Posted on 03/07/2011 11:04:39 AM PST by Signalman
Big traders are betting the ranch that oil prices will keep rising, testing the pain threshold of an economy that is not exactly setting records as is.
Large noncommercial speculators – firms that play the futures markets without taking delivery – added to their long position in West Texas Intermediate crude by 50,200 contracts last week, according to Commodity Futures Trading Commission data.
The surge of speculative money into the oil futures pits shows that big financial players are expecting the price of WTI crude to surge well above the recent $105 or so seen last week. If they are right, it will bring $4 gasoline a step closer.
That will not be good news for most consumers, though it could help some big energy traders score big paydays, thank goodness. You would hate to see the talent fail to get its due.
"It does not get any clearer which way Wall Street is trying to take oil," says Stephen Schork, who writes the Schork Report energy markets newsletter in Villanova, Pa.
Schork notes that speculators now own nearly six times as many barrels of oil – 268,622 futures contracts representing nearly 269 million barrels – as can be stored at the WTI trading hub in Cushing, Okla. And since the CFTC numbers released Friday only go through last Tuesday, they likely underestimate the degree of speculative fervor building in the energy markets.
Olivier Jakob, who covers energy markets for Petromatrix in Zug, Switzerland, estimates that traders added 40,000 to 50,000 crude contracts to their long positions in the second half of last week. That would take them up to seven times the Cushing capacity, a level he calls "extraordinary."
(Excerpt) Read more at finance.fortune.cnn.com ...
--whoever this ignoramus is, he needs an Econ 101 course---
Perfect. I’m selling Oil Stocks at the close today, and moving to Emerging Markets.
Buy Low, Sell High!
it would be nice to know how much of the futures were purchased with petrodollars to assist in the upward pressure on price.
It would also be interesting to see how many of these dollars find the path into the Obama war chest for 2012. Credit card companies should start hiring now to process all of those $50 web site contributions;)
Not that long ago (could be a decade or more) commodity and energy volatility was kept low because speculators couldn’t bet on commodities unless they could take delivery. There was a long time rule in the CFTC that they had to be a user or require a hedge in order to to buy a contract. Goldman Sachs was the first to receive a secret exemption to that restriction and the rest is history.
“Speculators” are NOT some evil boogeyman!
“They” are you and me, either directly or via mutual fund investments, buying scarce resources in anticipation of higher demand in the future.
Do these authors really pretend that “responsible investing” is limited to throwing money away in bankrupt bond issues?
Why should he take an econ 101 course?
It isn’t as tho having a PhD in economics makes for successful traders. LTCM had not one, but two Nobel-awarded economists PhD’s on their staff... and their silly theories helped drive LTCM into the ground at full military power.
The “Maestro” of economics, Greenspan, thought that the proliferation of silly mortgage products was good for the real estate market and the banking industry. Bernanke thought that sub-prime would be contained.
What economists know about actual markets could be dropped into a thimble, whereupon it would rattle around like a ball bearing in a railroad boxcar.
This will never happen because we have an Anti-American, Uber-Marxist in the White House... BUT (here is my “perfect storm”):
Tomorrow morning, announce that the US will move forward with full access and utilization of our domestic resources - from the Bakkan reserves, to full support for lignite use, the Gulf of Mexico is now open for business - exploration, drilling, and production, and ANWAR is now open.
Over night, the price of oil (and the criminal speculators’ portfolios) come crashing down.
Would be such poetic justice for those who continue to artificially inflate the price of oil.
Sorry, but the speculators have grown to such a volume that they can alter prices independent of demand.
During 2008, we were told oil was spiking because of massive demand growth in China. But if you bothered to do any independent research, the demand growth just wasn't there at a level to justify the spike. Meanwhile, it came out just how many contracts were held by speculators.
And then we saw the entire oil bubble pop in late 2008. The suckers had been lined up, lured by the rate of return climbing up the bubble, and then the likes of the investment banks rode the shorts all the way down.
Now the bubble is inflating again for all commodities. Central bank policies are partially to blame - both by devaluating the dollar (which oil is priced by) but also by creating vast pools of cheap money that chase returns - and pouring money into commodities over the last few year or so has been quite lucrative.
A few simple changes could fix this problem, such as higher margin requirements and tighter position limits on exchanges such as ICE, as well as an end to QE. But I don't see that happening anytime soon. Too much money to be made off the backs of consumers around the globe.
Legitimate speculators, like Airline buyers have a place and it makes sense and it helps their industry hedge against disruptions.
"they" in this case are buying a scarce resource "oil futures" in anticipation of selling it for a higher price later. To them, it could be oil, tulips or pork bellies. They are in it to make money by betting long and getting out on the upticks.
To all the jealous non investors should short whatthey could never own or trade...
I’m long UCO and I am very happy my investment is making me money...is that evil?
NOT in my court...think itis artifically too high...
THEN SHORT IT!
To all the jealous non investors should short whatthey could never own or trade...
I’m long UCO and I am very happy my investment is making me money...is that evil?
NOT in my court...think itis artifically too high...
THEN SHORT IT!
Since the CFMA in 2000, energy and financial futures products have been accorded special exemptions from some of the rules that have been in place in commodity markets since the 1920’s.
