Posted on 09/09/2009 1:44:20 PM PDT by USFRIENDINVICTORIA
BASHING “speculators” is a popular pastime for American politicians trying to explain high and volatile oil prices. But whether speculation has really been responsible for spiking prices is a controversial issue. In 2008 the Commodity Futures Trading Commission (CFTC) issued a report dismissing the role of speculators in last year’s startling run-up in prices. But banks, hedge funds and others who bet on oil (without a use for the stuff itself) still face limits on the positions they can take, if Gary Gensler, the new CFTC head, can show that their influence in markets does harm.
On September 4th the CFTC added more evidence to the debate by releasing what it said were more transparent data on market positions. Before this month, the CFTC simply classified traders as “commercial” or “non-commercial” in its weekly report on the overall long and short positions in the market. Now it has started to disaggregate them further, into producers and buyers, swap dealers and “managed money”. The third category includes hedge funds.
What do the new data show? On the New York Mercantile Exchange (NYMEX) swap dealers and managed money were both long on oil in the week to September 1st—the former by more than a 2-to-1 ratio. Producers and users, by contrast, are net short on oil by similar margins. And the swap dealers and managed-money players are bigger in the market, both in terms of the contracts they hold and their own sheer numbers.
But analysts at Barclays Capital note that long swaps accounted for just 6.4% of total futures and options contracts, not enough to drive prices up on their own. Physical traders held more of the outstanding long positions (10.3%) and held even more short positions. This one set of numbers, in other words, does little to prove that speculators are overriding market fundamentals to drive prices. New quarterly data also released by the CFTC show that money flows to exchange-traded funds (ETFs) in commodities failed to correlate strongly with last year’s price surge.
There are more disclosures to come. The CFTC says it will soon release the newly disaggregated data going back three years. If those numbers, like the quarterly ETF data, are equally unconvincing on the role of speculation, the case for limiting positions will be weakened. And a strong counter-argument remains: that speculators provide crucial liquidity. Even if they also have some effect on prices, taking them out of the game could well do more harm than good. It is tempting to look for scapegoats when high prices hurt consumers. But the real culprits for oil-price volatility may be much more familiar: supply, demand and global instability.
Nope. It’s the speculators. Too steep a slope of increase for supply and demand for a product that is still available in huge quantities and for market that had no major supply disruptions.
parsy, who will send you a link.
During this slow economy demand for gasoline and other oil products is down. If the economy every recovers and demand goes up since there has been no increase in the capacity to extract and produce the product prices will rise dramatically.
Here’s the link.
http://www.321energy.com/editorials/forest/forest072209.html
parsy, who thinks the evil speculators are to blame
The speculation was in the future's market — where punters are betting on the *future* price of the commodity. Perceptions of global instability, or other factors that could affect the current spot price, play a big role in any future's market. (So too does market dynamics, herd mentality, etc.)
Anyhow, this analysis of *actual data* should help resolve some issues.
From your link — one of the reasons why the oil (and gas) markets are price inelastic, in the short run. Supply doesn't increase in small increments, to match demand.
There’s a lot I don’t understand about the mechanics of the spec market, but from what I have read, there are limits in the ag futures market to keep price manipulation from occurring. And there is transparency.
From what I have read, there are no such limits in energy markets. Apparently, 27 bbls of oil “trade” for each 1 bbl that gets delivered to US. That seems to be way too much activity, and when large numbers of players have no intention of taking delivery, I think it leads to price hikes.
Have you read any of the speeches or materials at the CFTC or whatever its called?
parsy, who is trying to get a better of understanding of how it works
I am loathe to admit it, but the Dummycrats did seem to bust a bubble earlier this year when they threatened to slap harsh new regs on speculators
As for 27 bbl of trades in the futures market, for every bbl delivered — that's what creates liquidity. Without sufficient liquidity, the markets would jump in fits and starts. An illiquid market would not be good for producers nor for buyers.
I don’t think supply has to increase. It is already there. It is not like “corn” or “soybeans” which must be grown each year. So even with the “found, proven” reserves, there are easily 40-50 years at least of stock already available. From what I understand, there has pretty much always been that amount there, stretching back 60 years or so. That should be sufficient lead time to bring on new production.
Maybe there is even more:
http://www.runet.edu/~wkovarik/oil/
parsy, who has been trying to do some learning
“Supply”, in the case of oil, refers to what’s available to users. There are lots of reserves — but, it takes time to develop them, and ship the product to market. Meanwhile, people still need to drive, heat their homes, etc. — so they bid the price up, and up.
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