Posted on 07/04/2008 5:53:48 AM PDT by kellynla
NEW YORK (Fortune) -- Atlanta hedge fund manager Michael Masters has been a star witness in two recent Congressional hearings on how speculators are supposedly driving up oil prices. Masters and I don't see eye-to-eye on this issue, so I was surprised to get a call from him after my "Don't Blame The Oil Speculators" column went up on Fortune.com last week.
Masters contends that without speculators, the price of oil would be $65 or $70 a barrel. He points out that the amount invested in commodities index products has risen from $13 billion to $260 billion in five years, a fact he thinks is key to understanding oil prices.
"When a trader sends a buy order to the exchange floor or presses the 'buy' key on their trading terminal, if he or she is attempting to buy more contracts than are currently offered for sale at the market price, then the market price will rise," Masters told a House subcommittee in June.
My own view is that speculators can't materially impact prices if all they're doing is making bets on the direction of oil prices by trading futures and not taking delivery of actual oil - hoarding stuff that would otherwise go to consumers.
People don't fill up their tanks with futures contracts, and there's no evidence investors are putting more oil into storage as a bet on higher future prices.
In the end, Masters and I simply agreed to disagree. But there was one thing he said that really piqued my interest. "What do you think would happen," Masters asked, "if the market went into liquidation-only mode [i.e. if speculators started unloading their futures contracts], like we saw with the Hunt brothers in 1980?"
(Excerpt) Read more at money.cnn.com ...
The people don’t seem to realize that the direct cause of this oil crisis is the United States Congress.
Why do you think that the Congress is pointing the finger at everyone else? To distract from their own responsibility.
Congress is going to find its villain before November...right in the mirror!!!
This article is very simple and instructive. Conservatives need to understand and defend free markets and their role in a successfull economy.
Speculation doesn’t drive up the price of a commodity when they don’t accumulate inventory. The Hunt brothers were speculators that horded silver in a vain attempt to corner the market and drive up prices. It worked for a while..but they ran out of bucks and the price crashed.
This isn’t likely in oil. In fact, it looks like US inventory has splipped a little. Speculative hording in not taking place.
The Hunts had limited funds and could not support their attempted corner.
Those speculating in oil prices have as a group essentially unlimited funds.
It is true that our economy is not doing very well and the outflow of capital is staggering. The topic that is almost never mentioned when discussing oil exploration on land and in waters that we own is ALL the money that is now going to foreign regimes would be staying home and helping build a still greater United States of America.
Keeping ALL that money at home may be the most compelling reason to vote out the liberal dems and get on with the building of a better America.
“...Severin Borenstein, a Berkeley economist and the director of the University of California Energy Institute, contends that in order to push oil prices 30% above fair market value, speculators would have to hoard the equivalent of 2.5 million barrels a day....”
This is exactly what Iran is doing by parking 14 fully loaded super tankers (and more as they get their hands on them) in thePersian Gulf.
Shell to exon and bp you know what if we buy oil stocks we could.........
A good article, well worth reading.
“Severin Borenstein, a Berkeley economist and the director of the University of California Energy Institute, contends that in order to push oil prices 30% above fair market value, speculators would have to hoard the equivalent of 2.5 million barrels a day.
“At that rate,” Borenstein writes in a new paper, “in less than a year this secret market manipulator would have built an inventory larger than the entire U.S. Strategic Petroleum Reserve.”
That secret (not really) market manipulator does exist in the form of OPEC. By withholding production at the wellhead they ensure supply will not be enough to bring down the price. Evidence of their power to manipulate the market is the recent news that Brazil will soon be joining their ranks. The only real answer is to break the cartel by securing other supplies not controlled by them (domestic drilling) or opting out of the oil based economy altogether. The second option is best but we’re nowhere near ready to replace oil so for the next 20-50 years we’re going to have to produce our own oil.
Congress is only part of the problem. Force the speculators to take delivery of the oil and watch what happens.