Subsequent to CFMA, we have now had two clear, unequivocal instances of energy price manipulation. The first was Enron and electrical power futures, and the second was natural gas futures and Amaranth.
Amaranth was found last year to have manipulated prices:
It is time to undo the idiocy that Phil Gramm put into place with CFMA. Just undo it and go back to how the commodities markets used to work. They worked well for 70+ years for producers, consumers and speculators.
Gee, increase demand and resrict supply. Why would betting on higher prices be wrong?
Did this writer take ECON 101 in school? Or read “Basic Economics”?
I’ll short it just the way I have the other “ultra” funds: when the volatility declines or reverses, these “ultra” funds slaughter the people who are long in them.
#2 Oil (heating oil) futures began trading on NYMEX in 1982, and West Texas Intermediate Crude in 1983. From the first day, ANY speculator willing to plunk down the margin requirement could buy (or sell) these products.
There was and still is a position limit on the number of contracts that any single speculator can hold or control. In the case of WTI Crude today, that number is 20,000. Only legitimate hedgers can exceed this number and they must be recognised by the exchange AND the CFTC as legitimate hedgers before exceeding the position limit.
The problem occurred in the Commodity Futures Modernization Act of 2000. A portion of this (frankly idiotic) bill redefined the term 'hedger' to include operators of what are usually called 'index funds'.
The specific problem with index funds is that they can be -- and are, frequently -- created out of thin air. Suppose the Harvard University Endowment (to name one infamous example) decide they wish to invest in commodities. Tough luck; this activity happens to be thoroughly prohibited by law.
But, Harvard then talks to (say) Goldman Sachs, and Goldman says, "No problem, gents. We'll just create a commodities index fund for you.", and so they do, and pretty soon (figure about 4-5 weeks) Harvard is in the commodities biz. From the long side only -- it is also illegal for trusts, endowments, and other parties bound by the Supreme Court's 1840 "Prudent Man doctrine" to take short positions in ANY market. This is ludicrous, of course, but nevertheless quite true.
Please note that endowments and trusts ARE allowed by law to deal in indicies. However, the intent of the Regress was quite clear: when the law allowing this was passed, the only indicies of any importance were the usual suspects, S&P500, DJIA, NASDAQ 100, Tokyo's Nikkei, FTSE and DAX -- all of them securities indicies of long standing. The Regress could not envision the notion of "commodity indicies" aside from the venerable CRB index (which still trades, but not much).
Now, back to our example. So far, the markets haven't been affected at all by Harvard's actions; this is a private transaction between two entities. But now, Goldman, having sold X number of index fund units to Harvard, must get rid of its own risk, specifically that it is pretty considerably short in whichever commodities make up the index. How does one get rid of short-side risk? Easy. They buy futures contracts in the commodities that comprise the index.
If there were only one such "index fund" created in this fashion, there would be no problem and no story. The hammer comes now: if Harvard plays, MANY other similar institutions will also. And pension funds. And charitable trusts. And so the markets see, over a couple of years' time, a huge influx in long-side capital...and prices rise apace. Why is this?
Because the futures markets -- almost every one of them, and certainly every physical futures mkt such as corn or crude -- are VERY small in absolute dollar terms. There is so much capital sloshing around the world that, the minute capital-rich institutions decide to play, even indirectly as in our Harvard-Goldman example here, there are simply not enough 'natural' short players (typically those who hedge their production of a good against price risk) to accommodate all the would-be long "index fund" players.
The point of all this, if it accidentally has escaped you so far, is that Goldman and the investment banks are now allowed to purchase UNLIMITED numbers of futures contracts in any market that they've incorporated into an "index fund". Thus, prices in the affected markets -- which is most of the physical futures mkts by now -- tend to rise fairly sharply and over extended periods of time.
This is entirely a contrivance of goobermint, and politicians' desire for hefty payoffs from investment banks. It could be halted in its tracks by repealing a couple of provisions of the CMA of 2000...but don't hold your breath.
Hope this little explanation is of some use to you, and FReegards!
whatthey? Is that a new investment?
Seriously - the planet (and the US) has more than enough energy reserves for hundreds of years, even with no new types of energy development (bio fuels, wind, etc.). The issue is liberals/Marxists who are gunning all-out for domination at all costs.
The problem with oil futures speculation - it is contributing to, and actually giving claws to the marxists. The speculators are only too happy to see this nation destroyed if it bolsters their pocketbooks. But what happens when the demand crumbles because no-one can afford it any more - and the businesses in this country are gone? Then what happens? Oh - doesn’t matter, because by then, the speculators will have already pulled their profits out and will be happily dancing on the grave of the USA...
“Sorry, but the speculators have grown to such a volume that they can alter prices independent of demand.”
Add “or supply” and “for a very short time” to your sentence. Also, the big boys hedge their bets, lowering price volatility. Speculators are a positive for the rest of us, including me, a small time speculator.
What do you mean, 'us' - those stuck paying $4+/gal for gasoline? Those in other countries who can't afford to eat?
There are solid reasons for curbing speculation - namely to prevent the chaos uncontrolled speculation causes.
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