Posted on 08/03/2009 12:07:59 PM PDT by parsifal
Do you have to be a power-plant owner to really understand the natural gas market? Should makers of aluminum siding being the only ones allowed to buy aluminum? These are the kinds of questions being raised in many commodities markets today. The issue is speculators versus users of fuels, metals and agricultural products. Both of these groups are big investors in commodities. Users buy these goods to consume them. Speculators buy without any intention of ever using them. A speculator looks purely to make a profit by buying and selling the rights to a pound of copper or a barrel of oil.
But there is a growing movement to reduce speculation in commodities. The anti-speculation lobby believes that allowing "non-professional" investors to drive the price of commodities with their buying and selling distorts these markets, sending incorrect price signals to everyone involved.
(Excerpt) Read more at 321energy.com ...
parsy.
I’ve been meaning to put this up for a few days. This is about the potential ill effects of speculation.
parsy.
Interesting thought: we should only allow “professional” oil traders to trade oil. What could possibly go wrong?
IMO, you reduce the speculation in commodities, and you’ll see shortages of those commodities in short order.
I can think of a few things. Did you read the whole article yet
parsy.
Maybe in soybeans. I don’t see it in oil.
parsy.
Speculators provide liquidity to commodities markets. Without this liquidity, price discovery would be severely hindered & the gaps between bids and asks would become very large. That would hurt both producers and consumers of the commodities.
Sometime speculators make money, sometimes speculators lose money. Something must be done, immediately!!!
But, with all the “discovery” going on, gas still went to $4+, and then back to $2, and all over the place.I don’t think discovery is what is going on. I think it is gambling.
parsy.
Which leads to this author's premise: price fluctuations are bad. No, they are not. They are market signals. Try throwing a blanket on the natural gas options market, and then see if that LNG terminal ever gets built.
Read the article please, Toddster! I went looking for this last week when I was unsuccessful trying to help you “discover” that the price of oil was being manipulated.
I got to thinking about it, and thought maybe you needed the mechanism of how it could happen. So I searched around and thought this could help you.
parsy, the considerate
“They are market signals.”
Yeah, but when gas hits $4 a gallon for no good reason, then I think we need to signal back to the guys at the market. Its called regulation. And maybe jail.
parsy.
Yea, that’s the common party line. Trouble is, the facts don’t back up the assertion.
If the heavy specs (like Goldman) really wanted open price discovery and liquidity in markets, they would not have set up secondary markets (like ICE) to take liquidity and price discovery out of the established markets, would they? ICE wasn’t set up to improve liquidity and price discovery - it was set up to allow energy speculators to hide from the prior established markets, like the NY Merc.
If speculators want to speculate, that’s fine. If they want to take on large positions, that’s fine too — as long as they have the margin to back them up. Trouble is, the CFMA of 2000 allowed financial and energy futures to be put into markets that do not play by the same rules as hard commodities and ag commodities any more.
If the speculators want to walk their talk, then let’s put all the commodities trades on open, fully reporting exchanges, with enforced margin requirements and position reporting. No one should be able to make trades in secret, nor should they be able to escape margin requirements. Everyone should be able to see all trades, no matter how large or small, and everyone should have to abide by the same rules.
Many years ago, the writings of Milton Friedman convinced me that speculation was stabilizing, not destabilizing. I am very wary of anyone, especially someone from the industry involved, who advocates restrictions on who can engage in speculative activity.
Hmmmmm......if producers of these commodities had sold their future production on the commodity exchanges, they'd lock in future revenue and.......wait for it.......they'd have tempered the sky rocketing prices.
But who would be willing to buy huge amounts of future output at sky high prices? I mean besides speculators?
I was unsuccessful trying to help you “discover” that the price of oil was being manipulated.
So if I go to the NY Merc and buy 10 contracts (10,000 bbls) of oil for delivery in October, you think I'm manipulating the price of oil?
Don't allow leveraging. Tax short term gains at a much higher rate, etc.
How can the invisible hand work, when it is going up against the steroid-enhanced hand of gambling junkies?
And don't try and tell me that because people are putting their money on the line that they are making intelligent bets about the future. Or that somehow the average bet will happen to match the price on a pure supply/demand basis.
And don't try and tell me that if private companies make bad bets it is all the fault of government interference in the market. Some of the speculation that was the most out of line with reality was on instruments that were specifically unregulated by government.
We have had plenty of evidence over the past couple years that the most intelligent people are capable of making bets that are massively stupid, and that are completely out-of-line with supply and demand, e.g. housing market, CDSs, gas/oil, gold, biofuels, etc.
Like you said, for producers and consumers. And maybe a few side bets from time to time. But it is now more of the side bets than it is the hedging. The situation is ripe for price manipulation and gouging and all sorts of horrible things.
parsy.
Is your problem with speculators, or with the market? How do you feel when speculators drive the price of oil down?
No good reason? Someone was willing to pay $4 a gallon. Someone was willing to sell for $4 a gallon. Sounds like a good reason to me.
And maybe jail.
Guilty! Guilty of paying too much for gasoline. LOL!