No, the Hunts did not run out of money — and they had lots of Arab backing; rather, the COMEX (thanks to the efforts of William Simon) limited the transactions on silver, margin sales, and the amount of silver that could actually be delivered to speculators. The Silver Bulls not only wanted to corner the silver market, they wanted actual possession of the metal itself.
Anytime there is an imbalance in any market, no matter what it is, if there is more demand than supply prices rise. More supply than demand prices fall.Pretty simple.
Right now the world is short about a million and a half barrels of crude per day.
As long as that lasts prices will rise.
Brilliant post!
Let's hope that happens.
“..Iran, Opec’s second-largest oil producer, cut the number of tankers it has idling in the Arabain Gulf to 11, from 15 a week ago, ship-tracking data show. The 11 very large crude carriers, or VLCCs, have a storage capacity of about 22 million barrels. They are floating near the Kharg Island crude-oil loading facility or the nearby Soroush Terminal, according to AISLive data on Bloomberg.
Of the four tankers that set sail since June 23, two are bound for Egypt's Ain Sukhna terminal in the Red Sea, where they can empty their cargoes into a pipeline for refiners to collect. Another is going to China and one to Jebel Dhanna in the UAE.
Hojatollah Ghanimifard, executive director of international affairs at the National Iranian Oil Co, said June 2 that Iran, which had to use tankers for storage while its refinery customers carried out annual repair works, would start using the carriers for deliveries again by mid-summer.
Following is a table of Iranian-owned VLCCs stationed near Kharg Island. It normally takes 24 to 48 hours to load a cargo and set sail.
Meanwhile, Iran, the world's No 2 holder of natural-gas reserves, faces delays in rolling out projects as global lenders cut commercial ties with the country and bureaucracy crimps progress on the fuel's export, a report said.
Shipments of liquefied natural gas from Iran may be postponed by as much as five years to 2014-15 as Royal Dutch Shell Plc and Total SA defer sanctioning projects in South Pars, the largest single natural-gas deposit in the world, FACTS Inc said in a report yesterday.
Output from five blocks in the field is being delayed, the US consultant said.
Investment in new gas projects is needed to expedite export plans, meet domestic demand for the cleaner-burning fuel, and keep power and chemical plants running...”
I smell something! I still think that Iran was attempting to corner the world wide tanker market and thus control the price of oil. It looks economic squeeze on Iran is starting to hurt and they didn't have the money to buy up enough ships. After all, the only income they have, except for some pistachio nuts is from oil exports.
I’m not an economist and don’t play one on TV.
But it seems to me the author’s argument is likely to be accurate in the long run but not in the short. Speculation can indeed cause prices to rise in the short term, regardless of whether delivery is taken or not.
In the tulip craze, the Florida land boom of the 20s, the recent real estate crash in many parts of the country, and in every stock market bubble since they were invented, physical property for the most part has not been stockpiled. People bid up the price for pieces of paper that in theory represent value, on the assumption that a greater fool will buy them tomorrow for an even higher price. How does this differ from speculating in oil futures and derivatives?
I would also suspect that the length of time the speculative price can levitate above the “real” supply vs. demand price is related to the amount of money invested in the speculations.
If someone can explain (in simple language) why this theory is wrong, I will humbly accept correction.
The Hunt’s had basically unlimited funds in a very small, cheap market. Nobody has the $Trillions needed to move the oil market, its far too big. This is a Supply driven market that has been ignored for 30 years.
If you like $5/gal, Thank Congress in Nov.
Pray for W and Our Troops
The government is not your friend. What say Democrats to the mess they created. Bush is lame duck and Congress belongs to the democrats so who’s mess is this?
Next week I will "have" to spend $500 on gas for my van as I do business in the Southeast.
My buddy who bought 4 spec homes in Key West and is now stuck with them really didn't "have" to buy them. The demand for them was much "softer" than it is for oil. Just a guess.
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