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Subject: Speculators driving up the price of oil and gasoline rss

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Matthew M
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Koldfoot wrote:
Speculatin' isn't really speculatin' when the President has made clear that the US will not be drilling any more of its own oil.

Perhaps part of the blame lies elsewhere?????


http://www.gomr.boemre.gov/homepg/offshore/safety/well_permi...

PolitiFact: http://www.politifact.com/truth-o-meter/statements/2011/mar/...

Quote:
There have been 39 shallow-water permits for new wells since June 2010. And many more before that.


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James King
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Koldfoot wrote:
Speculatin' isn't really speculatin' when the President has made clear that the US will not be drilling any more of its own oil.

Perhaps part of the blame lies elsewhere?????

Yes indeed, the blame also lies in those would-be spinmeisters who would attempt to distract us away from the main culprits by pointing wildly in other directions.

The 1982 movie "Trading Spaces" starring Eddie Murphy and Dan Aykroyd provides an accessibly comprehensible example of what Oil Speculation is all about.





> Excerpt from the May 25, 2011 Wall Street Journal new story by Dan Strumpf & Liam Plevin entitled:

Traders Accused in Oil-Price Plot

Three years after launching a probe to determine whether the 2008 oil-market frenzy was fueled by excessive speculation, the U.S. alleged that two traders and their firms operated an international plot to manipulate prices.

In a federal-court lawsuit filed Tuesday, the Commodity Futures Trading Commission accused the traders of running a simple, but effective, scheme in early 2008 that reaped more than $50 million....

_______________________________


For more info, see the Wall Street Journal (WSJ) link below:

Oil Traders Accused of Market Manipulation
from: http://online.wsj.com/video/markets-hub-traders-accused-in-o...

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Chris White
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Sigh.

The fact of the matter is that prices are high because worldwide demand is rising (with more people, more prosperity in more of the world) and supply is dwindling (oil is a finite resource, people).

Blaming it on "speculators" is nothing but blame game, wishful thinking and a failure to face facts. So is claiming that "drill baby drill" does anything but buy us maybe a couple more years of the stuff at best. (And at tremendous cost, I might add.) They're two sides of the same denial coin.

Oil is rapidly becoming a fuel of the past, and if we don't find ways to live without it, our comfort and prosperity is going to be a thing of the past too.
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IF you are sure that speculators are driving up the price of oil and gas,
then buy put options on oil and gas. Or if you want money now sell call options. Or do some combination of both.

Cause speculation requires that the price keep rising so that speculation can continue. By prices can not keep rising indefinitely.

WHEN to buy your put option and/or sell your call options will still require some skill.

But the odds are in your favour IF speculation is having a significant impact on price.
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traininthedistance wrote:
Sigh.

The fact of the matter is that prices are high because worldwide demand is rising (with more people, more prosperity in more of the world) and supply is dwindling (oil is a finite resource, people).

While that is true, that factor is NOT mutually exclusive of other contributing factors, including that of oil speculation which accounts for some 30% of the increase of the price of oil.


traininthedistance wrote:
Blaming it on "speculators" is nothing but blame game, wishful thinking and a failure to face facts.

Nobody is blaiming oil speculation alone for the increase in oil prices even though it is accountable for some 30% of the increase of the price of oil at any one time.

In recent years, the States of California and Texas have put their respective funds for state employees' retirement monies in oil speculation.


traininthedistance wrote:
So is claiming that "drill baby drill" does anything but buy us maybe a couple more years of the stuff at best. (And at tremendous cost, I might add.) They're two sides of the same denial coin.

Only this subject is NOT a simplistic two-sided one. It's a multi-dimensional one.


traininthedistance wrote:
Oil is rapidly becoming a fuel of the past, and if we don't find ways to live without it, our comfort and prosperity is going to be a thing of the past too.

But we'll always have Thunderdome. zombie
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There was a quote from OPEC I saw recently stating that production hasn't dropped (as it was being blamed for price rises) and that the current market value of oil "carries 25% speculation surcharge".
 
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Bojan Ramadanovic
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Nothing changed since middle ages - people *just love* to blame high prices and shortages on "hoarders" and the like rather then to apply basic common sense.

If the "speculators" are driving up the price then "speculators" must be buying oil in significant quantities and storing it somewhere thus reducing supply and increasing demand.

