In-A-Gadda-Levitre Posted August 21, 2008 Share Posted August 21, 2008 OPEC, big Oil, and others have been shouting about this for a while. At least CFTC is investigating. This is one area where changes can have a big effect on the price of crude in the short term. But when the Commodity Futures Trading Commission examined Vitol's books last month, it found that the firm was in fact more of a speculator, holding oil contracts as a profit-making investment rather than a means of lining up the actual delivery of fuel. Even more surprising to the commodities markets was the massive size of Vitol's portfolio -- at one point in July, the firm held 11 percent of all the oil contracts on the regulated New York Mercantile Exchange. . . . "When the CFTC granted the 1991 hedging exemption to J. Aron (a division of Goldman Sachs), it signaled a major shift that has since allowed investors to accumulate enormous positions for purely speculative purposes," said Rep. Bart Stupak (D-Mich.) Now, he added, "legitimate businesses that hedge and take physical delivery of oil are being trampled by the speculators who are in the market purely to make profit." Link to comment Share on other sites More sharing options...
JK2000 Posted August 22, 2008 Share Posted August 22, 2008 Wow, 81% of the oils futures contracts on the NY Merc Exchange are held by speculators! Link to comment Share on other sites More sharing options...
TPS Posted August 22, 2008 Share Posted August 22, 2008 OPEC, big Oil, and others have been shouting about this for a while. At least CFTC is investigating. This is one area where changes can have a big effect on the price of crude in the short term. That was the point of my original post, as the quote by Keynes indicated: "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." Speculators are fine when they are the minority players in the market, but when they dominate markets, "the job is likely to be ill done." The futures markets were created to provide actual dealers with the ability to hedge price risk. When you allow "investors" to dominate these (relatively) thin markets, we get the kind of volatility we're currently experiencing, and the manipulation. This says it all: Meanwhile, commodities have been good business for big Wall Street brokerages. Its commodity trades helped keep Goldman Sachs profitable during the credit crisis, said Richard Bove, a banking analyst at Ladenburg Thalmann. Link to comment Share on other sites More sharing options...
In-A-Gadda-Levitre Posted August 23, 2008 Author Share Posted August 23, 2008 That was the point of my original post, as the quote by Keynes indicated:"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." Speculators are fine when they are the minority players in the market, but when they dominate markets, "the job is likely to be ill done." The futures markets were created to provide actual dealers with the ability to hedge price risk. When you allow "investors" to dominate these (relatively) thin markets, we get the kind of volatility we're currently experiencing, and the manipulation. This says it all: yes, you're right on. The basic problem, which is compounded by the lack of oversight, is that these guys never have to take delivery of a physical product, and they can buy everything on credit, so with their market positions, they just drive up the price by buying and selling. Other commodities fall under (much more) regulation and their markets are much more diluted. Link to comment Share on other sites More sharing options...
Steely Dan Posted August 23, 2008 Share Posted August 23, 2008 yes, you're right on. The basic problem, which is compounded by the lack of oversight, is that these guys never have to take delivery of a physical product, and they can buy everything on credit, so with their market positions, they just drive up the price by buying and selling. Other commodities fall under (much more) regulation and their markets are much more diluted. If I recall correctly this has something to do with the loosening of oversite that Enron lobbied for and got. That loosening led to the greater ability of Enron to "Steal from Grandma Millie." It also eventually led to Enron's demise. Link to comment Share on other sites More sharing options...
In-A-Gadda-Levitre Posted August 23, 2008 Author Share Posted August 23, 2008 If I recall correctly this has something to do with the loosening of oversite that Enron lobbied for and got. That loosening led to the greater ability of Enron to "Steal from Grandma Millie." It also eventually led to Enron's demise. bingo, the "enron rule" was added under intense lobbying from enron to allow speculators to trade on external platforms, aka unregulated. Link to comment Share on other sites More sharing options...
Steely Dan Posted August 23, 2008 Share Posted August 23, 2008 bingo, the "enron rule" was added under intense lobbying from enron to allow speculators to trade on external platforms, aka unregulated. It also led to the rolling blackouts that were engineered by Enron to stick it to California. The giddy market manipulators referred to as "stealing from grandma Millie" You'd think the Bush administration would have done something about that back then. Link to comment Share on other sites More sharing options...
