Here go the oil Speculator's again!

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Originally Posted By: sbergman27
Originally Posted By: ZZman
I have no problem with users buying oil in case there is a supply issue.

That, in itself, is easily enough to explain the price of crude oil at this time.

Sometimes a rose is just a rose.

-Steve


Wrong....there is no shortage. Certain people are worried there might be......might.
 
Originally Posted By: ZZman
Wrong....there is no shortage. Certain people are worried there might be......might.


So it's your argument that prices should stay low until there's a shortage? You do know that's how it works in primitive societies, where there's no incentive to boost production or build surpluses? And when the shortage occurs, they do without... if it's grain in short supply, then they starve?

With futures markets, there are always people planning for the future -- because they have an incentive, because they can profit. Where these markets do not exist, people are generally content to live in the here and now, or rather they have no choice in the matter.

Also, where there are no futures markets, seasonal oscillations in prices tend to be greatly exaggerated. I'm sure you've noticed that there are seasonal factors in the oil and gas markets?
 
I don't think anyone is saying there should be no futures market although there would be natural supply and demand at play anyway. What people are objecting to is the mostly unregulated oil futures market, derivatives and large financial institutions, hedge funds, etc pumping billions into oil futures who do not really use oil as part of their business. This artificially increases demand and price and encourages oil companies to buy and hold oil in hopes the price increases. Of course you continue to deny this but many financial people say all this money going into oil futures does raise the price.

http://www.lakelandtimes.com/main.asp?SectionID=9&SubSectionID=9&ArticleID=8068

http://money.howstuffworks.com/oil-speculation-raise-gas-price.htm
 
TR:

I have never said low. I have always said reasonable. (In my mind $ 70-80 a barrel right now is reasonable)

The price now is not reasonable.

And I mean a true shortage where people are literally selling to the highest bidder because there is actually a limited supply and the loser is gonna go without.

The incentive to produce more is you can sell more. That doesn't mean the price has to be jacked up higher. You will make more profit by selling more product. The incentive to build surpluses is so you have more product to sell, or are prepared if something "does" happen. Once again that is no reason for the price to get jacked up.

In your example if grain is in short supply it is in short supply. How does charging more for it change the supply? If it does then the shortage was a scam. If people want to make money they produce and sell.
 
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Originally Posted By: mechanicx
I don't think anyone is saying there should be no futures market although there would be natural supply and demand at play anyway. What people are objecting to is the mostly unregulated oil futures market, derivatives and large financial institutions, hedge funds, etc pumping billions into oil futures who do not really use oil as part of their business.


You might ask the folks at the Commodity Futures Trading Commission if the futures markets are unregulated. (You might also ask their counterparts in London, Singapore, and Dubai.)

Additionally, there are position limits that restrict the number of contracts each individual or firm can control.

Finally, what if there is a hedge fund that wants to put $1 billion or $10 billion into the oil market? Just the crude oil markets are worth nearly $3.5 trillion per year. A few billion dollars is chicken feed. But, eventually a $10 billion position needs to be rolled over as contracts expire, or they must take delivery. Again, every buy order is matched to a sell order.
 
Can you give me an idea on how many contracts are sold daily?

The size of these contracts?
 
Originally Posted By: mechanicx
I don't think anyone is saying there should be no futures market although there would be natural supply and demand at play anyway. What people are objecting to is the mostly unregulated oil futures market, derivatives and large financial institutions, hedge funds, etc pumping billions into oil futures who do not really use oil as part of their business. This artificially increases demand and price and encourages oil companies to buy and hold oil in hopes the price increases. Of course you continue to deny this but many financial people say all this money going into oil futures does raise the price.

[
http://money.howstuffworks.com/oil-speculation-raise-gas-price.htm


Very good article M.
 
I like this section from the first article M had too:

The art of the deal

So just how does speculation work?

Well, investors with large sums of cash purchase, on contract, barrels of oil at a pre-determined price for a future date, anticipating that, with rising prices, they will make a profit when the oil is delivered. So, for example, speculators may purchase in 2008 a barrel of oil at a certain price because of a contract - and leverage it later to a petroleum user for a higher price.

