Why There Should Be More Oil Speculation, Not Less

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[newbie2008]

We need more — not fewer — oil traders. After a roller-coaster ride that has sent oil prices from a record high of $147 per bbl. last July to below $35 in December and back to around $60, there has been a clamor to clamp down on speculators — those investors who trade oil but don't ultimately supply it or use it (the way airlines do, for instance). The economic disruption caused by oil's volatility has been so vexing that the Obama Administration believes it can stabilize prices by regulating speculators out of the market. It can't.

[Two Kids' Dad]

This should make O’Reilly cry ... or rant ... or bloviate some more... or all of the above.

[ckilmer]

this is not the right time for this. why US demand for oil is just cratering. it won't be long before the oil speculators will realize the safest bet for oil is straight down. this time it will break through 30 a barrel.

Here's a graph of US oil demand

US trade gap seen as positive for economy A steep 11 percent drop in oil imports -- with volume dropping despite rising oil prices -- accounted for half the decline in the May trade gap. Excluding oil, the trade gap closed 4.7 percent.

[Brilliant]

The left wants high oil prices anyway, so this is precisely what they ordered.

[rsobin]

Yea, right .It’s a good thing to have oil in a tanker traded dozens of times while in transit ? It’s a good thing to have large funds buying a tankers cargo in direct competition with refineries? Its a good thing to have dozens of tankers sit off shore and cause spot shortages in refinery stock? $147 dollar was crazy for the economy at that time. Speculation is not what we needed last summer. I really do not think we need long positions on oil and the manipulations necessary to make them profitable now either.

[newbie2008]

speculative purchases of oil aren’t end consumers, only inter temporal consumers. They only buy “in direct competition” with refineries of today vs refineries of tomorrow. Ultimately, all the oil they purchase will find their way to a refinery, at more stable prices.

Easing volatility and price swings dampens, not increases, the likelihood of shortages

[Batrachian]

I think that oil speculators should be forced to take physical possession of the commodity before they can resell it. Let's see some suit on Wall Street deal with 1,000,000 barrels of oil in his office. Good luck. And of course all this speculation is done with massive amounts of leverage, which the various commodities markets allow but the producers may not want to deal with selling their real-world commodity.

Let them buy and sell all they want, but in real, not paper, oil. Honesty. It used to mean something in this country.

[org.whodat]

People can buy and sell all they want, just take delivery of what you buy, and pay transportation. Works for Wal-Mart. You have no insurable interest in a piece of paper.

Proof

Speculators Blamed for High Gas Prices Article Preview: Michael Masters, portfolio manager of the Masters Capital Management hedge fund, thinks Americans are getting hosed at the gas pump. According to Mr. Masters and others, the price for a barrel of oil would begin to fall almost overnight if Congress were to write legislation to remove speculators from the energy futures market. Is it possible that the recent run-up in gas prices is largely due to factors other than traditional supply and demand? 6/26/08

He said the same thing before congress.

[Jacob R]

You are correct. It looks like there are a few candidates not afraid to say it, http://www.votejessekelly.com/news/2009/06/29/jesse-kelly-supports-energy-freedom

[IronJack]

Back when oil was soaring, I was crucified for saying the same things about oil speculators. There is no viler, more reprehensible profession on earth. I would rather my son be hanged as a Democrat pedophile before I would see him join that swarm of leeches.

Back in the Civil War days, angry citizens used to exact “frontier justice” from profiteers. It’s a tradition well worth resurrecting.

[zeestephen]

It is not correct to blame oil speculators for the high price of oil.

For the last 18 months world oil consumption has averaged between 87 million barrels per day and 83 million barrels per day.

As the price of oil reached $147 per barrel in 2008, which was 40% higher than the previous all time high, consumption fell by less than 1% per month.

This indicates that a huge majority of consumers - no matter how angry - were completely willing to buy oil at incredibly high prices.

Thus, oil price stayed very close to oil demand.

To my eye, the speculation theory always breaks down on two points.

First, the only way a speculator can make money when the price goes up is if another speculator loses exactly the same amount of money betting the price will come down.

Somehow, the theory goes, ALL the brilliant speculators have bought contracts, and ALL the idiot speculators have graciously sold them contracts.

That’s quite a coincidence, isn’t it?

Second, speculators make money only when the price moves, up OR down.

If you were brilliant speculator, why would you risk a political and public backlash by driving prices higher?