In-A-Gadda-Levitre Posted August 23, 2008 Author Share Posted August 23, 2008 It also led to the rolling blackouts that were engineered by Enron to stick it to California. The giddy market manipulators referred to as "stealing from grandma Millie" You'd think the Bush administration would have done something about that back then. You might be right, but I was living in cali then, and it sure didn't appear to be related to any kind of engineered plot. If was more indirect as the cost of energy was spiking and the usage was doing the same thing, due to hypergrowth. I'm admitting I don't know if that was manipulated by them or not. Link to comment Share on other sites More sharing options...
Steely Dan Posted August 23, 2008 Share Posted August 23, 2008 You might be right, but I was living in cali then, and it sure didn't appear to be related to any kind of engineered plot. If was more indirect as the cost of energy was spiking and the usage was doing the same thing, due to hypergrowth. I'm admitting I don't know if that was manipulated by them or not. Linkage Four years after California's disastrous experiment with energy deregulation, Enron energy traders can be heard – on audiotapes obtained by CBS News – gloating and praising each other as they helped bring on, and cash-in on, the Western power crisis. "He just f---s California," says one Enron employee. "He steals money from California to the tune of about a million." "Will you rephrase that?" asks a second employee. "OK, he, um, he arbitrages the California market to the tune of a million bucks or two a day," replies the first. The tapes, from Enron's West Coast trading desk, also confirm what CBS reported years ago: that in secret deals with power producers, traders deliberately drove up prices by ordering power plants shut down. "If you took down the steamer, how long would it take to get it back up?" an Enron worker is heard saying. "Oh, it's not something you want to just be turning on and off every hour. Let's put it that way," another says. "Well, why don't you just go ahead and shut her down." ______________________________________ "This is the evidence we've all been waiting for. This proves they manipulated the market," said Eric Christensen, a spokesman for the utility. That utility, like many others, is trying to get its money back from Enron. "They're f------g taking all the money back from you guys?" complains an Enron employee on the tapes. "All the money you guys stole from those poor grandmothers in California?" "Yeah, grandma Millie, man" "Yeah, now she wants her f------g money back for all the power you've charged right up, jammed right up her a------ for f------g $250 a megawatt hour." Link to comment Share on other sites More sharing options...
Steely Dan Posted August 23, 2008 Share Posted August 23, 2008 More Even More California Office of the Attorney General. The tools energy traders used to pour profits into their pockets were market gaming devices bearing such provocative names as Fat Boy, Death Star, Get Shorty and Ricochet. The evidence shows generators lied to power grid operators and withheld electricity to further increase prices. In audio tapes one of the masterminds of market manipulation, Enron, even bragged about stealing money from "Grandma Millie" in California. [To hear the conversations yourself, go to Listen Here - The Energy Tapes] Link to comment Share on other sites More sharing options...
DC Tom Posted August 23, 2008 Share Posted August 23, 2008 If I recall correctly this has something to do with the loosening of oversite that Enron lobbied for and got. That loosening led to the greater ability of Enron to "Steal from Grandma Millie." It also eventually led to Enron's demise. A big part of that problem, though, was that Enron was THE market. They had no competition. So it really wasn't much of a market...it was just a vehicle that Enron used to set prices where they wanted them. Theoretically, the actual value of commodities underpinning the derivative is supposed to be greater than the amount of money put in by speculators. When that relationship gets out of balance, either by tight markets (e.g. oil now, electricity in CA ten years ago - artificially generated, but a tight market nonetheless) or by sheer volume of speculation (e.g. the destruction of Pacific Rim currencies in the mid-90s, or Soros breaking the Bank of England betting against the pound in 1992) is when it starts to get problematic. Link to comment Share on other sites More sharing options...
Steely Dan Posted August 23, 2008 Share Posted August 23, 2008 A big part of that problem, though, was that Enron was THE market. They had no competition. So it really wasn't much of a market...it was just a vehicle that Enron used to set prices where they wanted them. Theoretically, the actual value of commodities underpinning the derivative is supposed to be greater than the amount of money put in by speculators. When that relationship gets out of balance, either by tight markets (e.g. oil now, electricity in CA ten years ago - artificially generated, but a tight market nonetheless) or by sheer volume of speculation (e.g. the destruction of Pacific Rim currencies in the mid-90s, or Soros breaking the Bank of England betting against the pound in 1992) is when it starts to get problematic. I guess I don't really understand the difference between Enron owning the vast majority of contracts and power or several companies with the same agenda controlling 81% of the market. It still seems the same to me. Link to comment Share on other sites More sharing options...
