Skip to comments.How does oil speculation raise gas prices?
Posted on 03/05/2012 6:41:53 PM PST by U-238
The next time you drive to the gas station, only to find prices are still sky high compared to just a few years ago, take notice of the rows of foreclosed houses you'll pass along the way. They may seem like two parts of a spell of economic bad luck, but high gas prices and home foreclosures are actually very much interrelated. Before most people were even aware there was an economic crisis, investment managers abandoned failing mortgage-backed securities and looked for other lucrative investments. What they settled on was oil futures.
An oil future is simply a contract between a buyer and seller, where the buyer agrees to purchase a certain amount of a commodity -- in this case oil -- at a fixed price [source: CFTC]. Futures offer a way for a purchaser to bet on whether a commodity will increase in price down the road. Once locked into a contract, a futures buyer would receive a barrel of oil for the price dictated in the future contract, even if the market price was higher when the barrel was actually delivered.
As in all cases, Wall Street heard the word "bet" and flocked to futures, taking the market to strange new places on the fringe of legality. In the 19th and early 20th centuries it bet on grain. In the 21st century it was oil. Despite U.S. petroleum reserves being at an eight-year high, the price of oil rose dramatically beginning in 2006. While demand rose, supply kept pace. Yet, prices still skyrocketed. This means that the laws of supply and demand no longer applied in the oil markets. Instead, an artificial market developed
(Excerpt) Read more at money.howstuffworks.com ...
This is not IMO a totally accurate article. The notion that a futures market is an artificial market is not correct. It does not track pure supply and demand at the end use, but it is based on pure supply and demand of the futures contract.
If not, then just buy oil futures and retire, cuz they never go down, right? Wrong.
I will say that futures market does mean that extremes can be exaggerated, but this works both ways. We’ve seen oil at 147 and at 32 in the last 36 months. The 32 was as unrealistically low as the 147 was high. The average of those two is about what it should be actually.
The point is, the futures market drove it down to 32. No one was bitchin about the “artificial” futures market then, were they?
One word. Stability. Flood the market with oil from a stable country, and the speculators will get out of that market and prices will crash.
You are correct. A+++
This is like blaming thermometers for the weather.
It is ludicrous.
Futures tend to follow real oil prices—not the other way around—something for fund managers to bet their clients’ money on. Other oil investors invest in each of many individual companies. Oil buyers are the drivers of oil prices, and enormous amounts of cash are required to take delivery.
Oil’s going up, because some of our trading partners are manufacturing many useful things and need more of it every year for their production and customers (hundreds of millions of new drivers over the next few years). Global interests (global corporate sponsors) pay for propaganda such as that posted above in order to keep the heat off of themselves.
Read “The Marching Morons,” by Cyril Kornbluth. Have fun. Enjoy the slide.
Gee, I wonder where we could find one of those.......hmmm........
The only type of speculation that drives up oil prices at all is the one about whether Zero was born in the US.
The problem is, and always has been, OPEC.
OPEC also bankrolls all the anti-American radical and liberal orgs in the US.
OPEC also bankrolls worldwide jihad.
OPEC also paid for Zero’s college years and who knows what else. He’s clearly never held a job, nor had to.
Great analysis, but have you ever tried explaining that to a lib? Zzzzzz.......
You are welcome, SunkenCiv.OPEC is a big obstacle.
Yes—kind of a long short story. But it’s funny to read and a little enlightening, even to this day, IMO.
'Rex Tillerson, the boss of ExxonMobil admitted last week that the price of oilbased purely on supply and demand- should be in the $60 to $70 a barrel range. The reason its above $100 a barrel, Tillerson explained, is due to the oil majors using futures contracts to lock in current high prices, and speculation that is engineered by the high-frequency trading of quantitative hedge funds.'
I remember reading that.
Thanks for linking that.
“The problem is, and always has been, OPEC.”
A viable plan to get us off ME oil and tap the vast pool of hydrocarbons here at home was put forward by longtime oil man T. Boone Pickens during the last election.
McCain wouldn’t touch it. Hannity wouldn’t entertain such ‘nonsense’ and the plan never saw the light of day on his show, to all of our detriment.
Maybe some of the current candidates will adopt it (I know Newt has some plan but I’m not familiar with it. I may also be a realistic plan as well).
Now, suppose you have April futures trading at 100, May futures trading at 110, and June trading at 120. This provides an incentive for somebody who holds physical oil to hold onto it and sell a May or June futures contract. Oil then gets held onto in storage in anticipation of higher future prices. Eventually, though, the holders of physical oil run out of storage and need to actually deliver.
Yes, the article has a very flawed premise. The vast majority of the oil market is based in real supply and demand. Speculation operates at the margin and most of the time it acts to depress price volatility, not make it worse. Speculation can temporarily distort price discovery, but the door closes fast and speculator’s monetary fingers get smashed if they don’t get out of the way when they are on the wrong side of the trade.
The writer asked a question, but failed to answer it, and oversimplified his attempt.
The writer also seems unduly taken with govt regulation as the way to keep the market real as oppposed to artificial. He’s got that not just wrong, but backwards.
A lot of oil in tankers is bought and sold many times before it is unloaded.
In 1974 I missed making 4 million on a tanker of oil by 15 minutes because I couldn’t get ahold of the one person that could, would buy it that I knew in time.
If you don’t think the futures market drives prices look at what happened in India today. They banned the export of cotton. That immediately drove up the Cotton Futures. The remaining cotton markets just got richer today because their cotton became more valuable since there’s less of it in the world for sale. There are already a lot of $200 and up pair of jeans on the market like True Religion. Watch the price top $400 a pair in the next couple of months. Until Iran is tamped down for good expect fuel price fluctuations.