How do you know that there was no good reason for last year's run-up in oil prices? If you thought that market fundamentals dictated a much lower price, I hope you backed up your thoughts with money and made a fortune in the futures market by shorting oil. If you didn't, why not? Don't you have confidence in your crystal ball?
Fantastic reply! I wish I had said it.
By the way, love the tagline. “He do the police in different voices.”
parsy, who has a facsimile copy.
Well, after they took about a trillion out of the economy, I still don’t like them.
parsy.
In other words, a free market is ok as long as it goes up? Those people to whom you refer may have forgotten that prices rise and fall in a free market. You may have forgotten that the market should be allowed to correct itself, without the government shoveling money into a hole trying to stop it.
Bingo. You should expand your question to ask: why did hardly anyone else not do the same thing, either?
“How do you know that there was no good reason for last year’s run-up in oil prices?”
Hate to answer a question with a question, but:
How could you think there was a “supply-demand” issue?
parsy.
Because the circus atmosphere and giddy prospects of getting rich made them all hang onto it. (Although in reality, I think the CFTS, or whatever, found net short positions?)
parsy.
You need some philosophy. Obviously, because we paid $4 for gas, it was worth it in this best of all possible worlds, and there must have been a good reason it was $4.
Read Candide. Ask some questions.
http://en.wikipedia.org/wiki/Candide
Candide, ou l’Optimisme (1759) is a French satire by the Enlightenment philosopher Voltaire, English translations of which have been titled Candide: Or, All for the Best (1759); Candide: Or, The Optimist (1762); and Candide: Or, Optimism (1947).[5] The novella begins with a young man, Candide, who is living a sheltered life in an Edenic paradise and being indoctrinated with Leibnizian optimism (or simply optimism) by his tutor, Pangloss. The work describes the abrupt cessation of this existence, followed by Candide’s slow, painful disillusionment as he witnesses and experiences great hardships in the world. Voltaire concludes with Candide, if not outright rejecting optimism, advocating an enigmatic precept, “we must cultivate our garden”, in lieu of the Leibnizian mantra of Pangloss, “all is for the best in the best of all possible worlds”.
parsy.
This is an extremely long read, but it is chugging full of pertinent info about the price of oil and speculation:
http://hsgac.senate.gov/public/_files/SenatePrint10965MarketSpecReportFINAL.pdf
parsy.
To me, it seemed like “an expected future supply and demand” issue. There was, at the time, a lot of ink spilled about declining production rates in Saudi Arabia and Russia and booming demand in China and India. Very few people (and especially the “evil speculators” that bet on continually rising prices) foresaw the global recession that sharply decreased the demand for oil.
You need some economics.
What you’ve written makes sense. I wonder if there is there such thing as a pure hedging market (as opposed to a speculative market)? Is there always speculator always on the other side of a hedge? Asking in true ignorance.
Hurricane Katrina!
Maybe Jim Cramer of Mad Money needs some economics, too?
You have repeated every stale truism of the GOP. Does your mind still work? If so, try on some exercises that might make you reconsider:
http://www.cnbc.com/id/31802208
That was the focus of today’s Outrage. As well intentioned as Commodity Futures Trading Commission Chairman Gary Gensler may be, and he’s considering new rules to limit futures trading, the industry lobby holds “tremendous amounts of…congressional mindshare,” and they’ll use it to maintain the status quo. Why not? They’re making big bucks right now. And these guys “don’t just have clout,” Cramer said, “they have a game plan.”
The Mad Money host today laid out what he thinks that plan is: Futures traders will reach out to the politicians whose elections they funded to influence Washington’s response. They’ll take the same approach with the universities that accepted their cash and get academics to publish “research” on how futures markets are too “deep” to be manipulated. A full-on media assault will trumpet message as well.
Then they’ll get so-called captains of industry to say that speculation provides the market with liquidity, and that makes better markets for hedging. And, of course, they’ll deny that last summer’s near $150 oil prices had anything to do with speculation at all – it was Chinese demand. Those that benefit most from deregulation will also say that investors need to be able to hedge against skyrocketing prices, such as those from last summer, even though they were the investors that drove crude to that level.
Lastly, they’ll say that it’s regulation that caused these problems in the first place, and that more rules will cause more problems. Maybe they’ll tap White House chief of staff Rahm Emmanuel, a native of Illinois, home also to the Chicago Mercantile Exchange, where many of these trades take place, to stop the call for greater government control. They might even threaten to pull their operations offshore, which would most certainly kill any new rules.
But go ahead and ignore this, too. The video is great. it makes sense. You either can not or will not see the forest for the trees. You have been screwed, blued, and tatooed, and you still haven’t caught on yet. What does it take to wake you up?
parsy, the alarm clock.
BTW, all. The four bigger paragraphs are from the link, not me. I forgot to put “” .
parsy.
Without a doubt. I hope he's not your teacher.
So you prefer massive volatility or shortages?
Correct observations. This is the worst populist idea ever and almost all populist ideas are terrible.
Its not an either-or.
Keeping gamblers out of the energy market is something that should just be common sense.
parsy.
