Posted on 07/09/2008 8:35:21 PM PDT by curiosity
ALTHOUGH the price of oil continues to hit new records, it has in one respect been a quiet week on the oil markets. America’s lawmakers are celebrating Independence Day by taking a few days off. That has led to a brief interruption in the torrent of proposals aimed at curbing speculation.
Ten different bills on the subject are in the works in Congress. Before the House of Representatives shut up shop, it approved one by a vote of 402-19. America’s politicians are not the only ones to have fingered speculators for the feverish rise in the price of oil and other raw materials. Italy’s finance minister believes that there is a “magnum of speculative champagne” included in the price of each barrel. Austria wants the European Union to impose a tax on speculation. Saudi Arabia and other big oil producers routinely blame the price on frothy markets, rather than idle wells.
The accusers point to the link between the volume of transactions on the futures markets and the price of oil. Since 2004 the near tripling of trading in oil on the New York Mercantile Exchange (NYMEX), the world’s biggest market for the stuff, has neatly coincided with a tripling in the price.
What is more, investing in oil has become something of a fad. Commodities traders and hedge funds with long experience have been joined by less expert sorts, including pension funds and individuals. All this, the theory runs, is contributing to a bubble in commodities. The rush of punters betting on higher prices is begetting a self-fulfilling prophecy: it is the tide of new investment, rather than inadequate supply or irrepressible demand, that is pushing the price of oil ever higher.
Follow the oil, not the futures
This reasoning holds obvious appeal for those looking for a scapegoat. But there is little evidence to support it. For one thing, the surge in investment in oil futures is not that large relative to the global trade in oil. Barclays Capital, an investment bank, calculates that “index funds”, which have especially exercised the politicians because they always bet on rising prices, account for only 12% of the outstanding contracts on NYMEX and have a value equivalent to just 2% of the world’s yearly oil consumption.
More importantly, neither index funds nor other speculators ever buy any physical oil. Instead, they buy futures and options which they settle with a cash payment when they fall due. In essence, these are bets on which way the oil price will move. Since the real currency of such contracts is cash, rather than barrels of crude, there is no limit to the number of bets that can be made. And since no oil is ever held back from the market, these bets do not affect the price of oil any more than bets on a football match affect the result.
The market for nickel provides a good illustration of this. Speculative investment in the metal has been growing steadily over the past year, yet its price has fallen by half. By the same token, the prices of several commodities that are not traded on any exchanges, such as iron ore and rice, have been rising almost as fast as that of oil.
Speculators do play an important role in setting the price of oil and other raw materials. But they do so based on their expectations of future trends in supply and demand, not on whims. If they had somehow managed to push prices to unjustified heights, then demand would contract, leaving unsold pools of oil.
The futures market does sometimes signal that prices are likely to rise, which might prompt speculators to hoard oil in anticipation. But it is not signalling that at the moment, and there is no sign of hoarding. In the absence of rising stocks, it is hard to argue that the oil markets have lost their grip on reality.
Some claim that oil producers are in effect hoarding oil below the ground. But there is also little sign of that, either among companies or countries: all big exporters bar Saudi Arabia are pumping as fast as they can.
It takes two to contango
Despite their dismal reputation, the oil speculators provide a vital service. They help airlines and other big oil consumers to hedge against rising prices, and so to reduce risk—a massive boon amid the economic turmoil. By the same token, they provide oil producers with more predictable future revenues, and so allow them to expand more confidently and borrow more cheaply. That, in turn, should help to lower the price of oil in the long run. Any attempt to curtail speculation, by contrast, is likely to make life harder for firms and oil more expensive.
I'll bite
"The New York Mercantile Exchange, Inc., a subsidiary of NYMEX Holdings, Inc. , announced today that its crude oil futures contract reached record open interest levels for the third consecutive day."
What am I learning, or not as a matter of fact.
yitbos
Is this true?
Total and complete BS.
You’re right, even as it was cratering on the way down, they continued to push real estate as “something they ain’t making any more of”.
Before that, they claimed that companies weren’t influencing the electric market in California.
BAH! I heard all this about the housing bubble. “There is no bubble,” they said. “Supply and demand,” they said. “There aren’t enough flippers to control the market,” they said. “Home prices only go up,” they said. Bullcrap. It was all bullcrap, and now you are ready to believe the same thing about oil.
Please explain to me WHY oil is up 48% year-to-date alone? Increasing demand? Bullcrap. Oil futures are forward looking and we haven’t even begun to see the world demand destruction caused by these leap-frogging oil prices.
I’ll never remember to say “I told you so”. Take note and remind me when the oil bubble bursts and it becomes obvious to everybody and his brother.
Never mind. The people who told me the NASDAQ was correctly priced because it was a “new economy” and “profits don’t matter” never bothered to come back and eat crow. The people who said there was no housing bubble never bothered to come back and eat crow. Now why would the same type of gullible fools who believe there is no oil bubble be any more likely to eat crow when they are proven as wrong as the previous fools.