Lol. A few years ago, India started a rice crisis. They made it illegal for most Indian rice to leave the country. In October 2007, they blocked exports of all non-Basmati rice. Thus turning a rice surplus into a rice crisis. Idiots.
“How does oil speculation raise gas prices?”
It doesn’t. Speculators, OTOH, do lubricate and hasten the price-discovery process. This is nothing more than deflection from the real culprits — governments that stand in the way of supply increasing to match demand.
good point. Who is the biggest speculator of all? The Us Government that’s who. They have the strategic reserve, regulate most trading, control the currency that oil is traded in, control the military that keeps the sea lanes open, and controls the regulatory apparatus that keeps oil scarce by prevent drilling and pipeline construction.
Of course the government will blame the few people who actually risk their own money in trading oil.
Some of our memories are not so short as to fail to recall just what occurred in the wake of the last bizarre runup in 2008.
SemGroup was found to have controlled well over half of all oil futures for speculative purposes, never planning on taking physical delivery. The CFTC at that time estimated that over 80% of the price of a barrel of crude was due to speculation, with a barrel changing hands on an average of 27 times prior to delivery.
But, don’t just take my word for it, articles and data didn’t just get swept down the memory hole from less than four years ago, here’s one detailing the failure of the aforementioned SemGroup:
Thank you RegulatorCountry for posting the link. I will bookmark it.
A speculator can make as much money if the commodity price is falling as if it’s rising. It has no long term affect on price. This idea that speculation makes prices rises is pure garbage.
Deep-pocketed speculators acting in accord can make even more money with higher volatility, yes? Run it up, ride it down. There are very few games in town to provide any sort of rate of return, and the hedgies have resorted to manufacturing instability for their own benefit, in my opinion.
Again. Just as in 2008.
Hear hear. It works (i.e. fails) the same way on the way down as well. I posted this earlier today on another thread:
“...Goldman Sachs significantly readjusted in August of that year  the GSCI’s gasoline weighting. Index products tracking the GSCI, and representing an estimated $60 billion in institutional investor funds, were forced to rebalance their portfolios resulting in an unwinding of positions. Originally, unleaded gasoline made up 8.75 percent of the GSCI as of 6/30/2006, but this was changed to just 2.3 percent, representing a sell-off of more than $6 billion in futures contracts.
“As a result, gasoline fell 82 cent in the wholesale market over a four-week period, an unprecedented move; and crude oil, which in July 2006 traded over $79 per barrel for August deliveryat the time an all-time recordsubsequently fell to around $56 by January 2007.”
It is a matter of historical fact that these are the two biggest peaks and collapses in the oil market, both happening in the past six years, and have been directly and solely caused by speculators.
Some see a means of assuring victory in the 2012 elections, and while I certainly support preventing a second term for the Obama administration, I'm just not going to throw my lot in with what has every appearance of being a lie.
Others seem to be cheering it on due to having skin in the game.
That is merely a statement of the simplest textbook example of supply and demand economics possible.
I have yet to be challenged on two timely posts on two other threads in this matter in two days. In fact, discussion more or less immediately halted:
http://www.freerepublic.com/focus/f-news/2854740/posts (see my #18 there)
http://www.freerepublic.com/focus/f-news/2854450/posts (see my #20 and #24 there)
This guy has no clue how the wholesale market works. It is simply a way to distribute commodities efficiently. He is in the hedge market which is basically insurance for the wholesale distribution market. He pulled that 60% number out of his ear and would love to see how he accounted for it.
Pray for America
It’s very simple. Speculators cannot hold up the price of oil - they can only push it up for a short time, but then it becomes time to take delivery, and the price crashes, since they have no use for the oil. Happens every time.
Don’t blame him, journalists are not the brightest bulbs on the tree.
Sounds like more tnan just Bernanke boned up on their Great Depression playbook.
Betting that the price of oil will go up is a no brainer with ObaMao in the white house. Anyone who has money to invest can place that bet.
Turning on the spigot from Canada would have just the opposite effect, thereby hurting ObaMao's buddies like:
What’s your 2 cents Thackney?
Too many people believe that supply and demand versus price means they move equally and linearly.
A small move in demand nearly equaling the total available supply will create a skyrocket in demand, of any product that doesn’t have much elasticity in demand.
The spot market is a market for actual users of the the oil. It is not a market for speculators unless they have storage capacity and see a significant contango. Even then, it is quite limited before storage capacity runs out or becomes too expensive.
Given that the spot market is not a speculators market, and that the spot market nearly always matches the near month futures market, I do not see how the claim of price driven by speculators and not real supply/demand holds any water.
“Given that the spot market is not a speculators market, and that the spot market nearly always matches the near month futures market, I do not see how the claim of price driven by speculators and not real supply/demand holds any water.”
Thank you kind Sir.
Guess donations from Wall Street are down so Barry is doubling down on his finger pointing game via “journalism”.
Did you mean demand or price?
I meant demand.
If demand is nearly equal to available supply, a bump up in the demand can send the price climbing very fast, if there was little to no spare capacity in supply.
Then I'm not sure I understand your statement. My reference was to the second "demand" in your statement. If you had said "A small move in demand nearly equaling the total available supply will create a skyrocket in price" I would agree with you otherwise I'm not sure I understand what you're saying. Why would a small increase in demand create a major increase in demand?
Thank you. I did mess that up.
If demand climbs when it is near or at available supply, a small increase in demand can create the price to skyrocket.