Skip to comments.Ready for the Oil Bubble?
Posted on 05/22/2008 5:51:24 AM PDT by wildbill
Ready for the Oil Bubble? Source: http://www.star-telegram.com/104/story/651928.html
One law is causing prices to go through the roof By Ed Wallace Special to the Star-Telegram
"Theres a few hedge fund managers out there who are masters at knowing how to exploit the peak [oil] theories and hot buttons of supply and demand and by making bold predictions of shocking price advancements to come, they only add more fuel to the bullish fire in a sort of self fulfilling prophecy." National Gas Week, Sept. 5, 2005 as reprinted in the US Senate Permanent Subcommittee on Investigations report, "The Role of Market Speculation in Rising Oil and Gas Prices," June 27, 2006
Fiddling While We Burn
There it is in plain sight for everyone to see, exactly what Ive been reporting for the past few years: Many individuals who are investing in oil and natural gas futures are going out in the media and trying to convince the American public that either we are out of oil or there is a serious supply shortage of crude against worldwide demand. The question is: Does it surprise you to discover that the US Senate investigated the rigging of the oil market by speculators in the summer of 2006 and concluded that there was no supply and demand problem with oil? Did you know that their conclusion was that speculators were responsible for a 70 percent overcharge in the price of oil in the months leading up to the summer of 2006?
This from page 1 of the Executive Summary of that Senate investigation, there is this one troubling line: "Today, U.S. oil inventories are at an eight-year high, and OECD (Organization for Economic Co-operation and Development) oil inventories are at a 20-year high."
Thats odd because, in 2006, just like today, the media reporting covered the serious international shortage of oil and justified oils high price. Even more troubling is that the House of Representatives held a hearing this past December, ominously titled "Energy Speculation and Price Manipulation." How did it pass under the radar that both the Senate and the House studied the issue of price manipulation in our energy markets and both concluded that it was unregulated, massive trading in one futures market that was really driving up the price of oil and natural gas? And given that conclusion, why has Congress done nothing about it?
Investors Make the News, Literally
A week ago Goldman Sachs issued a new investor note, suggesting that somewhere between six months to two years, the price of oil could go into a "super spike" and prices jump as high as $200 per barrel. It became the major story of the night. Ignored in the reporting frenzy was that many legitimate and well-respected oil analysts dismissed Goldman Sachs prediction as groundless.
Get ready for the next shock to your system. In the past month we have added 11.9 million barrels of oil into our stock reserves, giving us 32.3 million more barrels of oil than we had on hand January 1. On May 5, we found out that for the second time in as many years, Iran was storing its excess crude oil on tankers in the Persian Gulf, because it had run out of storage space in the desert and was awaiting buyers for its heavy crude. That same day Saudi Arabia cut the discount price for its Arabian Heavy crude to $7.45, hoping to entice more buyers for immediate delivery. We didnt hear that news, either.
While researching my third article for BusinessWeek online about the worlds oil situation in 2008, I asked for the most current report from Oil Movements. Because the oil industry is not transparent, Oil Movements tracks every tanker at sea, from both OPEC and non-OPEC oil countries, along with their cargoes final destinations. Anne OShea responded immediately to my request with their report dated May 8, 2008. Just so you will know, oil shipments are up from a year ago in almost every class, including Middle East oil in transit and Non-OPEC in Transit. The only class of oil shipment that has declined is covered on page 3 of that report. That chart is labeled, "4-Week Changes in Westbound Oil at Sea."
Thats right, shipments of oil headed west have shown serious declines during the month of April, down 800,000 barrels per day in the week before the publication of the report. Now, let me give you the first line from under the Westbound Oil shipments chart: "In the west, a big share of any [oil] stock building done this year has happened offshore, out of sight."
Could this be true? Oil Movements, the unimpeachable source for finding the real world situation on oil transits, is saying that oil is being hidden offshore, not declared in inventories? Yes, that is exactly what they are saying.
That same week our refineries cut their production runs back to 85 percent, down from 89 percent a year ago, to trim more gasoline out of our stock reserves, to increase their profits per gallon.
National Short-Term Memory Loss
Its amazing how quickly we forget our recent history. Congressional hearings in 2001, blasting certain Wall Street executives for using the media to sell the public on stocks in order to bid up the price so their firm could divest of its shares without taking a beating. Meanwhile, other trusted advisors pushed stocks that were fundamentally worthless, because their affiliated banks had large loan agreements with those companies.
