U.S. Considers Curbs on Speculative Trading of Oil

[Tornado Red]

Originally Posted By: ZZman
So you are saying they wouldn't honor their legal contracts? So their incentive wouldn't be a legal and binding contract and consistent sales?

I was talking a global agreed upon price. All oil producers and major world buyers agree to a set price. Not just U.S.

If when oil was $ 40.00 a barrel why didn't all the oil producers just quit selling oil so the price would skyrocket back up from the shortage of oil from them refusing to sell? Why.....because they can't. They need income just as badly as we need oil.


If you and I sign a contract, and I try to get out of it, you can take me to court. Now, if you're a commercial oil buyer in Rotterdam and I'm the sales representative of a producer in Jakarta, which court is going to enforce that contract we both signed? Let's say I agreed to sell at $72/barrel, but that was when the dollar index was at 80. What happens if the dollar drops 25% against other currencies and $72/barrel isn't enough anymore?

Maybe you will claim that I should have hedged my currency risk? But that's what futures markets are for, to hedge risk. What happens is, risks and the perceptions of risk changes constantly, not just minute by minute but also second by second. There is no way to factor all the potential risks into a single price, negotiated once a year. The spread between what the buyers would be willing to pay and what the producers would be willing to accept would simply be too wide.

 

[ZZman]

Tornado Red:

As you said these are preceived or potential risks or events. Who knows if they will ever happen or affect anything.

Who enforces contracts now?

Why should you try and get out of it? If that is the price you agreed upon you bite the bullet until the next contract like many other businesses do...unless you have no honor or character. Just like I might have to bite the bullet if the price would have went down.

Who decides that $ 72.00 isn't enough? Maybe I thought $ 40.00 was enough for you but because I realize there is some risk and negoiation needs to go both ways I agree to $ 72.00.

 

[Tornado Red]

Originally Posted By: ZZman
As you said these are preceived or potential risks or events. Who knows if they will ever happen or affect anything.

With each trade, one party is betting that something will happen and the other is betting that it won't. That is the reason why the futures markets exist, so people with a low tolerance for risk can transfer those risks to those who are able to handle them. Of course, the ones who take the big risks expect a higher-than-normal return.

You do know that there's a difference between risk and certainties?

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Who enforces contracts now?

In the regulated futures markets in the US, each trader must maintain a margin requirement, must add funds each day if they receive a margin call, and their positions must be liquidated if they cannot cover the margin call. So the funds are deposited with the exchange each day, enough to cover all trading positions if everyone liquidated. Sometimes one of the smaller firms loses money on the trades it makes for its own accounts, and then it's forced to close. But all the customers' money is safe.

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Why should you try and get out of it? If that is the price you agreed upon you bite the bullet until the next contract like many other businesses do...unless you have no honor or character.

I don;t know. Do you think Iran or Venezuela would sell their oil for the previously-agreed price, if someone comes along and offers to buy 100% of their production for 30% more money?

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Who decides that $ 72.00 isn't enough? Maybe I thought $ 40.00 was enough for you but because I realize there is some risk and negoiation needs to go both ways I agree to $ 72.00.


The producer who agreed to $72/barrel might be the one who thinks it's not enough, if someone comes along who offers a whole lot more.

If that happens, what are you going to do? Complain loudly, "But we had a deal! I have a contract! I have a contract! Where's my oil?"?

I suppose they might bother to come up with an excuse for not delivering the oil they promised to sell, but then again maybe they would not even bother with an excuse.

 

[ZZman]

I have no problem with certainties such as: A hurricane knocked out a refinery and the production can not be made up or a war has cut production making a true shortage. But things like Korea is going to shoot a missle or the Iran Leader flipped off the Iraq leader etc....and all of a sudden we have an excuse to raise prices.

My understanding is that the full amount of the trade does not have to be put up. So if they do lose they only lose a small amount of money they could have lost. If that is correct then that causes more risk taking. Is that correct?