The trick is, these speculators themselves drive up the price because, by entering the market, they drive up demand.

"The large purchases of crude oil futures contracts by speculators have, in effect, created an additional demand for oil, driving up the price of oil to be delivered in the future in the same manner that additional demand for the immediate delivery of a physical barrel of oil drives up the price on the spot market," the Senate report stated. "As far as the market is concerned, the demand for a barrel of oil that results from the purchase of a futures contract by a speculator is just as real as the demand for a barrel that results from the purchase of a futures contract by a refiner or other user of petroleum."

Even in 2006, the report stated, analysts estimated that speculative purchases of oil futures had added as much as $20-$25 per barrel to the 2006 price of crude oil, thereby pushing up the price of oil at the time from $50 to approximately $70 per barrel.

In addition to this direct effect, the report stated, speculation has a pernicious domino effect: by purchasing large numbers of futures contracts, and thereby pushing up futures prices to even higher levels than current prices, speculators have provided a financial incentive for oil companies to buy even more oil and place it in storage.

**TR: I see why you say some want to build surpluses.
 
Originally Posted By: ZZman
Can you give me an idea on how many contracts are sold daily?

The size of these contracts?


I'm guessing few if anyone know for sure and speculators don't want anyone else to know.
 
Quote:
In your example if grain is in short supply it is in short supply. How does charging more for it change the supply? If it does then the shortage was a scam. If people want to make money they produce and sell.


No, higher prices lead to conservation in the short term and increased production in the long term. Or, higher prices encourage the importation of expensive supplies from further away, despite the costs of transportation; or they encourage the use of more-expensive alternatives. For example, if the people normally eat chicken because it's cheaper than beef, when chicken prices go high enough then consumers may switch to beef.

See, these are all topics covered in Econ 101, Microeconomics. Don't feel too bad, there are many Ph.D economists working for the government who forget or ignore these basic economic laws, too.
 
Originally Posted By: ZZman
I have never said low. I have always said reasonable. (In my mind $ 70-80 a barrel right now is reasonable)

The price now is not reasonable.

And I mean a true shortage where people are literally selling to the highest bidder because there is actually a limited supply and the loser is gonna go without.

You cannot give me an objective definition of "reasonable" because that term is not objective. "Reasonable" might be in the middle of the recent range of prices; but how do you know that $120/barrel is not in the middle of the range four weeks from now?

I can easily argue that the current range of $95-120 for various grades of oil is reasonable, and that $70-80 is too low, and thus unreasonable.

As for shortages, of course there is a shortage of oil. The current production of about 83 million barrels per day is just about the amount that is demanded today -- but the world is still either in recession or just barely growing out of recession, and if the global economy ever starts growing robustly then there will be not nearly enough oil to go around.
 
Originally Posted By: mechanicx
Well I don't think it's very regulated and it is not chicken feed. These financial institutions and their funds are huge. Generally derivatives are bigger than the real market. As far as there being buyers and sellers and that cancels out everything, is it really that simple


If a $10 billion hedge fund risks everything, it could control more than $10 billion worth of oil. And while it is buying, it could drive up the price slightly. But, even hedge funds have rules which they must follow, or else no one will trust their money with a fund. These rules are designed to protect the investors' money, so that it can't all be lost on even a slight correction in the market.

So let's assume a reasonable level of risk, and the $10 billion is used to control $20 billion worth of crude oil. That would be slightly more than two day's worth of global production.

Let's assume that the hedge fund spreads out its purchases over several delivery months: some in the June contract, some in July, some in December. Again, reducing risk. But as the expiration dates approach, the hedge fund must sell June and buy some later month. This "massive" selling of the June contracts drives down current ("spot") prices, while the simultaneous buying of later contracts drive those prices higher.

But look at what happens to these speculators: they are constantly buying the more-expensive distant contracts and selling the less-expensive nearby or spot contracts. What happens when you buy high and sell low?

I'm serious. What happens when you buy high and sell low? Do you know? In fact, the hedge funds and ETFs are not losing as much now as they did a few months ago, when the contango was steeper. But they are not making the huge profits that you think they are.
 