The year before Enron had been caught manipulating the California energy market, even forcing rolling blackouts across the northern part of their state apparently just for effect to support their claim that there just wasnt enough electricity to go around. Again, we now know that claim was untrue. It was Enron shutting down certain power generation plants, while placing bets on their unregulated energy futures market. The net cost to California consumers was almost $8 billion.
It didnt end there. Amaranth Advisors, a hedge fund, literally was cornering the market on natural gas futures, to make it appear that there was a shortage of natural gas, when the Commodities Futures Trading Commission told Amaranth to liquidate its position on the NYMEX because its bidding had already moved natural gas prices far beyond the reasonable limits of supply and demand. Now, remember this name: ICE, short for Intercontinental Exchange the "dark futures lookalike market."
Once the CFTC told it to back off its natural gas futures contracts, Amaranth simply shifted gears, got out of the NYMEX, placed its massive bets outside of government regulation in ICE and managed to drive natural gas futures to $8.50 per MBtu.
As the Senate investigation into the manipulation of the energy markets showed, "Amaranth the day before they failed, natural gas was about $8.50; the day after it failed, it went to $4.46 MBtu." Thats right, one major hedge fund managed to double the price of natural gas simply by loading up on futures contracts; when the government told them their bets were unwarranted, they simply moved their monies to a futures exchange that was unregulated. Only when Amaranth failed did natural gas prices fall back to what was considered normal for supply and demand.
Sadly, like oil today, when this was happening we were being told that natural gas supplies were tight worldwide. That statement simply wasnt true.
Likewise, British Petroleum was busted for manipulating the propane market in the winter of 2004 and fined $373 million. Of course, in Texas, under deregulation of our public utilities, our electric rates can be set using the futures market for natural gas, so the manipulation of the natural gas market spelled trouble for us. Consider this, by 2006, according to www.powertochoose.org, electricity rates for us had climbed to 15 cents a kilowatt-hour due to the high cost of natural gas. But, that was the exact same time period that Amaranth was proven to be manipulating the market and sending natural gas futures through the roof. Two months later the hedge fund collapsed and natural gas prices fell. Therefore, most Texans paid higher electric bills for Amaranths manipulation of the natural gas market.
Professor Michael Greenberger of the University of Maryland, a former board member of the Commodities Futures Trading Commission, testified in front of the House Committee on Energy and Commerce on December 14 of last year. Under discussion that day was the manipulation of the energy markets and prices, but Professor Greenberger added these comments: "Three, four months from now, youre going to have a hearing on the subprime meltdown, and youre going to find that the very same legislation [deregulating energy] deregulated something called collateralized debt obligations, CDOs." That legislation, friends, directly ties the mortgage meltdown to the high price of energy today.
It was called H.R. 5660, the Commodities Futures Modernization Act of 2000. At first this bill went nowhere in the House, not even up for debate. Then, a few months later, late one night a 242-page bill written by Wall Street lawyers, with the exact same name as the former House bill, was quietly added to an 11,000-page appropriations bill, and the Enron loophole was created. The power behind that bill was one Texas Senator, one Texas Congressman and their wives.
Next week: How the unregulated futures market pushes the price of oil, natural gas and gasoline far beyond those commodities market value, thanks to the creation of the Intercontinental Exchange. Worse, Congress knows this, but does nothing.
AOL and Lucent were at $80 a share
250,000 Homes were selling for 500,000
Hoping beyond hope Oil is next
Also disclosing why the only things worse is government control.
I share in this theory as well. You cannot discount the devalued USD, but that is also someone a rsult of energy prices. The bottom IS going to fall out of this, there is nohing substantial to support these prices. If only I could predict when... but then again, that is the million dollar question.
$150 before $100 or $90 again.
Yes, and once oil prices come down to earth, we will see the sob stories on the national news of offshore oil workers losing their jobs, etc., etc.
Here's your "oil bubble"...................It ain't gonna pop any time soon..........
If a oilman as successful and as savvy as T. Boone Pickens is pumping billions in to wind farms, and if he says high oil prices are here to stay, you have to pay attention. He is no fool.
Man, I love me a good cospiracy theory.
Man, I love me a good conspiracy theory.
Yet everytime the President asked, the media reported the Saudis told him no.
Well, if this article is factual, there is going to be a huge glut of oil at some point, leading to the inevitable.
Hopefully, they will run out of places to put the oil.
But the bigger this bubble gets, the bigger the pop will be.
Anything he says is a self-fulfilling prophecy, and he knows it.
I refer everyone to the statement by the Saudi Oil Minister.
He said they would produce more and sell it—if there were buyers.