When did big investor groups start playing in the oil futures market anyway?

As far as them following the contract. If it was a global contract with all producers/buyers, who or why would someone offer them more money than the agreed upon price? They pump as much as they want and we buy what we need. They have no reason to not pump because a glut doesn't matter because prices stay the same. Countries buying can use up their oil or store it understanding that the next contract will probably be slightly higher due to inflation increase.

Who really sets the price anyway? A few do. Whether there is a glut or shortage a few set the price. Just because there is a shortage or preceived shortage of something doesn't automatically mean they have to jack the price up. Why did oil cost $ 140.00 last year and $ 40.00 this year? Because certain people decided it. It doesn't matter what price someone sets if no one decides to buy it.

What would the U.S do if a contract was not honored? Ever heard "speak softly but carry a big stick"?

Actually if it was a global contract the countries of the world could sanction/punish the offender.

 

[Shannow]

Oooh, sounds like people are starting to call for one world Gubment...

 

[ZZman]

Not at all. Just some sanity.

If we keep the investors out that are seeking to make a buck and base decisions on facts and not preceptions and speculation, none of this complicated stuff is needed.

 

[Tornado Red]

Originally Posted By: ZZman
I have no problem with certainties such as: A hurricane knocked out a refinery and the production can not be made up or a war has cut production making a true shortage. But things like Korea is going to shoot a missle or the Iran Leader flipped off the Iraq leader etc....and all of a sudden we have an excuse to raise prices.


Let's say a hurricane is bearing down on the Gulf Coast of Louisiana. How close does it have to get before you start worrying about future supplies from the off-shore rigs? How intense does it have to get before you get concerned about refinery operations? In this situation, a risk obviously exists. Are you saying the futures markets should ignore these risks?

At any given time, there is a risk of war with North Korea or Iran or even Canada. With NK or Iran, it might be 5% in the next six months, with Canada it might be 0.05% in the next ten years. My point is that the probabilities are not zero. Are you saying oil prices should not adjust according to changes in the probabilities of war? Or wait until bombs are already dropping before recognizing that the risks of supply disruptions have increased?

You're asking people to ignore their suspicions, to ignore the weather reports and prophecies of war, to ignore evidence staring them in their faces, and to pretend that there's no reason for concern -- just keep buying and selling at the old price, despite what might happen in five minutes. That will never happen.

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My understanding is that the full amount of the trade does not have to be put up. So if they do lose they only lose a small amount of money they could have lost. If that is correct then that causes more risk taking. Is that correct?

No, that is not correct. Typically the margin requirement is around 5% of the full value of the contract. This means if the price move 5% in the wrong direction, the trader does not lose 5%, he loses 100%.

Now, you might be very blase if you have an investment that may rise or fall 5%; but if you stand to lose everything in a single trading session, you might actually be very careful in your trading strategy. You might even be satisfied to hold a position for a few hours or even a few minutes, and to take a small profit rather than hold on and risk losing a lot.

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When did big investor groups start playing in the oil futures market anyway?

Oh, sometime before there really were organized oil futures markets.

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As far as them following the contract. If it was a global contract with all producers/buyers, who or why would someone offer them more money than the agreed upon price?

Maybe because the world is never the same from one minute to the next, and what looks like a secure situation with abundant supplies might not look the same five minutes later. Maybe because one country begins to grow faster than expected, and it needs more oil... which the world's producers are not able to supply at the previously agreed-upon price.

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Who really sets the price anyway? A few do.

Actually the current price is a composite of the preferences of every producer and every consumer, all 6+ billion of us. The price cannot be different than what we are prepared to pay. The notion that prices are set by a tiny group of conspirators is simply absurd.