You’ll see it in oil, but as an energy shock. Better: get the government out of the commodity business all together (i.e. no farm subsidies, no corporate welfare, no import restrictions, and a sane energy policy that blocks enviro-whackos (is that how you spell it?) from holding the nation hostage)
Should Southwest Airlines be kept out of the oil futures market?
Did you watch the video? Do you think everybody who is starting to say speculators have caused unwarranted price increases is just nuts?
Even if you disagree with their conclusions, you surely must we ain’t all idiots. or not.
parsy.
That is a very reasonable set-up, yet when has it ever been followed?
Yes.
Do you think everybody who is starting to say speculators have caused unwarranted price increases is just nuts?
Who is a speculator versus a legitimate market participant? How does a speculator cause an "unwarranted price increase"?
This statement doesn't jive with the rest of your exposition. Check it. Also, increasing short-term capital gains causes less stability as people make investment decisions based on tax issues. Better to have long and short term gains taxed the same and best to have that rate be zero.
From “The Accidental Hunt Brothers
http://accidentalhuntbrothers.com/?p=327
Rogue Trader Singlehandedly Pushes Oil Prices Up $2+ Per Barrel
July 9, 2009 by Adam
Filed under: News Articles
“The startling spike in oil prices to their highest level this year on Tuesday was caused by a rogue broker who placed a massive bet in the Brent oil market, triggering almost $10m (€7m) of losses for his company.
PVM Oil Associates, the world’s largest over-the-counter oil brokerage, said on Thursday it had been the “victim of unauthorised trading”. The privately owned company said that as a result of the unauthorised trades it had been forced to close substantial volumes of futures contracts at a loss.”
Prices rose in one hour from $71 to $73.5, the highest level for the year, according to Reuters data. In total, futures contracts for more than 16m barrels of oil changed hands in that hour – equivalent to double the daily production of Saudi Arabia, the world’s largest oil producer, and far more than the traditional 500,000 barrels for that time of the day.
Traders said the broker implicated had allegedly accounted for at least half of the unusual activity, with the rest the result of others chasing the rally. Oil prices on Thursday fell to $66.5 a barrel, down almost 10 per cent from Tuesday’s peak. Click for ARTICLE
* ‘Rogue broker’ blamed for oil spike
* Javier Blas and Izabella Kaminska
* Financial Times
* July 2, 2009
Buying and selling by market participants can and does move prices in fact it is the only thing that moves prices. With a trade of 8 million barrels in size this trader moved prices up by more than $2.
In the first six months of 2008, Index Speculators poured between $50 and $60 billion into commodity indices. This resulted in the buying of between 130 and 170 million barrels of WTI crude oil in the futures markets. This is over 1 million barrels per day, every day, for 6 months. If 8 million barrels moves the market $2 then 150 million barrels must move the market by $37.50 per barrel, accounting for a big fraction of the increase in the spike in prices from mid-$90s to $147 per barrel.
And oh by the way in the first five months of 2009, we estimate that between $35 and $40 billion has poured back into commodity indices. This resulted in the buying of between 125 and 155 million barrels of crude oil in the futures markets. Using our rough estimates above that would mean about $35 in increase or almost all of the increase from the mid-$30s to the mid-$70s. It certainly wasn’t supply and demand since supply is exploding and demand has fallen off a cliff.
parsy, who keeps hoping this will sink in
"An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative."
Having sold my "investments" to speculators has been very profitable. That someone decides to speculate is their business.
At the same time the oil market, which seems to concern you most, is affected by all kinds of government intervention. For instance if we opened all our areas to oil investment and lowered the cap gains tax to zero, which way would the price of oil go?
Dude,
If they buy the futures and have no place to keep the oil, and have no intention of ever taking delivery of the oil, that is speculating or gambling on the price.
If you like gamblers playing with the oil price, that is your business. Maybe you think, like so many others here, that $4/gallon was just the market working like it should. To you it may have been the rain. It is becoming more and more clear, it wasn’t raining on us.
Back in the day, we used to say of the gullible,” They not only don’t know anything, they don’t even suspect anything.”
Please don’t be one of them. Read some of the above links. Listen to the Cramer video.
parsy.
parsy.
LOL! Someone doesn't know how the math works.
You never answered, should Southwest Airlines be kept out of the futures market?
Who is a speculator versus a legitimate market participant? How does a speculator cause an "unwarranted price increase"?
Southwest Airlines is gambling on the price of oil. Should they be stopped?
No, I think SW Airlines has a legitimate interest. I am not even against a little speculation. BUT when you have a 27 to 1 interest going on, bad sh*t is going to happen.
(And yes, I do think the Hunt poster had some math issues)
Some things are better left un-played with. Take mortgages. They used to be mortgages, not securities. People bought them who were in that business. Then they started getting brokered like crap. Gambling money flew into the mix, and whammo, sub-prime crash.
I saw some of the paper that was flying at the time and believe me, some nut had to be investing. And if the nuts had lost their money, I could care less. Ask yourself, who’s paying for the mess? Ever hear of too big to fail? We pick up the tab. And we’re picking up the oil betting tab too. Every time we fill up or buy something.
parsy.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.