Now, let us consider what could possibly be consequences of this behaviour if it is actually taking place:

If there are underlying reasons for a price spike in oil/gas and "speculators" are correct in sensing those - then when this underlying reason actually happens they will release their accumulated reserves to "take profit". In doing so they will smoothen the transition and prevent shortages due to whatever event they are speculating on.
What is more, if they are correctly predicting the future jump in price, by buying dear now they are sending a price-signal to oil producers to increase production *before* the "underlying" jump even happened. By doing so they are reducing the disruptive effect of the jump even further.

In other words, if there is a reason to suspect that underlying prices of oil will go up in the near future - then "speculators" are doing you all a favour while managing to profit from their ability to forecast trends.

On the other hand, if there is no jump in underlying price then speculators are making a mistake - sooner or later they will have to stop increasing their reserves and then the price will go down and they will lose a lot of money. In that scenario price will go below its "underlying" level as "speculators" release their reserves in order to stay solvent or manage their losses. One "societal" loss would be a bit of over-investment in oil and gas as industry followed false price signal, but overall - this scenario would lead to long-term *reduction* in price for consumers.

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Ed Bradley
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bramadan wrote:
Nothing changed since middle ages - people *just love* to blame high prices and shortages on "hoarders" and the like rather then to apply basic common sense.

If the "speculators" are driving up the price then "speculators" must be buying oil in significant quantities and storing it somewhere thus reducing supply and increasing demand.

Now, let us consider what could possibly be consequences of this behaviour if it is actually taking place:

If there are underlying reasons for a price spike in oil/gas and "speculators" are correct in sensing those - then when this underlying reason actually happens they will release their accumulated reserves to "take profit". In doing so they will smoothen the transition and prevent shortages due to whatever event they are speculating on.
What is more, if they are correctly predicting the future jump in price, by buying dear now they are sending a price-signal to oil producers to increase production *before* the "underlying" jump even happened. By doing so they are reducing the disruptive effect of the jump even further.

In other words, if there is a reason to suspect that underlying prices of oil will go up in the near future - then "speculators" are doing you all a favour while managing to profit from their ability to forecast trends.

On the other hand, if there is no jump in underlying price then speculators are making a mistake - sooner or later they will have to stop increasing their reserves and then the price will go down and they will lose a lot of money. In that scenario price will go below its "underlying" level as "speculators" release their reserves in order to stay solvent or manage their losses. One "societal" loss would be a bit of over-investment in oil and gas as industry followed false price signal, but overall - this scenario would lead to long-term *reduction* in price for consumers.



What happens when the price is affect by, say, people buying tankerloads of oil and having them sit at anchor waiting for the price to rise?

http://www.telegraph.co.uk/motoring/news/6601779/Oil-tankers...

It's quaint that the article is from 09 and is worried about the price hitting 110p/litre.
It's 143 now.
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johann-hari-how-goldman-gambled-on-starvation-2016088.html

They like to 'speculate' on food to. And it doesn't involve actualyl Hoarding food, I'm afraid.
 
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James King
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Greendan wrote:
johann-hari-how-goldman-gambled-on-starvation-2016088.html

They like to 'speculate' on food to. And it doesn't involve actually Hoarding food, I'm afraid.

Food speculation price abuses are essentially what created the conditions that ignited the first public demonstrations of the Arab Spring of 2011. The United Nations’ Food and Agricultural Organization reported food prices reached a record level world-wide in February.


> Excerpt from the June 29, 2011 Zawya Select news story at: http://www.zawya.com/story.cfm/sidZAWYA20110629051450

The $53,000,000,000 Food Basket

Rising Food Prices

Like the rest of the world, the Gulf states are also facing rising food prices. Indeed food inflation was one of the primary triggers that led to the Arab Spring, mostly in poorer countries like Tunisia, Egypt and Morocco. But while it toppled governments in poorer Arab countries, high food prices will not spare richer countries either.

A combined study by the Organization for Economic Co-operation and Development (OECD) and FAO expect commodity prices to rise in real terms especially 20% higher for cereals (maize) and up to 30% for meats (poultry), over the 2011-20 period compared to the last decade.

"Increases in commodity prices are now moving down the commodity chain into livestock commodities. As higher prices for commodities are passed through the food chain, recent evidence indicates that consumer food price inflation is currently rising in most countries, contributing to higher aggregate consumer price inflation," says the study published earlier in June.

"This raises concerns for economic stability and food insecurity in some developing countries as the purchasing power of poorer populations is reduced."

_________________________________________________


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bramadan wrote:

If the "speculators" are driving up the price then "speculators" must be buying oil in significant quantities and storing it somewhere thus reducing supply and increasing demand.

The wonders of derivatives allow speculators to buy future oil. Which does have an effect on the present price. And storage in the future is amazingly cheap. I dunno why - houses must be gonna get bigger or something? Maybe its cause the universe is expanding faster and faster?
 