 

[ZZman]

If you have to raise prices you do so when the events have actually occurred and a shortage has happened. You base it on facts and on reason. Did the hurricane actually hit? Is production going to be down long enough to cause any shortages? Did a war actually happen? Is it affecting their ability to pump oil? If the answer after these have occurred is it will make very little difference than leave prices alone. Wait until is actually is an issue. Not what might be.

So one minute oil is $ 75.00 a barrel and a little tidbit of news jumps it to $77.00 a barrel. Then a few minutes later other news brings it down to 76.00 a barrel. What has really changed in that time frame in reality......nothing.

When are the producers not able to meet demand? We are not to the point yet where supply exceeds demand. When gas prices shot up in Michigan because of hurricane Katrina they blamed refineries being down. The price shot way up. Why? There were no shortages. Everyone got fuel. After the initial panic prices went right down.

Stop going into a panic attacks for no reason!

How many of these little bits of news and speculation that moves oil prices actually comes true and would have any real bearing on oil prices. Very few.

Maybe we should change the trading to the "here and now" market and not the "futures" market.

 

[ZZman]

How does me worrying about whether an oil refinery gets hit and can function after it is hit change anything? Does raising the price cause it to be fixed faster? Does it make it produce oil any faster? No....If it is damaged it is damaged whether oil is $ 50 or $ 75.

If it is a war other countries can increase their output to make up the difference.

Oil speculators need to find something else to play with. Maybe pop...or beer. Maybe not beer, the upset drinkers might go on a killing spree if prices shot up.......

 

[Tornado Red]

Originally Posted By: ZZman
If you have to raise prices you do so when the events have actually occurred and a shortage has happened. You base it on facts and on reason. Did the hurricane actually hit? Is production going to be down long enough to cause any shortages? Did a war actually happen? Is it affecting their ability to pump oil? If the answer after these have occurred is it will make very little difference than leave prices alone. Wait until is actually is an issue. Not what might be.


I am surprised that you are so dense. Or, it would be more accurate to say that your lack of understanding of how markets work, about how human psychology affects markets, makes you totally unsuited for any job or position that involves dealing with markets.

If you are a service station owner, do your customers wait until the hurricane arrives before they begin stocking up on gasoline, milk, bread, bottled water, etc. If you sell home improvement supplies, you know your customers will be buying plywood and electric generators before the hurricane hits -- they will not wait to see if the risks turn into certainty.

If there is a drought in the Midwest, and every day there are news stories about predictions of declining crop yields... and you are a farmer whose crops are doing very well.. then will you sell your corn for $3/bushel and soybeans for $7/bushel when market forces will drive corn to $8 and soybeans for $15? Do you think you ought to sell for the old lower prices just because you don't want to take advantage of the misfortunes of others?

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So one minute oil is $ 75.00 a barrel and a little tidbit of news jumps it to $77.00 a barrel. Then a few minutes later other news brings it down to 76.00 a barrel. What has really changed in that time frame in reality......nothing.

What has happened is a change in the perception of what it will be like in the future. There tend to be fluctuations around a trend line, or around an equilibrium price, but that is because even in a very liquid market there are usually not an equal number of buyers and sellers at every instant.

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Maybe we should change the trading to the "here and now" market and not the "futures" market.


Maybe we should just educate people better about human psychology, about economics, about markets, and in this case about futures markets specifically.

 

[ZZman]

You are right. I am too sane and too dense to work in that environment. Greed does not rule me. The difference in other futures markets is they seem to move in small moves. Even large jumps in price are small in comparsion to oil. If corn doubles in price from $ 2.00 to $ 4.00 big deal. If oil doubles in price from $ 40.00 to $ 80.00. That is a big deal.
Plus if something gets too high in price I can choose to buy or eat something else. That is not possible with oil. I have to have it and pay what they bid it up too.

You are right that people would prepare and should. These people's storing up supplies and preparing their properties changes the outcome of how they weather the storm.
But how does raising oil prices change the outcome of whether or not there will be shortages due to damage to a refinery or lack of the ability to offload oil? The damage/shortages etc are the same whether oil is up or down in that case. Now if OPEC did an Embargo then I could see why prices would have to go up.
As far as corn you are talking a real supply and demand issue. Drought causing prices to go up. This can be seen and felt on a real level not imaginary level.

