exactly... there should be a law we have to use ONLY domestic oil till it runs out and that will be the time table for getting new energy sources on line.
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 ...
There will be a problem this winter with heating houses. A lot of houses won’t be heated, no two ways about it. Watch out for your neighbors, especially shut-ins and elderly.
True.
In fact, by not drilling we are in effect 'hoarding'.
Here is a congresscritter pointing his finger at evil big oil.
Would love to hear what those-more-knowledgeable-than-me have to say about his claims...
http://www.house.gov/list/press/ny22_hinchey/morenews/062608UseItOrLoseItFloorVote.html
You can't grow long positions without growing short positions equally . It's a zero sum game.
You can grow what is termed "open interest" however. i.e. total contracts outstanding.
exactly... there should be a law we have to use ONLY domestic oil till it runs out and that will be the time table for getting new energy sources on line.
Exactly. He can sell his 1,000,000 barrels of expected August 1st production on August 1st or he can sell 1000 July futures contract on Monday and deliver his 1,000,000 barrels on August 1st.
For the future delivery he merely needs to leave the oil in the ground until he needs to deliver it.
For the spot delivery he merely needs to leave the oil in the ground until he needs to deliver it.
So long as long side positions continue to grow, that is oil that stays off the market.
No, the oil is not staying off the market.
You're presupposing that we do in-fact extract all that is discovered and proven. And that we do in-fact conduct robust exploration.
I fear however, that we prefer not to extract or explore robustly. Those days are past.
We've probably reached the "peak" for abundant easy (i.e. cheap) oil. However there is much oil both cheap and expensive that can still be extracted.
A good analogy is the Californis Gold Rush in the 19th century. After they scoured the creek beds for all the easy gold with their pans and sluice boxes what was left had to be extracted by expensive hard rock mining.
The primary obstacles are political.
Yes, and the short position is just as likely a supplier who is quite happy to deliver you the barrel at the contracted price, or to sell you a new contract when the old one expires.
Exactly! Plus, silver is easily stored — oil is hard to store (unless you count just leaving it in the ground). If you can’t hoard it, you can’t drive up the price. The U.S. Congress is hoarding far more oil than any speculators (by keeping it locked up in the ground).
But if the buyer is a long side only speculator who is happy to accumulate a growing position over time and roll over his expiring contract, and the seller is a producer, the date when the producer actually needs to pump the oil out of the ground and deliver it can be put off until the current situation reverses itself, if ever, a day that may not need to come since demand is growing.
The game only works when you have low interest rates, and inelastic supply and demand.
The long side only speculators did not make the present market circumstances. Growing demand and short sighted congresses did that. But that does not mean that they cannot make money off of exploiting the market conditions.
Now OPEC can hoard and limit if they so choose. But the international political/economical effects would be disastrous if they seriously undertook such a mission.
Or the majority of the speculators may be on the short side along side the producers. And the consumers on the long side along with a few savvy speculators.
The seller cannot put off the delivery. If he sells a July contract, he has to deliver between August 1st and August 31st.
Contracts don't expire worthless, like options can. The seller has to deliver after the contract stops trading.
But the seller can buy back the contract and sell a new one. Since the long side only index speculator doesn't want delivery they are both happy.
But the issue that is currently being debated is what to do about long side only index speculators, who are now the dominant speculators in commodities. By definition and in practice they don't alternate between long and short positions. They have been taking ever larger long side positions. You can read about the issue with charts and graphs showing the nature of the issue here: Testimony of Michael W. Masters Managing Member / Portfolio Manager Masters Capital Management, LLC before the Committee on Homeland Security and Governmental Affairs United States Senate May 20,2008
Why would a guy with an oil well want to buy back a contract? Make up your mind, you said "likely a supplier who is quite happy to deliver you the barrel at the contracted price".
If he's happy to deliver, he'll be selling, not buying, contracts.
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