Lehman-backed hedge fund fails as oil play peters out

BBC via Bloggingstocks ^ | Sep 3rd 2008 | Peter Cohan

[DGHoodini]

BBC News reports that another hedge fund has closed down thanks to its failure to bail out of the oil speculation trade that boosted oil to a peak of $147 in July. This is yet another piece of evidence that people like Hank Paulson, who insisted that record oil prices were due to supply and demand, were either being less than honest -- particularly since his former employer Goldman Sachs Group (NYSE: GS) was a big beneficiary of this speculation -- or ignorant of reality.

The hedge fund in question this time is Ospraie Fund, which invested in commodities like oil and gold. It "has lost 38% of its value since the start of the year." Gold is down 22% to $800 from its $1,030.80 an ounce high in March. Oil has tumbled 25% to $109 since peaking in July, according to BBC News. But 1440 Wall Street suggests that the biggest commodity culprit in Ospraie's demise was copper's tumble. The lesson here is that if a sufficient number of big money speculators get together and decide to, say, short the dollar and go long commodities, there will seem to them to have safety in numbers.

But when the government started investigating the cause of spiking oil prices, the trade got very unprofitable very fast. As I posted, the Commodities Futures Trading Commission (CFTC) recently found that 81% of oil trading volume was driven by speculation. Then we witnessed the failure of SemGroup and the indictment of Optiver Holding for manipulating energy prices -- those funds who were too slow to reverse their positions and got creamed.

[ikka]

AS I have been telling my friends, as soon as Goldman Sachs is done selling off their contracts, the price will crater.

[meatloaf]

Goldman Sachs better move fast. The summer drive time is over. Recent reports point to even less demand next year. Unless the Gulf coast takes a bad hit, it looks like the oil market can’t go anywhere but down.

[highpockets]

Demand is going down for oil.

The recent, last couple of days, strengthening of the dollar has impacted the price also.

[Moonman62]

This is yet another piece of evidence that people like Hank Paulson, who insisted that record oil prices were due to supply and demand, were either being less than honest

Add George W. Bush, John McCain, and just about every other politician to the list.

[Dustbunny]

I always thought this was happening. Greedy people wanting to become millionairs on the backs of others.

Rush was wrong on this one, it was not all supply and demand driving the cost of gasoline etc. up.

[VanShuyten]

Don't confuse supply and demand for gasoline at the pump with supply and demand for oil futures.

[Red in Blue PA]

Smart.

Money.

Not.

[thackney]

Demand is going down for oil.

Rate of the increase of demand for oil has gone down.

But the overall demand for oil in the world continues to rise, just more slowly than it was.

Global oil product demand for 2008 remains unchanged at 86.9 mb/d (+0.9% or 0.8 mb/d versus 2007). Demand in 2009 is nudged up 70 kb/d to 87.8 mb/d (+1.1% or 0.9 mb/d versus 2008). Growth is driven by projected non-OECD demand, largely unchanged at 38.3 mb/d in 2008 and 39.7 mb/d in 2009.

http://omrpublic.iea.org/

Fortunately the supply is rising as well and at a decent rate. The cure for high prices is high prices and the results they bring.

Global oil supply increased by 890 kb/d in July to 87.8 mb/d. Norway, Canada, Argentina and Brazil underpinned non-OPEC growth of 520 kb/d, amid a lull in seasonal maintenance elsewhere. Growth in non-OPEC output now averages 455 kb/d for 2008 and 665 kb/d for 2009, after 425 kb/d in 2007.

[DGHoodini]

As I have been expressing on the topic for quite a while.
I wasn’t taken seriously when I said that inventory numbers were being manipulated.
I wasn’t taken seriously when I suggested that we’d be seeing in the near future, a day where oil would drop $10 maybe even $20 in one day, when those who are trying to prop up the price, realise they were just thowing money away, and gave up trying.

You can imagine me shaking my head yesterday, after prices fell down to a little over $105, only to watch as fools bid it back up over the days trading to $110 a barrel...now, to watch all those barrells that were bought, lose $5.00 in value in a single day....I wonder how many hundreds of thousands or even millions of barrels were traded yesterday?

We’re talking about *serious* money. They vccan’t keep up bolstering that price...they’re eventually going to run out of assets they can afford to lose to an artificially inflated, and gradually/slowly shrinking market.

They’re just spending they money they got from selling their golden eggs, to feed the goose that lays them, empty calories.

[highpockets]

Thank you for this information and your view.

