Posted on 08/03/2009 12:07:59 PM PDT by parsifal
Do you have to be a power-plant owner to really understand the natural gas market? Should makers of aluminum siding being the only ones allowed to buy aluminum? These are the kinds of questions being raised in many commodities markets today. The issue is speculators versus users of fuels, metals and agricultural products. Both of these groups are big investors in commodities. Users buy these goods to consume them. Speculators buy without any intention of ever using them. A speculator looks purely to make a profit by buying and selling the rights to a pound of copper or a barrel of oil.
But there is a growing movement to reduce speculation in commodities. The anti-speculation lobby believes that allowing "non-professional" investors to drive the price of commodities with their buying and selling distorts these markets, sending incorrect price signals to everyone involved.
(Excerpt) Read more at 321energy.com ...
parsy.
I’ve been meaning to put this up for a few days. This is about the potential ill effects of speculation.
parsy.
Interesting thought: we should only allow “professional” oil traders to trade oil. What could possibly go wrong?
IMO, you reduce the speculation in commodities, and you’ll see shortages of those commodities in short order.
I can think of a few things. Did you read the whole article yet
parsy.
Maybe in soybeans. I don’t see it in oil.
parsy.
Speculators provide liquidity to commodities markets. Without this liquidity, price discovery would be severely hindered & the gaps between bids and asks would become very large. That would hurt both producers and consumers of the commodities.
Sometime speculators make money, sometimes speculators lose money. Something must be done, immediately!!!
But, with all the “discovery” going on, gas still went to $4+, and then back to $2, and all over the place.I don’t think discovery is what is going on. I think it is gambling.
parsy.
Which leads to this author's premise: price fluctuations are bad. No, they are not. They are market signals. Try throwing a blanket on the natural gas options market, and then see if that LNG terminal ever gets built.
Read the article please, Toddster! I went looking for this last week when I was unsuccessful trying to help you “discover” that the price of oil was being manipulated.
I got to thinking about it, and thought maybe you needed the mechanism of how it could happen. So I searched around and thought this could help you.
parsy, the considerate
“They are market signals.”
Yeah, but when gas hits $4 a gallon for no good reason, then I think we need to signal back to the guys at the market. Its called regulation. And maybe jail.
parsy.
Yea, that’s the common party line. Trouble is, the facts don’t back up the assertion.
If the heavy specs (like Goldman) really wanted open price discovery and liquidity in markets, they would not have set up secondary markets (like ICE) to take liquidity and price discovery out of the established markets, would they? ICE wasn’t set up to improve liquidity and price discovery - it was set up to allow energy speculators to hide from the prior established markets, like the NY Merc.
If speculators want to speculate, that’s fine. If they want to take on large positions, that’s fine too — as long as they have the margin to back them up. Trouble is, the CFMA of 2000 allowed financial and energy futures to be put into markets that do not play by the same rules as hard commodities and ag commodities any more.
If the speculators want to walk their talk, then let’s put all the commodities trades on open, fully reporting exchanges, with enforced margin requirements and position reporting. No one should be able to make trades in secret, nor should they be able to escape margin requirements. Everyone should be able to see all trades, no matter how large or small, and everyone should have to abide by the same rules.
Many years ago, the writings of Milton Friedman convinced me that speculation was stabilizing, not destabilizing. I am very wary of anyone, especially someone from the industry involved, who advocates restrictions on who can engage in speculative activity.
Hmmmmm......if producers of these commodities had sold their future production on the commodity exchanges, they'd lock in future revenue and.......wait for it.......they'd have tempered the sky rocketing prices.
But who would be willing to buy huge amounts of future output at sky high prices? I mean besides speculators?
I was unsuccessful trying to help you “discover” that the price of oil was being manipulated.
So if I go to the NY Merc and buy 10 contracts (10,000 bbls) of oil for delivery in October, you think I'm manipulating the price of oil?
Don't allow leveraging. Tax short term gains at a much higher rate, etc.
How can the invisible hand work, when it is going up against the steroid-enhanced hand of gambling junkies?
And don't try and tell me that because people are putting their money on the line that they are making intelligent bets about the future. Or that somehow the average bet will happen to match the price on a pure supply/demand basis.
And don't try and tell me that if private companies make bad bets it is all the fault of government interference in the market. Some of the speculation that was the most out of line with reality was on instruments that were specifically unregulated by government.
We have had plenty of evidence over the past couple years that the most intelligent people are capable of making bets that are massively stupid, and that are completely out-of-line with supply and demand, e.g. housing market, CDSs, gas/oil, gold, biofuels, etc.
Like you said, for producers and consumers. And maybe a few side bets from time to time. But it is now more of the side bets than it is the hedging. The situation is ripe for price manipulation and gouging and all sorts of horrible things.
parsy.
Is your problem with speculators, or with the market? How do you feel when speculators drive the price of oil down?
No good reason? Someone was willing to pay $4 a gallon. Someone was willing to sell for $4 a gallon. Sounds like a good reason to me.
And maybe jail.
Guilty! Guilty of paying too much for gasoline. LOL!
How do you know that there was no good reason for last year's run-up in oil prices? If you thought that market fundamentals dictated a much lower price, I hope you backed up your thoughts with money and made a fortune in the futures market by shorting oil. If you didn't, why not? Don't you have confidence in your crystal ball?
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