This is a delicate way of saying the oil speculators are driving up prices beyond the normal effects of supply and demand.
It takes many people and ideas, that cross party lines, to make this junk happen in congress. Trading the laws Ed mentions for votes against drilling is one way that we are making life hard for hard working people.
Goldman Saks is doing far more than the oil companies to reap a profit from us all right now.
Oil companies are running 8-10% profit, Goldman’s speculation and price manipulation is making them FAR more profit than that, and the oil companies are riding on their coat tails with a smile on their face.
If Congress wants to investigate something they should look at any collusion between the two managements.
This tells me that their original scolding of the rest of us was not entirely based in economics, but maybe was really a projection of some other personal issue, like maybe they were secretly cheering what they hoped was the impending disaster. For stocks and real estate, the “disaster” would not be in the run-up in prices, but in the “collapse” that would follow. For oil, the “disaster” is high and ever-higher prices. Any collapse in price would only be good news for the economy. In previous asset bubbles the phrase “tipping point” was mentioned so often it got worn out. In this bubble, I have not seen the phrase used once.
>> T. Boone Pickens is pumping billions in to wind farms
T. Boone Pickens has done the math, and concluded that wind farms (with their massive gubmint subsidies and tax breaks) will be a profitable business — for him, that is.
I wouldn’t conclude too much from that about T. Boone Pickens knowledge (or lack thereof) about oil price futures.
That makes alot of sense. But then why did Bush ask him to produce more?
Maybe I’ve missed it but I would bet that mr Soros is involved somehow..funny this problem comes up the summer before an election two times in a row..???...mmmmmmm....adjusting tin foil, but only slightly..LOL
Oil future contract inflation is how Big Money (fascist and socialist based) is covering its losses from their sub prime fiasco. Congress wont seriously investigate because we have the best Congress Big Money could buy. IMHO.
... but then again, that is the million dollar question.
No...the billion dollar question!
You all are right, this is the mother of all bubbles and when it pops, the crude is going to splash everywhere.
Oh your analysis may be spot on. If not Soros then some other RAT. I hope he loses billions in this little gamble.
All part of the media game. There has to be a logical explanation for the dollar inflation of oil future prices. Big Money owns DC and the MSM. So they bash the House of Saud and bash the Oil Executives, while the real culprits (big money speculators) go untouched.
...absolutely not (at least for me).
Let's pilfer Greenspan’s term...irrational exuberance. When home prices escalate 20% a year and “NO DOC” loans are granted and “interest only loans” were making up an ever increasing % of loans written, you have a bubble.
...And the run up in the price of crude, almost doubling without a doubling of demand would indicate something wholly irrational is going on.
Tech Stocks in the 90’s
Real-Estate and Commodities recent past years
See a pattern?
I think Pickens is getting into water...as are a lot of other big corps.
Hope it pops by this weekend. I'm going to be doing a 1000+ mile road trip to see my grandkids in my V-8 SUV.
This run up in crude is siphoning money out of the people
s pockets, only to refill the lost funds from the housing debacle. The timing is too co-incendental. At least in my opinion.
I asked a couple of Bankers what they were doing with Deposits now they had cut down on Mortgage Lending. One said they were putting it into Commodities. I suggested that was speculative. He didn’t seem to think so.
So I believe the surplus Deposit money is driving up all commodity prices, not just oil, (and it’s an endless spiral cos the cash circulates from Depositor to Bank to Commodity to Depositor). The rules need to be changed so Banks can’t use Deposits to speculate.
I hear ya. Just filled my boat up (100 gallons)...doh!
Add to that scenario that this is also a national election cycle in the US. What better way to sway the minds of the voting public!!!!
At least we have a robust supply albeit at an outrageous price.
About 6 months of President O’Bammy and a filibuster proof congress and we’ll be back to 55 mph and gas lines.
As detailed in an earlier article, a conservative calculation is that at least 60% of today's $128 per barrel price of crude oil comes from unregulated futures speculation by hedge funds, banks and financial groups using the London ICE Futures and New York NYMEX futures exchanges and uncontrolled inter-bank or Over-The-Counter trading to avoid scrutiny. US margin rules of the government's Commodity Futures Trading Commission allow speculators to buy a crude oil futures contract on the Nymex, by having to pay only 6% of the value of the contract. At today's price of $128 per barrel, that means a futures trader only has to put up about $8 for every barrel. He borrows the other $120. This extreme leverage of 16 to 1 helps drive prices to wildly unrealistic levels and offset bank losses in sub-prime and other disasters at the expense of the overall population.