I know human psychology, that is why I hope paid professionals know enough to make wise decisions. Yeah I see what our economic brains anfd their policies and their greed have done for our country and the world.

Markets and real market forces I can understand. Future's I can not.

 

[Tornado Red]

Originally Posted By: ZZman
You are right that people would prepare and should. These people's storing up supplies and preparing their properties changes the outcome of how they weather the storm.
But how does raising oil prices change the outcome of whether or not there will be shortages due to damage to a refinery or lack of the ability to offload oil? The damage/shortages etc are the same whether oil is up or down in that case. Now if OPEC did an Embargo then I could see why prices would have to go up.
As far as corn you are talking a real supply and demand issue. Drought causing prices to go up. This can be seen and felt on a real level not imaginary level.


Will you demand the same quantity of gasoline or diesel when the price is $5.00 a gallon, as when it was $1.50? You say you understand markets, but the demand for any good or commodity depends on the price. If the price is $1.50 or $2.00 a gallon, then when a hurricane threatens everyone tries to fill their tanks, creating a shortage where none existed before. If the price rises to $5.00 a gallon, lots of people would complain and would accuse the station owners of gouging; but people would buy only what they need and there would be enough for everyone to have what they need.

How many big-screen LCD TV sets did you buy when they were over $2000? are you more likely to buy now that they cost less than 1/3 as much?

Are you more likely to buy a lobster dinner for $10 or for $30?

Are you more likely to buy a new pickup for $20,000 or the identical pickup for $40,000?

If your demand for any good or commodity does not change when the price changes, then I guess there is no incentive for any merchant to lower his prices to get you to buy. You don't care whether prices are high or low, it does not matter to you.

 

[ZZman]

I agree with some of what you said Tornado.

For goods I would of course be more likely to buy when prices were down. (But for the record I don't and wouldn't eat a $ 30.00 lobster and I don't own a LCD T.V)

This does not hold true for fuel. My fuel needs do not change with price. I drive the same whether the price is 2.50 or 3.50 a gallon as I still have to go to work, the store etc. This may not hold true for many people who have toys like boats, motorhomes etc...as they might cut back usage.

The problem with people going into a panic and buying up all the fuel was they saw prices rising and heard they were going to go even higher and they got nervous.

But what does raising crude oil because of something like a hurricane have to do with fuel prices shooting up like they did?
If there is a true shortage of fuel because they can't make or ship it then it makes sense that the price would rise if stations had to get into bidding wars to get some. But why would the price of crude have to go up when the supply of crude is not affected?

OPEC and the other producers do not control oil prices. The futures market does. It is at the whim of any and everything.
I believe most oil producers would like a steady fair price. OPEC has said it thinks prices in the current range are fair.

So what are you saying: that gas station owners raised their prices for the common good of all so as to keep people from hoarding fuel and leaving some with none? Or did they in fact see a chance to fleece the public of their cash. If their fuel costs did not truly change yet and they were able to get fuel why did they have to raise their fuel prices? In Michigan when this occurred the Attorney General threatened to prosecute any stations accussed of price gouging and asked people to call in and the State Police where checking prices. As soon as that news came out the prices started dropping immediately.

Oil is a unique commodity because it is a one of a kind commodity that can not be replace with something else and has to be used. It should be treated as such.

Do merchants need to lower prices to convince me and others to buy? Sure. That is because there is competition from other merchants and the fact that I probably don't really need their products or I might be able to buy it used. Oil has no direct competition and I have to have it. I can not just stop using it or by "used" oil at a discount.

I understand in this complicated world my ideas would not work. There is too much greed, too much concern for self and not about others.

Thanks for all your input and the lively debate...............