Futures and Oil prices

[TPS]

unregulated markets

 

Interesting piece on how unregulated futures markets are contributing to rising oil prices. Regulated markets have a cap on the amount of contracts any single buyer can purchase to prevent speculators from doing exactly what they're doing now in the unregulated markets. As Keynes said,

 

"Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes a bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill done."

[Sketch Soland]

But I thought it's all the Oil Companies fault?

 

That's why Congress is "grilling" them on Capitol Hill, right?

 

[TPS]

Which is why they can also sit back and say, "Gee, it's supply and demand...don't blame us..."

[Sketch Soland]

Thanks for posting this, btw. More people need to be aware of the factors involved in the pricing. God knows the !@#$ing politicians will never provide them with such information

[GG]

The above was brought to you by: James Collura, vice president for government affairs at The New England Fuel Institute.

 

NEFI's representation of the Oilheat industry in Washington is complemented by our new internal Legislative and Regulatory Action Center. Working in concert with our Washington D.C. regulatory consultant and legislative council, this in-house operation significantly enhances industry representation in the nation's capital. The Center boosts NEFI's ability to issue prompt communications to members concerning a variety of pertinent and time-sensitive issues.

 

The Center takes advantage of technology that allows nearly instantaneous communication with individual members of Congress, or with groups such as committees or leadership bodies. The Center also facilitates NEFI's ongoing cooperative efforts with New England member states and other state associations around the country, and national associations including the National Oilheat Research Alliance (NORA), the National Association for Oilheat Research & Education (NAORE), and the Petroleum Marketers Association of America (PMAA).

 

I'm guessing he's impartial in his views.

 

There's no argument that futures traders impact the price of oil. What is in question is how much. By most reasonable accounts it's in the 10%-20% range. The real reasons are the obvious ones - supply/demand, value of the dollar and the risk premium. If Collura's case was true, energy prices would have spiked much sooner than last year. (And Amaranth wouldn't have failed because it was betting long)

[meazza]

unregulated markets

 

Interesting piece on how unregulated futures markets are contributing to rising oil prices. Regulated markets have a cap on the amount of contracts any single buyer can purchase to prevent speculators from doing exactly what they're doing now in the unregulated markets. As Keynes said,

 

"Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes a bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill done."

 

http://www.economist.com/opinion/displaySt...atures_box_main

[ExiledInIllinois]

If it is a demand issue... Won't there be shortages at the pump soon? Gas lines?

[TPS]

The above was brought to you by: James Collura, vice president for government affairs at The New England Fuel Institute.

 

 

 

I'm guessing he's impartial in his views.

 

There's no argument that futures traders impact the price of oil. What is in question is how much. By most reasonable accounts it's in the 10%-20% range. The real reasons are the obvious ones - supply/demand, value of the dollar and the risk premium. If Collura's case was true, energy prices would have spiked much sooner than last year. (And Amaranth wouldn't have failed because it was betting long)

I think the true test of his argument is if we see the speculative bubble burst in the next 6 months or so. Speculators are betting on the continued rise, and as long as they can find others to make that bet, the game continues. No different than speculation on any other asset.

[ExiledInIllinois]

I think the true test of his argument is if we see the speculative bubble burst in the next 6 months or so. Speculators are betting on the continued rise, and as long as they can find others to make that bet, the game continues. No different than speculation on any other asset.

 

If the "game" continues... How far could it rise?

[TPS]

http://www.economist.com/opinion/displaySt...atures_box_main

I assume this is supposed to counter the point made in the article I posted?

If so, I'm a bit shocked that an article in The Economist could have such a glaring error. Futures speculators do not take delivery, nor do they have to "sell" to someone who will. They "close" their position by taking an opposite position in the same contract. The majority of futures contracts are not "delivered."

[OCinBuffalo]

I assume this is supposed to counter the point made in the article I posted?

If so, I'm a bit shocked that an article in The Economist could have such a glaring error. Futures speculators do not take delivery, nor do they have to "sell" to someone who will. They "close" their position by taking an opposite position in the same contract. The majority of futures contracts are not "delivered."

Looks like somebody actually knows the futures market. Careful, actually knowing what you are talking about hasn't been well received around here lately.