[CodeToad]

“oil speculation “

Not possible. All the “players” here on FR told us this was Supply & Demand, not speculation. They said we must cut our consumption to regain favorable oil prices. /drippy-drippy-sarcasm

[highpockets]

Not possible

What makes FR so great is the sharing of ideas. Good ones or bad ones.

I learn something everyday. Real answers and honest information.

And then I go and say things that are really dumb:)

Not this time!!!

[ikka]

This link:

http://futures.tradingcharts.com/marketquotes/index.php3?market=CL

Shows the current price of NYMEX crude, plus the contract volume, I think each contract represents 1000 barrels of oil, but I am not sure.

[CodeToad]

It was obviously not supply or demand and neither had changed so much as to demand such price increases.

[DGHoodini]

well, with caveats, I agree with them. It has been the consumer demand recessiion, (I simply can’t bring myself to call it a crash, at least not yet.) That has so clearly made the speculators situation, blatent and untenable. But the plain fact of the matter is, that the speculators, could never have done what they did, without the tight supply and demand situation, that made the ever hiking of prices possible.

So reduced Demand *did* in fact, get us here, from $147 a barrel, and is one of the factors that will hopefully take us to sub $100 prices in the near future.

But many “speculators” weren’t crooked schemers who rigged the market, thety simply took advantage of the situation to increase their profits for their IRA shareholders.

It’s one of those things like the DemoCommies wanting to rob the oil companioes of their profits to bribe their voters...Guess who will be seeing that money disappear from their accounts? All the working class people who have IRA portfolios who are invested in oil companies.

So yes, if they tax Big Oil...It’s coming out of *your* retirement account pocket, so the Dems can bribe you with your own money...or more likely, they bribe their umndeserving poor voters, with Other Peoples Money....*not* their own.

[CodeToad]

The speculators were acting on a hypersensitive market. It happens with all kinds of “investments”. There actually was little movement in the supply versus demand numbers but there was a load of news saying supply was short and demand was high. The vast majority of people act with ignorance about investing. They run on emotion. Institutional investors do, too. They know that hype can be created and sustained long enough for them to sell and get out. They did.

[CharlesWayneCT]

The fundamental problem with the argument is the suggestion that “speculators” deal outside the realm of supply and demand.

In fact, the current price collapse and subsequent hedge fund losses proves that speculators are bound by the same laws of the free market as the rest of us.

If they can drive up demand above supply, prices will go up. But if they can’t, all the wishing in the world will not allow them to sell their wares for a higher price than the market will bear.

Of course, there’s also the whole issue of how China and Europe appear to have stagnated, thus changing the REAL-WORLD demand equation for oil, while the U.S. has lowered it’s need for oil, and all the expected disasters affecting supply have failed to materialize.

But for whatever reason, the market today proves that speculators, and oil companies, do not set the price of their product — the market does, and with brutal results to those who pretend differently.

[Toddsterpatriot]

BBC News reports that another hedge fund has closed down thanks to its failure to bail out of the oil speculation trade that boosted oil to a peak of $147 in July. This is yet another piece of evidence that people like Hank Paulson, who insisted that record oil prices were due to supply and demand, were either being less than honest -- particularly since his former employer Goldman Sachs Group (NYSE: GS) was a big beneficiary of this speculation -- or ignorant of reality.

I heard that all those speculators always made money every time they trade. And pass the higher price on to you. I guess the people who said that were either being less than honest -- or ignorant of reality.

[Toddsterpatriot]

Rush was wrong on this one, it was not all supply and demand driving the cost of gasoline etc. up.

What was it?

[Toddsterpatriot]

It was obviously not supply or demand and neither had changed so much as to demand such price increases.

Obviously. How much does supply have to drop or demand rise in order for a $1 rise to be okay with you?

[Toddsterpatriot]

In fact, the current price collapse and subsequent hedge fund losses proves that speculators are bound by the same laws of the free market as the rest of us.

Shhhh. Hedge funds only buy, they never sell.

Their buys make the price rise but their sells don't make the price fall.

And they always make money.

They're evillllllllll.

[CharlesWayneCT]

Good one, although in this particular case it sounds like one hedge fund forgot about the “selling” part. Not that I feel bad about it, although I’ll probably learn at the end of the quarter that my mutual funds all invested in this particular fund — I’m just lucky that way :-)

[CodeToad]

We all know your oddball view of this issue, so there is no sense in even trying to converse with you.

[Toddsterpatriot]

I guess you would consider actually understanding the markets to be oddball.