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bramadan wrote:
Nothing changed since middle ages - people *just love* to blame high prices and shortages on "hoarders" and the like rather then to apply basic common sense.

If the "speculators" are driving up the price then "speculators" must be buying oil in significant quantities and storing it somewhere thus reducing supply and increasing demand.

Now, let us consider what could possibly be consequences of this behaviour if it is actually taking place:

If there are underlying reasons for a price spike in oil/gas and "speculators" are correct in sensing those - then when this underlying reason actually happens they will release their accumulated reserves to "take profit". In doing so they will smoothen the transition and prevent shortages due to whatever event they are speculating on.
What is more, if they are correctly predicting the future jump in price, by buying dear now they are sending a price-signal to oil producers to increase production *before* the "underlying" jump even happened. By doing so they are reducing the disruptive effect of the jump even further.

In other words, if there is a reason to suspect that underlying prices of oil will go up in the near future - then "speculators" are doing you all a favour while managing to profit from their ability to forecast trends.

On the other hand, if there is no jump in underlying price then speculators are making a mistake - sooner or later they will have to stop increasing their reserves and then the price will go down and they will lose a lot of money. In that scenario price will go below its "underlying" level as "speculators" release their reserves in order to stay solvent or manage their losses. One "societal" loss would be a bit of over-investment in oil and gas as industry followed false price signal, but overall - this scenario would lead to long-term *reduction* in price for consumers.



In my interest to understand how this works I ask for some clarification. I've been led to believe that speculators are actually speculating on contracts for some future delivery of oil. They don't necessarily have to buy the oil today and hoard it. A saavy speculator watches the actual market and unloads when they think the price on their contract is is low enough vs the projected price upon delivery, or to minimize their loss if, according "speculation", the price is going south. If there is enough speculative money in the system buying contracts, then the demand for contracts, not oil, is what actually drives up the price. I could be totally off base on this as my personal sphere of experience has absolutely no overlap with wall Street investing.

So if there is an an increase in speculative oil contracts, it doesn't necessarily mean a spike in oil production. As we have seen, the oil producing companies (I would say countries, but that would be naive) control their levels of production in order to set prices on their own, either at the tanker or at the refinery. if speculators drive up the price further, who are they to quibble about making more money for producing less oil. To my vastly simplified view of the subject, that seems to be the problem. The price is not set by actual supply and demand, but by artificial supply and demand created by people who make a profit by driving prices up, not down. I want to pay prices based on my demand, not on what some Wall Street trader has to return a certain percentage of dividends on to get their bonus.
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Listen, I'm not an expert but speculators do not take actual delivery of oil and the same oil is sold at higher prices many times.

Speculation uses extreme leverage to create artificial demand for oil. All they have to do is require a higher percentage and the oil market would drop like the silver market did. Alternatively, they just need to require that anyone buying an oil contract must be able to take actual delivery of the oil. I prefer the first option- it's simpler.

http://goldandsilverblog.com/how-the-comex-crashed-the-silve...
How the COMEX Crashed the Silver Market

Quote:
As of Monday, initial contract margin requirements would be increased to $21,600 and to $16,000 for hedgers. A year ago, when silver was trading in the $18 range, the margin requirement for a speculative contract was only $4,250.


As a side note, at one point last year the oil storage facilities were so full at one point that tankers were being used as storage facilities as they were unable to unload. Yet the price continued to go up.

If you want a genuine pinch point- look to the refineries and their well timed closing for maintenance plus legal requirements to blend an excessive variety of gasoline types for pollution control reasons. But that's gasoline- not oil.
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maxo-texas wrote:

If you want a genuine pinch point- look to the refineries and their well timed closing for maintenance plus legal requirements to blend an excessive variety of gasoline types for pollution control reasons. But that's gasoline- not oil.


The refinery issue is one of those glaring examples of market manipulation that makes you doubt every single thing that comes of out of oil executive mouths. Refining capacity is such a dirty, corrupt, evil game that it should be investigated on purely national security reasons.
 
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Koldfoot wrote:

The only thing that he has made a stand on is that the US should go green.


Do we live on the same planet?
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TheChin! wrote:
bramadan wrote:
Nothing changed since middle ages - people *just love* to blame high prices and shortages on "hoarders" and the like rather then to apply basic common sense.

If the "speculators" are driving up the price then "speculators" must be buying oil in significant quantities and storing it somewhere thus reducing supply and increasing demand.

