that most people will understand. Icandoitdon made the most important point when he said "in the end oil is a commodity that the world economy needs to function."

That is the key if you step back and take a broader look and not just at oil. For everything else I'm saying now, I'm referring to the world in aggregate, not just one city, country, continent or region.

A "functioning" world economy is believed to mean a growing one. The world is now growing, and has been growing for many decades if not most of industrial history, at an aggregate rate of (ballpark) 2% per annum over all these years. This is rooted in population growth. By definition, economic growth must approximate population growth over time.

2% annual growth in humanity, whether it's economic or population growth, is exponential growth. (I'm not going to have this discussion with anyone - talk to a math professor if you don't believe it). Exponential growth in a closed system (the earth) is IMPOSSIBLE in perpetuity. If you don't believe this then stop reading. You are in denial and nothing will change your beliefs. But to give you an example, take a lone bacteria (people) in a test tube (earth-a closed system) full of bacteria food. Let's say the bacteria doubles every minute (exponential growth), so at one minute you have 2 bacteria, at 2 minutes you have 4 bacteria, etc. In about 60 minutes, the test tube is full and there's no food left. Now go backwards. At 59 minutes, it's 50% full, at 58 minutes, it's 25% full. Go to minute 55 of a 60 minute cycle and the test tube is only 3% full. Let's say that at minute 55 one of the bacteria wakes up and says "we have a problem." The other bacteria say he's crazy. They've been there 55 minutes and there's still 97% free space. Then at 59 minutes they realize that the first bacteria was right and there is indeed a problem. So they turn the problem over to engineers and bio-chemists and in one minute they create three more test tubes full of bacteria food (call it technology figuring out ways to stretch our resources, though there's no way it can quadruple them as the bacteria do in this example, it can't even increase it by a significant fraction). That still buys them just 2 more minutes.

This is a hyper-accelerated and simplified example of where we are and biologists agree that humanity is past the 59th minute, though I don't know what the cycle-time (60 minute bacteria test tube equivalent) for humans is, so I don't know how long that minute will last, though it's probably multiple decades at least.

But the point of this all is that we (as a species) are simply exceeding the carrying capacity of the planet, both in terms of sources (resources) and sinks (wastes). Oil is the one commodity that is used globally for almost everything in one way or another and can't be replaced by anything for some applications; and in many ways that it can be substituted for, it will take many decades to get to anything approaching global scale. So it stands to reason that evidence of these limits being approached and surpassed is being manifested in the supply/demand balance of the one commodity that is universally required in size. Now you may or may not believe that, but don't stop there. Energy of all types, food, air, water, soil erosion, deforestation etc etc. Strains are appearing in the quantity and quality of all of these things world-wide. These strains manifest as higher prices and shortages in the tangible goods such as energy and food; and decreased quality of things like air and water due to the pollution, waste and by-product streams. You may be able to take a few facts and twist them to your liking and present them as proof of conspiracies and manipulators and Machiavellian schemes in the oil market and have the un-initiated believe it, but to deny all the other limits to growth that we are bumping up against is to have a very active imagination for it would take the imagination of an ostrich with it's head stuck in the sand to deny all that. And if anyone thinks that seeing what is all around us every day are not symptoms of the ultimately suicidal path of "growth at all costs" that industrial society has embarked upon is someone who is either in denial or doesn't care. And to think that the price rise in oil is artificial when all these other limits are being surpassed is to truly have an active imagination, because it's all linked, seeing as it's one closed system with now too many "bacteria" demanding too many resources.

Commodities Prices: Speculation Exposed

fx: Look, you can trade a billion futures contracts or do forward swaps until you're blue in the face, whether you're Goldman Sacs or a SAC fund. But unless you are prepared to accept the oil at contract end, you cannot impact the price at which those barrels of oil actually trade hands. Since it's impossible to "hoard" oil, that will not change. Now that global spare capacity is effectively zero (despite what you hear, it is zero - everyone is pumping every drop they possibly can), even OPEC is powerless to push prices lower at their whim.

I won't be able to convince most people of these facts and that's fine. Actually that's good, because it allows me to get longer at prices which wouldn't exist otherwise. But I've had these exact same discussions when oil was at $50 for the first time and going to $60. This guy Phil who wrote this article that we're replying to has been wailing and gnashing his teeth about speculators and conspiracies for the last $100 since oil was at $30. He was wrong then and he's wrong now. I heard all the same faulty arguments and finger pointing then and I'm hearing them again now. We'll do it all over again when we get to $200 because it's a hell of a lot easier to point the finger and blame "they" or "them" and demand that someone change things than it is to look inwardly, face the truth and realize we need to have a massive change in our society/lifestyle to stave off disaster, if in fact it isn't too late. We need to (among countless other things) get off our collective asses and walk a mile to the corner store rather than jump in the Escalade or the Yukon every time we need a gallon of milk or a loaf of bread. Only by significantly reducing consumption will we keep prices from spiraling out of control. The sad truth is that this won't happen voluntarily or even soon. Instead, that discipline will be imposed upon us through far higher prices of everything, not just direct energy costs, because the impact of energy prices is felt in almost every aspect of daily life.

