Bishop,
wrong again. You didn’t get the point. What the article is saying is that the futures price determines the price in the physical, more private market. Because the futures market is small, it can be manipulated. The oil producers don’t care about making the money in the small (futures) market. They might as well lose money in futures market. They make their real money in the physical market. It’s like this...the futures market is a 9 billion dollar market. The physical market is more than 100 times that size. If you are an oil producer....why not screw around with the small, 9 billion dollar market in an attempt to influence prices in the BIGGER market? A little money wasted in the small market (not selling off ones positions - perhaps taking delivery of the oil thereby keeping the contracts off the market) means high prices in the other. Its leverage with a kick ass mechanical advantage ratio.
And those sellers of oil you mention?? Who might they be? Other oil producers?? Why on earth would they want to short the oil?? They are also making money by the new high prices. it is not necessarily in their interest to short the oil.
I understand the Ford stock analogy. That makes perfect sense. But the point here is that the oil producers don’t care about making their cash in the futures market - they care about making their money in a DIFFERENT market - the physical oil market. They screw with the small market to set up better prices in the bigger market. The small market is cheap to screw around with.
The Ford stock traders ARE concerned with making money IN the Ford stock trading market. The Oil contract traders ARE NOT concerned with making money in the Oil Contract trading market.
It does stink that this has become politicized (not accusing you, but previous posts).
Methinks you posted to the wrong Freeper.
Chrisj6,
Maybe we are talking past one another. I shall still argue that I got your point. I just don’t agree with your conclusions. I’ll try to put the oil market in perspective as best I can. Speculation in oil futures adds almost nothing to the price of oil because futures trading is a zero sum game. It is like a poker game in which money is won only by others loosing. At the end of the game the same amount of money is on the table; it has merely changed hands.
Perhaps most importantly, the total amount of speculative trading (that is, hedge funds, etc) is only a tiny fraction of total contracts bought and sold by producers and refiners. Therefore, their impact could not possibly be large when you realize that annual world oil sales total about $3.4 trillion dollars. Your arguments about how small the futures markets are, undermines the very thesis that they have a powerful influence over prices.
The actual sale of oil takes place in a global auction in six major centers around the world, which are logically the major refining and distribution centers, in which thousands of trades take place simultaneously. These are completely free markets and are not “rigged” simply because it is not possible to rig them. The market is simply too large and diversified for that to happen. Keep in mind that in these auctions there are actual sellers who have oil to sell, mostly government-owned oil companies. Most of the buyers are independent oil companies, primarily refiners. A unified manipulation is possible only in the wildest of conspiracy theory.
The actual sale of oil does not take place by means of futures contracts, but rather spot market contract sales. These contract sales can be for immediate delivery, or delivery at a future time, in which case they are called forward contracts. What distinguishes forward from futures is that forward are binding commitments to make and take delivery. With futures actual delivery almost never takes place. Contract sales are for “cargoes,” that is ship or barge loads of oil or in some cases amounts delivered via pipeline.
So, what is the futures market ultimately all about? Its about hedging one’s bets on future price. Futures serve as a price signal about where the price is likely headed, and most importantly for actual oil traders, futures trading serves the function of leveling out both gains and losses; in other words futures trading actually stabilizes prices for traders. To blame those who speculate with futures is plain wrong.
And finally, I’d like to clarify BobbyT’s point about Ford. What he meant was that Ford shareholders obviously want to make money in the stock market, but the Ford Corporation itself cannot affect it’s own quarterly profits by simply tikering with stocks. The stock values are based on the P/E ratio, book value, etc. not visa-versa.
Anyway, I’m worn out. Have a nice day.