 

As far as where this all ends, it actually doesn't take that much to burst this bubble. Even a slightly persistent rumor could do the job and start some people taking short positions. If more than a few start doing that, everybody else will have to do something about their positions. At the very least everybody will be on the phone, and that by itself is enough to start a legion of people mitigating their risk.

 

It could be a simple rumor like: "Russia has produced more oil than they estimated" or, "South Pacific Demand not likely to be as high" that starts the trend, and the rest will be based on the fact that prices have been so high, for so long, that people assume that there has got to be a correction sooner or later. The whole point of futures trading is to know when things are going to happen ahead of time and not get caught holding the bag. Prices have been high for so long, everybody will start to "expect" a drop and that expectation can make the slightest info look larger than it is, which can start the ball rolling as well.

 

What I see is any of the following things come true in the next 3 months there will be a correction:

1. Positive movement on Israel/Palestine

2. Continued progress in Iraq, in fact any major political milestone passed

3. Any kind of reasonable energy policy coming from DC.

4. The weakening of the Environmental Lobby by common sense forces the Democrats to lift their moratorium on shale oil(they just voted to continue it 2 weeks ago so I doubt it, but this would be = a nuke going off).

5. Any kind of unifying UN resolution that goes after Iran.

6. As I said above, any kind of news regarding supply/demand

[GG]

I assume this is supposed to counter the point made in the article I posted?

 

It did and it did.

 

If so, I'm a bit shocked that an article in The Economist could have such a glaring error. Futures speculators do not take delivery, nor do they have to "sell" to someone who will. They "close" their position by taking an opposite position in the same contract. The majority of futures contracts are not "delivered."

 

Perhaps you should read the article again, because it got the mechanics right. The article is clear that "as the delivery date approaches, they sell their contract to someone who actually needs the oil right away, and then invest the proceeds in more futures." How in the world is that wrong. On the expiration date of the futures contract, it will be owned by someone who has to make or take the delivery.

 

It is not an option, but a contract for set delivery at a set price.

 

A little bit of knowledge can indeed be damgerous.

[TPS]

It did and it did.

 

 

 

Perhaps you should read the article again, because it got the mechanics right. The article is clear that "as the delivery date approaches, they sell their contract to someone who actually needs the oil right away, and then invest the proceeds in more futures." How in the world is that wrong. On the expiration date of the futures contract, it will be owned by someone who has to make or take the delivery.

 

It is not an option, but a contract for set delivery at a set price.

 

A little bit of knowledge can indeed be damgerous.

Here's a little primer for you:

http://www.investopedia.com/university/futures/futures2.asp

 

Specifically this part,

"Now that you see that a futures contract is really more like a financial position, you can also see that the two parties in the wheat futures contract discussed above could be two speculators rather than a farmer and a bread maker. In such a case, the short speculator would simply have lost $5,000 while the long speculator would have gained that amount. In other words, neither would have to go to the cash market to buy or sell the commodity after the contract expires.) "

[TPS]

Looks like somebody actually knows the futures market. Careful, actually knowing what you are talking about hasn't been well received around here lately.

 

As far as where this all ends, it actually doesn't take that much to burst this bubble. Even a slightly persistent rumor could do the job and start some people taking short positions. If more than a few start doing that, everybody else will have to do something about their positions. At the very least everybody will be on the phone, and that by itself is enough to start a legion of people mitigating their risk.

 

It could be a simple rumor like: "Russia has produced more oil than they estimated" or, "South Pacific Demand not likely to be as high" that starts the trend, and the rest will be based on the fact that prices have been so high, for so long, that people assume that there has got to be a correction sooner or later. The whole point of futures trading is to know when things are going to happen ahead of time and not get caught holding the bag. Prices have been high for so long, everybody will start to "expect" a drop and that expectation can make the slightest info look larger than it is, which can start the ball rolling as well.

 

What I see is any of the following things come true in the next 3 months there will be a correction:

1. Positive movement on Israel/Palestine

2. Continued progress in Iraq, in fact any major political milestone passed

3. Any kind of reasonable energy policy coming from DC.

4. The weakening of the Environmental Lobby by common sense forces the Democrats to lift their moratorium on shale oil(they just voted to continue it 2 weeks ago so I doubt it, but this would be = a nuke going off).