No, never mind. You needn’t bother. But I am still waiting for that explanation how issues of supply and demand alone have caused a 48% increase in oil cost year-to-date. I’ll give 20% of that to a collapsing dollar. I also know that the FED must eventually Volker the funds rate and that will strengthen the dollar, IMMEDIATELY lowering the dollar price of oil by 20%.
Now what is the other 28% year-to-date cost rise due to?
The Bum Rap on Biofuels
American Thinker | 5-13-08 | Herbert Meyer
Posted on 05/14/2008 3:59:06 AM PDT by Renfield
http://www.freerepublic.com/focus/f-news/2015711/posts
Campaign to vilify ethanol revealed
ethanol producer Magazine | May 16, 2008 | By Kris Bevill
Posted on 05/17/2008 9:22:13 AM PDT by Kevin J waldroup
http://www.freerepublic.com/focus/f-news/2017389/posts
Just because housing was a bubble doesn't mean oil is a bubble.
It was all bullcrap, and now you are ready to believe the same thing about oil.
Like you, I called the housing bubble. I moved to Seattle in 2006. Even though I could afford to buy, I chose to rent, and continue to rent, because I realized there was a bubble.
That's because there was data supporting the bubble hypothesis for housing: rents out of line with prices (much cheaper to rent, even without the tax deduction), flippers buying up virtually all new units coming online, etc.
There's zero data to back up the idea that there's an oil bubble.
Please explain to me WHY oil is up 48% year-to-date alone? Increasing demand?
That, and declining production in existing fields, and fewer than expected new finds in exploration.
Bullcrap. Oil futures are forward looking and we haven’t even begun to see the world demand destruction caused by these leap-frogging oil prices.
Both futures and spot prices are high. Futures prices are actually low compared to spot prices right now; there's a sizeable net convenience yield. Inventories are lower than usual for the summer. All the indicators point to a shift in fundamentals as the underlying cause.
If futures speculation were driving the current price, there would be a rise in inventories and futures prices and the net convenience yield would be negative. That's just not what the data show.
Never mind. The people who told me the NASDAQ was correctly priced because it was a “new economy” and “profits don’t matter” never bothered to come back and eat crow.
Unlike with the tech bubble, all the traditional fundamental indicators point to the conclusion current prices are rational: low inventories, high net convenience yield, few new fields coming on line, declining production in existing fields. There's nothing new here. Just good old fashioned analysis.
It's the bubble crowd who's waving their hands and claming everything has changed because of the supposedly evil speculators.
Now why would the same type of gullible fools who believe there is no oil bubble be any more likely to eat crow when they are proven as wrong as the previous fools.
We'll see who eats crow (hint: it's going to be you).
Okay. Then please tell me how exactly speculation in futures can lead to a spot price runup without causing a rise in physical inventory.
Also, please explain how a bubble is consistent with the fact that futures prices are actually low compared to spot prices, there being a sizeably positive net convenience yield.
Don't know. But even if it were true, I don't see how it's relevant.
The really unfortunate part is that she is the smarter of the two senators from Washington.
That's got to be one of the stupidest analogies I have ever heard.
A huge chunk of both generation capacity and the energy trading market were controlled by one company, which gave it sizeable market power.
None of the "evil" speculators supposedly driving up the oil price controls even 1% of the global oil market.
Just because one market can be easily manipulated does not mean another one can be as well.
That's right! There's absolutely no way airline CEO's could possibly attempt to blame someone else, like the evil speculators, for their failure to properly hedge their fuel price risk! No, not a chance. These men need to be taken at their word! /sarcasm
I agree with you, dear colleague, that we need to open up these resources, but we also have to be realistic about their impact on current prices. From the numbers I've seen, ANWR and the OCS aren't going to increase global supply by more than 3%. While that's nothing to sneeze at, and will help some, we shouldn't kid ourselves into think its some kind of panacea. Long-run oil demand elasticity is estimated to be around 0.4. So even if we increase supply by a generous 5%, that's only going to decrease the price by about 5%/0.4 = 12.5%. Nothing to sneeze at, but not all that impressive, either.
As to Rocky Mountain shale, while developing at least some of it may be just barely positive NPV right now, with oil price volatility being what it is, the option value of waiting for prices to move up is probably too high for any company to seriously undertake any large scale development right now. Hence even if we do start leasing it (as I believe we should), it will be quite some time before anyone chooses to start producing from it. Hence shale oil is likely only to help in a very long run.
What sayest thou?
btrl
Just because some markets were manipulated in the past (and, FYI, I never denied the eletricity markets were being manipulated), doesn't mean this market is being manipulated now.
I googled it, and all I could come up with was "better than real life" and "British Telecom Research Laboratories."
Somehow I doubt you meant either. Would you care to explain it to me?
Sorry for the confusion. It’s an old FR acronym for ‘bump to read later.’
Cheers!
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