Posted on 07/08/2008 12:29:07 AM PDT by gpapa
Congress is back in session and oil prices are still through the roof, so pointless or destructive energy legislation is all but guaranteed. Most likely is stiffer regulation of the futures market, since Democrats and even many Republicans have so much invested in blaming "speculators" for $4 gas.
Congress always needs a political villain, but few are more undeserving. Futures trading merely allows market participants to determine the best estimate – based on available information like supply and demand and the rate of inflation – of what the real price of oil will be on the delivery date of the contracts. Such a basic price discovery mechanism lets major energy consumers hedge against volatility. Still, "speculators" always end up tied to the whipping post when people get upset about price swings.
As it happens, though, there's a useful case-study in the relationship between futures markets and commodity prices: onions. Congress might want to brush up on the results of its prior antispeculation mania before it causes more trouble.
(Excerpt) Read more at online.wsj.com ...
I’m not so sure. I think we should follow Newts advice and flood the market with the reserves—let’s see if it makes a dent in the speculators “not my fault” excuses anf funds. Then the drill now and drill here policy needs to go ito effect. Let’s see if the sauds want to be eating oil in the next 5-10 yrs. If they don’t—too bad-they have mades their bed.
What kind of punishment will Congress pass to sanction Southwest Airlines which “speculated” on price of jet fuel and is now able avoid fuel surcharges?
The WSJ, fails, as always, to actually understand how “oil futures” are actually being traded.
They also are pointing to an ag commodity which isn’t well commoditized, ie, onions.
When you look at the ag commodities, there are specifications for what the commodity is - eg, the test weight (lbs per bushel) and moisture content of grain (wheat, corn, beans, etc).
Onions aren’t quite so uniform, for starters. I’m sure it could be done, but there would have to be some give on both sides - on the contract specs as well as by the farmers growing onions.
Throughout this whole “speculators are to blame” and “they are not!” tit-for-tat, the WSJ has displayed deliberate ignorance that:
a) energy futures were exempted from the level of oversight by the CFTC that are given to ag futures
b) the rise of cash-only futures exchanges like ICE
c) that the same legislation that enabled the energy speculators to effect Enron’s manipulation of power prices, Amaranth’s manipulation of natural gas futures is still in place, and that if there have been two successful manipulations of price in less than 10 years, the burden of proof here shifts to proving that oil specs aren’t to blame here. “Trust us” no longer quite seems to work when there are two cases of maniupulation under the CFMA.
d) CFMA also opened up the market in financial derivatives trading, and probably has a role in the current credit market problems.
The WSJ is simply carrying water for the financial industry here, just as they’re bucket boys for businesses who want illegal immigration for cheap labor.
None. Southwest didn’t speculate.
There is a difference between speculation and hedging. What SWA did is hedging, not speculation. SWA takes delivery of a commodity - in huge quantities.
Speculators neither produce, nor take delivery on, a commodity. They settle for cash no matter what side of the contract they’re on.
Can you show us their huge storage tanks? Who is on the other side of the contract?
Do you think those idiots in Congress will distinguish between hedging and speculation? Furthermore, the excesses of the hedge funds have provided politicians with perfect spin language.
” I think we should follow Newts advice and flood the market with the reserves “
And put ourselves at risk of having insufficient fuel to prosecute a suddenly necessary military action in a volatile fuel supply environment? I used to have a lot of respect for Newt, but this is dangerously stupid. Not to mention a shallow, temporary effect. One bullet in that gun; once you’ve fired it, you’re screwed.
Think this crap through, people.
I'm not sure what is appropriate, but it should be harsh. It's not fair that they are paying less that everyone else.
Perhaps a public hanging?
No they don't.
Speculators neither produce, nor take delivery on, a commodity.
Exactly. So how does buying and then selling a contract days, weeks or months later have a permanent impact on the price?
They ultimately purchase jet fuel. Jet fuel has no futures market but since the biggest price component is crude oil, it follows crude oil pricing.
By trading crude oil futures they have protected themselves in a rising price market.