Originally Posted By: Tornado Red
Originally Posted By: mechanicx
Well I don't think it's very regulated and it is not chicken feed. These financial institutions and their funds are huge. Generally derivatives are bigger than the real market. As far as there being buyers and sellers and that cancels out everything, is it really that simple


If a $10 billion hedge fund risks everything, it could control more than $10 billion worth of oil. And while it is buying, it could drive up the price slightly. But, even hedge funds have rules which they must follow, or else no one will trust their money with a fund. These rules are designed to protect the investors' money, so that it can't all be lost on even a slight correction in the market.

So let's assume a reasonable level of risk, and the $10 billion is used to control $20 billion worth of crude oil. That would be slightly more than two day's worth of global production.

Let's assume that the hedge fund spreads out its purchases over several delivery months: some in the June contract, some in July, some in December. Again, reducing risk. But as the expiration dates approach, the hedge fund must sell June and buy some later month. This "massive" selling of the June contracts drives down current ("spot") prices, while the simultaneous buying of later contracts drive those prices higher.

But look at what happens to these speculators: they are constantly buying the more-expensive distant contracts and selling the less-expensive nearby or spot contracts. What happens when you buy high and sell low?

I'm serious. What happens when you buy high and sell low? Do you know? In fact, the hedge funds and ETFs are not losing as much now as they did a few months ago, when the contango was steeper. But they are not making the huge profits that you think they are.


This is a debate that never ends. I just don't think you are arguing it honestly. First the leverage is more than 2:1 more like at least 10:1, but granted that can work both for and against a speculator. Point here is they are both buying and selling so the demand remains artificially high along with oil prices. If price keeps rising they are not buying high and selling low. When they go to sell the contract it is selling for more than they originally payed for the contract. They don't have continue to buy they can also short if they believe the price will not rise. If some hedge funds or ETFs are losing money, then someone else is gaining it. The big players and insiders aren't stupid and most sources say they make a lot of money, and at the expense of the smaller speculators, investors and I think oil consumers. I don't think either side of the argument is going to change their mind so what's the use in continuing to debate each other?
 
Originally Posted By: mechanicx
This is a debate that never ends. I just don't think you are arguing it honestly. First the leverage is more than 2:1 more like at least 10:1, but granted that can work both for and against a speculator. Point here is they are both buying and selling so the demand remains artificially high along with oil prices. If price keeps rising they are not buying high and selling low. When they go to sell the contract it is selling for more than they originally payed for the contract. They don't have continue to buy they can also short if they believe the price will not rise. If some hedge funds or ETFs are losing money, then someone else is gaining it. The big players and insiders aren't stupid and most sources say they make a lot of money, and at the expense of the smaller speculators, investors and I think oil consumers. I don't think either side of the argument is going to change their mind so what's the use in continuing to debate each other?


The leverage can be much greater, but fund managers have to follow certain guidelines because their investors want their money back someday.

As for whether prices will continue higher and those with long positions will profit... that is not known and cannot be known. If known facts indicated that crude ought to sell for $140, then it would immediately adjust to that price -- it would not take weeks or months to reach that price, but only a few hours at the most.
 
There is no actual shortage right now. And "if" and "when" the global economy comes back production could increase as well.

Reasonable is a simple term made complicated it appears. What do the majority of people think is a fair price. What do oil producers think is a fair price? I bet it is way lower than the current price and closer to mine.
 
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The real problem is greed and the never ending thirst for more at any cost.

Greed beats out common sense.

Sad
 
Originally Posted By: ZZman
Reasonable is a simple term made complicated it appears. What do the majority of people think is a fair price. What do oil producers think is a fair price? I bet it is way lower than the current price and closer to mine.


What the majority thinks is irrelevant. I'm sure you're familiar with the saying, "put your money where your mouth is." The price of oil or any other commodity is determined by what people are willing to pay... and apparently the 6 or 7 billion humans on this planet are willing to pay whatever the price is today. If they weren't, then the price would quickly adjust to some different price.
 
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