5. Any kind of unifying UN resolution that goes after Iran.

6. As I said above, any kind of news regarding supply/demand

One can't guess what the next "event" will be, but I would add that if government(s) do something to regulate the "dark markets," then we'll see a "correction" as well. $4/gal is also radically changing habits in this country, so an unexpected(?) decline in US demand could trigger as well.

 

Btw, be careful about suggesting I might know what I'm talking about, you could get blacklisted around here...

[GG]

Here's a little primer for you:

http://www.investopedia.com/university/futures/futures2.asp

 

Specifically this part,

"Now that you see that a futures contract is really more like a financial position, you can also see that the two parties in the wheat futures contract discussed above could be two speculators rather than a farmer and a bread maker. In such a case, the short speculator would simply have lost $5,000 while the long speculator would have gained that amount. In other words, neither would have to go to the cash market to buy or sell the commodity after the contract expires.) "

 

And that would only be the case if two speculators happened to be on both sides of the contract at expiration. And it doesn't explain why cash setllement markets were higher than the futures markets if the speculators were the primary cause.

[pBills]

Is it true that the current stock prices for the main oil companies basically equate to oil being around $70.00 per barrel?

 

I had also seen a graphic showing the top five ways of drilling for oil. The hardest demanded around $60.00 per barrel. Now I understand how a sniff of trouble in the world & supply and demand can raise those prices. However, can someone explain to me how and maybe why prices have gone up so much since 2001? Think about it... people including me, used to be pretty annoyed when gas was around $2.00 a gallon. Now, we're hoping that it stops at $4.00... most likely going up $5.00 per by the end of summer. Something is really wrong here and I just can't see India and China killing the market that much. Granted they play a part, but has their part really gone up that much in the past 4-5 years?

 

Personally, and I will admit I do not know that much about this (hence questions above)... I feel as though OPEC is just completely F'ing all of us because they know that ultimately technology (hybrids, etc.) will knock the demand for oil/gas down. Might as well make some serious a cash now right?

[TPS]

And that would only be the case if two speculators happened to be on both sides of the contract at expiration. And it doesn't explain why cash setllement markets were higher than the futures markets if the speculators were the primary cause.

Isn't that the entire point, that the relatively recent infusion of money from speculators (in unregulated markets, where there are no contract limits) has caused the price to rise by some 10-30% higher than they should be?

[GG]

Isn't that the entire point, that the relatively recent infusion of money from speculators (in unregulated markets, where there are no contract limits) has caused the price to rise by some 10-30% higher than they should be?

 

Even if you attribute the higher 30% range as the speculator effect, it wouldn't explain the doubling of oil prices and the predictions of $200 oil.

[VABills]

Is it true that the current stock prices for the main oil companies basically equate to oil being around $70.00 per barrel?

 

I had also seen a graphic showing the top five ways of drilling for oil. The hardest demanded around $60.00 per barrel. Now I understand how a sniff of trouble in the world & supply and demand can raise those prices. However, can someone explain to me how and maybe why prices have gone up so much since 2001? Think about it... people including me, used to be pretty annoyed when gas was around $2.00 a gallon. Now, we're hoping that it stops at $4.00... most likely going up $5.00 per by the end of summer. Something is really wrong here and I just can't see India and China killing the market that much. Granted they play a part, but has their part really gone up that much in the past 4-5 years?

 

Personally, and I will admit I do not know that much about this (hence questions above)... I feel as though OPEC is just completely F'ing all of us because they know that ultimately technology (hybrids, etc.) will knock the demand for oil/gas down. Might as well make some serious a cash now right?

Just an FYI gas was less than 2 bucks a gallon last February. A large part of the price change was attributed to us putting oil back into the reserve. Not as much as the price increase,but some of the cost is attributed there. Since we no longer will be doing that (the bIll I believe was signed last week), it may help a little with the costs as long as the future market is somehow brought into check.

[colin]

while markets can get pushed around, the argument that speculators tend to make markets swing more wildly is silly.

 

if speculators make the highs higher, they must do so by buying. if they make the lows lower they must do so by selling.

 

this would make speculators losers -- they'd end up buying high and selling low.

 

now this isn't to say that speculators can't push markets, they can and do, but this is about the true economic effect of free markets.

 

free markets improve liquidity, anyone who's ever traded anything knows that a market without real liquidity either barely trades or just gets pinned in one direction on a fairly regular basis.

 

 

speculators are a good thing.