Same with Crude Oil. The variation is large in qualities available, specifically with sulfur content and API gravity. That is why it is included in the NYMEX specification and includes some pre-agreed pricing variations.
Recently Rio Tinto increased its iron ore prices by up to 97%. Iron ore is not traded on the futures market and demand did not jump 97% in a few weeks so what would account for the increases in price? Can we say the company
its self is speculating? Betting that future demand will continue or accelerate? China, Japan, Korea are willing to accept price increases of 85, 95 and 97% for iron ore because they see future demand going up.
In the same way speculators are trying to guess future markets.
A good article on the futures market is at the Mises.org site, “The Market Works Just In Time”, by Robert P. Murphy.
As a consequence of iron ore prices going up the price of scrap steel will continue to go up too since a lot of scrap is used in making steel.
So what’s wrong with neither producing or taking actual delivery of something a person deals in?
Their storage is at airfields in their network. They sometimes pay airports to upgrade their fuel storage facilities.
There isn’t a perfect one-for-one contract to hedge JetA, so there are more complicated correlated futures being used to hedge JetA. Regardless of this lack of exact contract, FASB as well as the CFTC, consider what LUV is doing as “hedging” because they do take delivery on a product - JetA.
Now, as to “where do they take delivery?” Well, a hedger can take delivery at approved delivery terminals. Since JetA is fungible, if you’re a commodity hedger and you want to take delivery of JetA at an approved terminal somewhere clear across the country, you simply call your fuel broker (usually a major company) and say that you have XXX barrels of product YYY appearing at the delivery terminal. Your fuel distributor can then arrange a credit into your account or similar accounting disposition for the fuel you had delivered to your fuel distributor’s tank or pipeline head.
The important thing to know about hedgers is this: they’re either “long” a commodity (usually in the case of a commodity producer) and hoping the price goes up. Or they’re consumers of a commodity and want the price (ideally) to go down, but at the very least be protected against price increases. Either way, the hedger is producing or consuming the commodity in question.
A speculator produces no product and takes delivery of no product - they buy or sell futures contracts without any underlying commodity in their possession and they settle the contract for cash.
At all ends, this is a very interesting paper detailing some of Southwest’s hedging srtategies:
http://www.kellogg.northwestern.edu/research/fimrc/papers/jet_fuel.pdf
Conversely if there is an anticipated shortage (e.g. from Mideast unrest) and the airline wants to buy fuel futures and producers won't sell theirs at that time, who are they going to buy from? The "speculators" are the answer in both cases, they are simply middlemen, they can make wrong or right bets (and a lot of them are long and wrong right now).
In small enough quantities, nothing at all.
What’s wrong right now is that the CFTC has previous set limits as to how much of the market in a commodity (ie, what percentage of contracts) are to be bought/sold by people with no physical commodity position (ie, they’re neither producers, not consumers of the commodity).
Let’s back up a moment: the commodities markets were created to serve both producers and consumers of commodities. Speculators were recognized as adding enough liquidity in a market to help price discovery when producers or consumers might not have their physical counterparty in the market to make a market, but the “position size” of speculators was limited.
The CFTC set a limit to how many contracts in any particular market can go to speculators. The number of contracts being held in hedges and in speculation is part of the CFTC’s “commitment of traders” report. Here’s more info from the CFTC themselves:
http://www.cftc.gov/industryoversight/marketsurveillance/speculativelimits.html
The ICE has had no such limits, and there is no physical delivery. When the number of non-physical contracts for a commodity overtakes the market’s fundamentals, then the market ceases its intended function, ie, helping the producers and consumers of traded products.
Yes, you’re right — sorry, I flipped that out after a 1,000 mile drive and two hours of sleep.
Re-reading what I was trying to say:
Producers are “naturally long” - ie, they want the price of what they produce to go up.
Consumers are “naturally short” - ie, they’d really like the prices to go down.
Their hedge positions would be against the opposite of their fondest desires happening.
And without markets they have no recourse but to go long. With markets and their middlemen (speculators), they can go neutral, reduce their risk, help smooth the macro economy, etc.
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