Commodities Prices: Speculation Exposed

CJ-49 - in most cases, you would be right. For example, the Hunt brothers' famous attempted silver corner succeeded for a time because they were able to take physical silver off the market. It blew up because they over levered themselves and they didn't have enough cash to maintain the position. In the oil market, there is nobody outside the industry that can take a cargo of crude and "park" it somewhere and keep it off the market. There isn't a warehouse anywhere for crude that some pension fund or hedge fund can just dial up and rent some storage tanks for a week or a month or a year. Practically all of the storage facilities (besides the SPR) are owned by the oil companies and refiners and they are in continual motion (filled and emptied etc etc) in the ordinary course of running their businesses and managing their inventories. That's the basis of the weekly inventory numbers that are reported on Wednesday. Nothing nefarious there. If there were available storage facilities, all the oil ETF's that exist would simply buy up the oil that their underlying shares call for and park it there, adding and subtracting from it as shares are bought and sold. Instead, they all need to muck with the futures to gain their exposure. That's why the growing open interest in the out months that Mr. Masters described. That's also why there's big tracking errors in the ETF's depending on how exactly they set up the funds' exposure. But it still DOES NOT affect the spot price on the CLOSE OF THE FINAL EXPIRY DAY. Of course the day-to-day speculation affects the spot price and vice-versa, but at the end of the contract that's where the rubber meets the road. If you own a contract of crude on the close that day and the price is $126, you are paying for it and buying it at $126. (I know, I know, not necessarily because you would have bought it earlier at a different price, but you know what I'm trying to say)

Oddly enough though, there is a situation going on right now that is contributing to the price escalation. Though this is only temporary and can't last for reasons that are obvious. The Iranians lately have been dissatisfied with the discount that their heavier (and much harder to refine) crude grades have been getting in the market, so lately they've been renting oil tankers, loading them with oil and parking (literally) them in the Gulf, unsold, rather than sell them at the steep discount to light crude that the refiners are bidding at. This can't last because as more tankers come off the market, the cost of renting them will escalate to the point where Iran will be losing more money in tanker rental than in the price discount. But besides that, this also shows (to anyone who doesn't know it already) that there simply is no dial-a-storage system that exists for the speculators to use to manipulate the spot market. When Iran wants to "park" some oil, they literally have to rent oil tankers to do it. This can't last, and it doesn't happen very often. Besides, I don't think they're doing it to be manipulative, they're just being pig-headed, IMO.

Say What:

Let me simplify it for you. Lets assume the current contract runs for 30 more days. Of course, speculators affect the spot price. For 29.9 days. By the 29.99th day, i.e. at expiry, all of the speculators will have sold (or bought back if they're short) their contracts because they have no intention of filling their swimming pools with oil. So if there are 43 real buyers (say refiners) for 895 contracts of oil and 43 sellers (say independent drillers) of 895 contracts, the price won't move. If there are 264 contracts to buy and accept delivery and 895 contracts for sale to be delivered, then the price at the end of the day will plummet to find that equilibrium price that will attract buyers at a steep enough discount to recent prices. That's why there's so much volatility on the last day and especially in the last few minutes of a contract's life. Then the speculators can come in on the next contract and have their way for another 29.9 days. If this were the case, then you would have a huge drop on expiry day every month. Because there's not, it shows there are true buyers and sellers at the contract's closing price.

And by the way, nobody has ever said anything about plunging supply. Supply is plateauing. It's been about 85-86mm bbls for the past 3 years, while global demand has been increasing relentlessly a few percent per year for a long time. It's just that those two lines have now crossed.

Icandoitdon: You talk about speculation-driven manias. Let's just call them bubbles, ok? None of the examples you cited are what we have in the oil market today. Oil is a commodity that is consumed as it's produced, cannot be hoarded or stored (unlike precious metals) due to physical constraints except for short periods of time (though there is the SPR which is a different animal, but is a constant) and market participants, both hedgers and speculators alike, are free to go long or short in an unbiased way (unlike say real estate, tulips or tech stocks), in fact they must do so equally. This is one of the purest price discovery markets that exists. I'M sorry to say this is no bubble. It may get too high or too low at times, but the days of $30, $40 or even $50 or $60 are long, long gone.