It has never been this easy to be a daytrader. Open a futures account. Fund it. Buy metals and oil futures on every single pullback. Take profits.
...and so will Wall Street speculators that get caught with their pants down when they hit the pavement from 35 stories up. Call me insensitive, but I'm going to LMAO if and when this happens.
If this is really true, the speculators need to be thrown UNDER the jail and their families put into debtors’ prison.
This profiteering is not just fattening their wallets using our money — which is bad enough and worthy of harsh punishment. It’s emboldening and enriching the people that would kill us. And that my friends is treason.
If some traders wanted to do this and since the Futures Market is a paper trade, the price could be manupulated down.
One way would be for several groups of traders put in buys for a example about of $90.00 per barrel and then another group sells that paper for $90.00 that morning. Late that same day, it is done again but for example down to $85.00 per barrel.
The next day put in the same buy for $85.00 and then trade that paper to the same opposing group. A few hours later, lower the buy price to $80.
If enough paper trading is flashing across everyone’s radar, a panic sell off of paper could result.
79 posted on Thursday, May 22, 2008 8:16:17 AM by Deaf Smith (Don’t pick a fight with an old man. If he is too old to fight he’ll just kill you.- John Steinbeck)
A lot of people are in denial about anything they don’t want to hear. I was on the receiving end of quite a bit of vitriol on a thread yesterday for daring to suggest that we won’t be able to rely on oil much longer and we should stop fighting the inevitable.
The rules need to be changed so Banks cant use Deposits to speculate.
The rules need to be changed so that only investors that have facilities to take delivery of the commodity can bid.
These speculators include fund managers for large unions and government agencies. Basically the derivative investors that lost their shirts during the Sub Prime crash. We are talking about the complete failure of the National US financial system and our National government. The House of Cards is very shaky right now. We all knew The People would end up bailing these 'investors out'. We just perhaps did not know how.
This profiteering is not just fattening their wallets using our money which is bad enough and worthy of harsh punishment. Its emboldening and enriching the people that would kill us. And that my friends is treason.
The demand is dropping as people stop driving and companies fold. Their profits may not even be an issue here, but I am just speculating. Perhaps this is how we get cooperation to neutralize the Iranian threat ? Who knows.
It’s difficult to compare Housing/real estate and other commodities with the World energy market.
The biggest driving force is fact that China, India and many formerly third-world countries have greatly industrialized. The World demand for oil has nearly doubled in just a short while.
There is not much of a bubble here at all. Maybe a few dollars as the market fluctuates, but in the long run, it will double again in the near future.
From our own standpoint, we have to import refined distillates because we do not have the capacity to meet our own demand. Now that the rest of the World is starting to pass us economically, we will see even more demand that will sustain the current prices and even drive them higher.
Costs of trading with those countries will also go up because the energy costs went up for those foreign traders.
Believe me, there is no bubble, only foam on the water.
I bought two quarts of motor oil. I expect to retire on the profits!
I’ve given up on waiting for the increase to supply or the decrease in demand to bring down the price.
We cannot afford (as a family) to do nothing.
We traded in our Fords for Toyotas already.
We’ve cut down on driving - but even that isn’t helping us now.
I’m doing grocery shopping at Aldi’s and Sam’s (buying bulk).
I am not a green thumb, but we recently bought a book on square foot gardening and will give that a try this summer.
Our next step is to figure out the best alternative to our oil fuled furnace - which is only 7 yrs. old.
We’d like to figure out a way to keep the furnace, but power it with a different source.
We also live on top of a very windy hill with enough land for wind power - but in NY the cost of implementing wind energy is out of our reach.
~~~~~Hopefully, they will run out of places to put the oil.~~~~~
According to some people, Iran has a plan to flood the market with cheap oil...The purpose being to destroy the U.S. economy...And some say that’s the real reason we are at the doorstep of war with Iran...
This guy has some interesting information...
Pinging you for your take on this. I’m as surprised as anyone about the fact that Iran is storing its supply in tankers offshore due to being out of land-based storage.
I was aware we, the US, had decreased our consumption (116 B brls per day?) than in the past, but was unaware of the ‘over-supply’ inferred in this article.
“At least we have a robust supply albeit at an outrageous price.
About 6 months of President OBammy and a filibuster proof congress and well be back to 55 mph and gas lines.”
I wrote about what I believe the ‘rats will do to “bring down prices” yesterday in this post:
Since when has cheap oil ever been the downfall of our economy?
It looks pretty certain that 4 dollar oil is doing a pretty good job of it though.