GG Posted August 23, 2008 Share Posted August 23, 2008 yes, you're right on. The basic problem, which is compounded by the lack of oversight, is that these guys never have to take delivery of a physical product, and they can buy everything on credit, so with their market positions, they just drive up the price by buying and selling. Other commodities fall under (much more) regulation and their markets are much more diluted. Ok then, take this to its logical conclusion. If speculators never intend to take delivery, wouldn't you think the unfortunate Exxons would avoid the futures markets to squeeze the speculators at the expiration of the contract? After all, someone has to be on the other side of the trade that always goes up in price. Why in the world would actual users of oil participate in the futures market when they know it's dominated by speculators who have zero capacity to take delivery. If I'm the poor little guy at Exxon looking for a break, I'd wager a bet on the spot market thinking that perhaps the evil trader at Goldman will have to dump his contract right before expiration because 85 Broad Street doesn't have a big oil tank in the basement. Link to comment Share on other sites More sharing options...
finknottle Posted August 23, 2008 Share Posted August 23, 2008 Ok then, take this to its logical conclusion. If speculators never intend to take delivery, wouldn't you think the unfortunate Exxons would avoid the futures markets to squeeze the speculators at the expiration of the contract? After all, someone has to be on the other side of the trade that always goes up in price. Why in the world would actual users of oil participate in the futures market when they know it's dominated by speculators who have zero capacity to take delivery. If I'm the poor little guy at Exxon looking for a break, I'd wager a bet on the spot market thinking that perhaps the evil trader at Goldman will have to dump his contract right before expiration because 85 Broad Street doesn't have a big oil tank in the basement. But, but, but - you would be *speculating* on the future circumstances of the speculators. A tax on you and all your house! Link to comment Share on other sites More sharing options...
Steely Dan Posted August 23, 2008 Share Posted August 23, 2008 Ok then, take this to its logical conclusion. If speculators never intend to take delivery, wouldn't you think the unfortunate Exxons would avoid the futures markets to squeeze the speculators at the expiration of the contract? After all, someone has to be on the other side of the trade that always goes up in price. Why in the world would actual users of oil participate in the futures market when they know it's dominated by speculators who have zero capacity to take delivery. If I'm the poor little guy at Exxon looking for a break, I'd wager a bet on the spot market thinking that perhaps the evil trader at Goldman will have to dump his contract right before expiration because 85 Broad Street doesn't have a big oil tank in the basement. Then why is it happening? Link to comment Share on other sites More sharing options...
GG Posted August 23, 2008 Share Posted August 23, 2008 Then why is it happening? Why is what happening? It's been acknowledged that financial speculators may impacted the price of oil by maybe 10% or so. I guess you can say that the trading curbs had a part in this months decline, but at the end of the day the price still mostly reflects the supply demand fundamentals. Just like Enron traders didn't create CA's energy problem they just made it worse. Even without Enron, CA would have been screwed because of limited electricity supply lines. Link to comment Share on other sites More sharing options...
Chef Jim Posted August 23, 2008 Share Posted August 23, 2008 Why is what happening? It's been acknowledged that financial speculators may impacted the price of oil by maybe 10% or so. I guess you can say that the trading Did you just die in the middle of this post? If there is no reply in 20 minutes I suggest someone call 911. Link to comment Share on other sites More sharing options...
/dev/null Posted August 23, 2008 Share Posted August 23, 2008 Did you just die in the middle of this post? If there is no reply in 20 minutes I suggest someone call 911. At least he didn't type aaggggghh as he died Link to comment Share on other sites More sharing options...
GG Posted August 23, 2008 Share Posted August 23, 2008 Did you just die in the middle of this post? If there is no reply in 20 minutes I suggest someone call 911. I didn't, but the damn iphone did. Link to comment Share on other sites More sharing options...
Chilly Posted August 23, 2008 Share Posted August 23, 2008 I didn't, but the damn iphone did. You've got an iPhone? Might as well just wear a sign that says "I'm a douche". Link to comment Share on other sites More sharing options...
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