You can make exactly the same amount of money by driving prices down.

Theoretically, you could drive the price down to $0 per barrel.

That’s absurd, of course.

$0 per barrel would cause a surge in demand, and a collapse in supply.

Bottom line:

Speculators can never take the price higher than consumers are willing to pay.

Speculators can never take the price lower than suppliers are willing to pump.

[RJL]

I'm sure that a large part of an oil speculators job is trying to predict what our idiot energy social engineers in Congress are going to do.

If the oil producers demanded more money for their oil with Sarah Palin in control the speculators could tell the producers to pound sand because she understands that America runs top to bottom on abundant cheap energy.

With the fools we have in Congress now, the speculators, and the users, us, have to pay up.

[NVDave]

The author pulls a bait-n-switch. He fails to mention the volume of contracts on ICE, mentioning only NYMEX.

When he starts a serious discussion about ICE and the OTC markets, I’ll listen.

[jiggyboy]

There are maybe three sentences in that article that aren’t absolutely perfect inversions of the truth.

Not including the paragraph about Vitol and SemGroup that completely invalidates his bogus premise, which he barely mentions in passing with no irony or rebuttal whatsoever.

[jiggyboy]

This would not explain how the oil price started a 66% drop WITHIN HOURS of SemGroup covering its last short position, declaring bankruptcy, and turning over its assets and trading book to Barclays.

[jiggyboy]

Bingo. I commented as much the other day. Only people who can provide the commodity can be sellers, only people who can take delivery can be buyers, and you can’t be both.

Pension plans, for example, buying contracts and rolling them over month after month “as an investment” reduce the supply of oil available.

[org.whodat]

The truth is a pimp s a more honest person than a speculator. The government needs to first change the laws on short term gains tax, to apply to commodities sells, where delivery is not taken, the same as everyone else. Then raise short term gains tax by about 10%.

But in the long term if you do not take delivery you do not need to be in the market.

[zeestephen]

jiggy,

I disagree.

SemGroup declared bankruptcy two months AFTER the oil market peaked at $147 and two months AFTER the price of oil had already dropped by 15% to $125 per barrel.

SemGroup is a perfect example of what I wrote in my comment.

A speculator can only make money when the price goes up IF there is another speculator losing exactly the same amount of money betting the price will come down.

SemGroup was just the last, and the loudest, short seller to get crushed.

The market turned at $147 per barrel because sellers finally outnumbered buyers, and the price came down hard and fast.

[newbie2008]

How then do we know if a certain price fluctuation is due to speculation or other factors? The answer to that question is: by looking at inventory changes. In order for speculators to increase/lower prices they must increase/lower inventory levels. The reason for that is that if they take long positions in futures contracts they are left with two choices. Either they unwind that long position in which case they will lower the price to the level where it would have been if they hadn’t taken that long position in the first place, or they’ll have to keep the delivery they paid for as inventory. Meaning that in order for speculation to affect the price, inventories must increase.

If you look at the evidence (For the original data go here and then click “Complete History XLS) , you can see that in the months before the July 2008 peak, inventories fell significantly(about 50 million barrels below year ago levels), while in the coming 5 months inventories rose sharply (shifting to being nearly 50 billion above year ago levels). Since then they have been more or less flat adjusted for seasonal patterns. This means that speculators helped reduce the price increase that we saw until July 2008, and then helped reduce the price decrease until December 2008. The increase in price we’ve seen after that was by contrast purely driven by underlying supply and demand movements.

http://stefanmikarlsson.blogspot.com/2009/07/speculation-oil-price-fluctuations.html

[jiggyboy]

The high close of $147.27 was Friday July 11 2008. That weekend was July 12-13, and SemGroup gave their books to Barclays on Wednesday July 16. That’s three business days later — i.e. the day that shorts covered on Friday settled, or the day that unmet margin calls would force liquidation. I stand by my statement that the all time tippy tippy top in crude oil was within hours of SemGroup covering their last short.

now to articles like this one:

http://www.laobserved.com/biz/2008/07/the_mysterious_semgr.php

a few relevant quotes:

“In the three days surrounding that transfer” to Barclays, crude futures “plunged $15.89...thus, with SemGroup removed from the market, crude oil has been free to fall,” wrote Stephen Schork, editor of the Schork Report, a newsletter tracking the oil market.

“Some traders note that SemGroup’s activity dried up well before July 16...”