arwerth: the weak dollar argument is a spurious one - the price of oil and many commodities have increased by far, far more than what the dollar has decreased. It's had an influence, no doubt. But it's a small portion of the story. The supply/demand balance has tipped - that's the real story and it's a simple one. But I know, I know; it's really the fault of the speculators.............. (yes, I'm being sarcastic)

Commodities Prices: Speculation Exposed

This testimony ignores one critical point. That is the self-discipline that is imposed by the delivery process. There are huge numbers of speculators in the market and huge dollars involved. True. However, lets take crude oil as an example. June crude oil just went off the board. Forget all the action in the out months and even in the current "spot" contract for it's entire life until the close on delivery day. Plot a chart of the price of the spot contract on the close on that expiry day for every contract going back as far as you want. That will give you the true cost of a barrel of crude oil that supply/demand dictates with zero impact from ANY speculators. If all the speculators have driven up the price of oil, by (I'm picking a number out of thin air just for the purpose of example) $40, then when the June contract expired the price would be driven down to $86 by that last trade, rather than the $126 (or whatever it actually was) it expired at. That's why the expiring contract never has any limits. It's to allow the true price discovery that's built into the futures markets no matter where the true price may be.

4 additional points

1) This is only true for futures contracts that don't allow cash settlement - oil is NOT one of those, so it's true price discovery on expiry day.

2) The argument is that speculators just roll their contracts forward and never take delivery. True, but then the (alleged, in the example above) $40 premium that those speculators created by buying all those contracts would evaporate by the end of expiry day as they would have to sell and there are no willing buyers to take crude at $126 when it's true value is $86. Since this doesn't happen, that means there are true buyers and sellers (i.e. supply/demand) that transact at $126, or whatever.

3) The impact that the "new" speculators do have on the market is by skewing the forward contracts. In a market like we have now, where strong demand and limited supply is driving up the spot price, the normal relationship might be (again the numbers are just for example) July crude $132, Dec 2106 crude $115. Instead, Dec 2116 crude is priced at $139. No arguing that that is purely the impact of these index speculators that Mr. Masters talks about. But it has no impact on the spot price at the close on expiry day. If it weren't for that futures/physical connection, these markets would have been manipulated decades ago.

4) If you don't understand how futures markets work, then either go find out so you can understand the facts, or ignore it and keep pointing to conspiracies and speculators when you curse at the $4+ it costs you at the pump.

Is Oil Actually Worth $100 a Barrel?

Two comments:

1) when you talk of "agenda" or conspiracies, nobody will take you seriously

2) I take all those inventory stats with a huge grain of salt. What I would really like to compare is US, or even global oil inventories as measured in days of demand. Look at that today and over the past weeks, months, years, decades and excluding the SPR. That will give a decent context of where inventories are or if they even matter. Whether we have 6 weeks of demand on hand versus 8 weeks would really be irrelevant. If the numbers show inventories are at 2 weeks or 20 weeks would be significant. I haven't been able to find data like that.

My .02

Is OPEC the New Fed?

Get serious. Assuming for a minute that your ridiculous notion of de-facto central banker to the world is one that they actually want to pursue (which will never happen), they actually have to have the ability to increase or decrease production according to conditions, just as the Fed can increase or decrease the money supply at will. They've been crying about oil prices being too high since it broke $40 and haven't been able to do a damn thing about it. So that ends your theory right there. Oil at $160 is just shooting themselves in the foot as all of the world's resources will be hell bent on developing alternative energy sources. And besides, no single country has the will or the fortitude to reduce production any more than an addict would refuse drugs if you thrust more and more upon them. The only reduction in production will come about by accident due to natural depletion and forces of nature.

But really, I don't even know why I'm even wasting my time replying. Good luck to you. If this is the sort of thing that you think about, then you'll need all the luck you can get.

Is OPEC the New Fed?

What a ridiculous notion. OPEC is irrelevant today. They couldn't put out a single extra drop of oil if their life depended on it. Anyone who thinks they (or the rest of the world for that matter) are running at any level other than flat out is deluding themselves. Spare capacity, my ass.

Patience, Crystallex Investors: The Venezuelan Government Will Eventually Come Through

If anyone really thinks KRY will be able to mine this property at any sort of capitalist terms is both nuts and delusional.

The Oil Scam Driving Crude Over $80

Wow - what's next? Black helicopters?

It's really very simple. Supply and demand. Demand is climbing, supply has been flat for three years. Everything else is just noise. Just take an objective look at the EIA data (unless of course you think they're also in cahoots with the NYMEX traders, the government, big oil and the Easter Bunny) and the trend is obvious.

But of course, if the facts get in the way of a preconceived notion, just find some numbers that can be shaped to your call it a conspiracy. Because heaven forbid you couldn't possibly just be WRONG.