Now, let us consider what could possibly be consequences of this behaviour if it is actually taking place:

If there are underlying reasons for a price spike in oil/gas and "speculators" are correct in sensing those - then when this underlying reason actually happens they will release their accumulated reserves to "take profit". In doing so they will smoothen the transition and prevent shortages due to whatever event they are speculating on.
What is more, if they are correctly predicting the future jump in price, by buying dear now they are sending a price-signal to oil producers to increase production *before* the "underlying" jump even happened. By doing so they are reducing the disruptive effect of the jump even further.

In other words, if there is a reason to suspect that underlying prices of oil will go up in the near future - then "speculators" are doing you all a favour while managing to profit from their ability to forecast trends.

On the other hand, if there is no jump in underlying price then speculators are making a mistake - sooner or later they will have to stop increasing their reserves and then the price will go down and they will lose a lot of money. In that scenario price will go below its "underlying" level as "speculators" release their reserves in order to stay solvent or manage their losses. One "societal" loss would be a bit of over-investment in oil and gas as industry followed false price signal, but overall - this scenario would lead to long-term *reduction* in price for consumers.



In my interest to understand how this works I ask for some clarification. I've been led to believe that speculators are actually speculating on contracts for some future delivery of oil. They don't necessarily have to buy the oil today and hoard it. A saavy speculator watches the actual market and unloads when they think the price on their contract is is low enough vs the projected price upon delivery, or to minimize their loss if, according "speculation", the price is going south. If there is enough speculative money in the system buying contracts, then the demand for contracts, not oil, is what actually drives up the price. I could be totally off base on this as my personal sphere of experience has absolutely no overlap with wall Street investing.

So if there is an an increase in speculative oil contracts, it doesn't necessarily mean a spike in oil production. As we have seen, the oil producing companies (I would say countries, but that would be naive) control their levels of production in order to set prices on their own, either at the tanker or at the refinery. if speculators drive up the price further, who are they to quibble about making more money for producing less oil. To my vastly simplified view of the subject, that seems to be the problem. The price is not set by actual supply and demand, but by artificial supply and demand created by people who make a profit by driving prices up, not down. I want to pay prices based on my demand, not on what some Wall Street trader has to return a certain percentage of dividends on to get their bonus.


I agree that most people who speculate on oil do so on future contracts.
I do not agree that this impacts the price of oil for the consumer.

Let us consider, for the sake of discussion, that there in fact exists a competition between different producers of oil (private and state companies both).

Say there is a lot of demand for contracts as "speculators" want to be heavily invested in oil because they think oil in the future will be expensive.
What this signals to oil companies is that *because oil in the future will be expensive - it is well worth their while to invest in infrastructure to get it out of the ground*. This is not some theoretical construct - there are quite a few marginal projects in Alberta tar sands (and this is just one example of many) which get started or stall depending on the investor expectation of the future price of oil.
Only impact this could possibly have on the end-price at the pump is that oil ends up being cheaper then it would otherwise have been.

In other words, if there is lots of speculation going on *and* the price is going up - the correlation between the two is not a causation as the two are in effect in a negative feedback loop.

Now, you can say - what if there is no competition ? What if marginal projects in Canada, Russia etc do not in-fact determine price of oil and if it is set by the cartel of super-producers in OPEC ? I.e. what happens if the producers are able to control the price without demand input.

In that case, you are right and speculation will not do anything for the production, but on the other hand will not do anything for the current price either. Price will be exactly what the monopolists want it to be.
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pwn3d wrote:
I am not an expert in derivatives. But I will try to explain how I understand the situation from the report that was linked in the article.

I think commodity futures were initially meant to "smooth" out the price of a commodity for a large producer or consumer of that item. If you are a corn farmer and have just planted and the current price of corn is profitable you can buy a future and lock in that price of corn and not have to worry about a price drop when your crop comes in. On the other side if you are a corn product consumer and you buy large amounts of the item for your product you can lock in a preferred price so that unexpected events will not destroy your profits when you go to manufacture.

Eventually what happens in any type of market is you will have people that specialize on speculating what the price of a commodity is and they make bets on what will happen. If the size of the speculator positions is small compared to positions taken by actual producers/consumers then their effect on the market is not considerable and can actually have a positive effect by providing liquidity to the market and stabilize the market by their presence.

But now there are the investment banks. I am talking about the ones who have the ability to borrow money from the fed at close to zero percent interest rates at current effective fed interest rates. They have to do something with all of this free money and since the housing market is
not as attractive as it was until recently they are moving into the commodity markets.

They have the ability to move into a market and control it because they can have such large positions. Their positions and their timing of changing them has a LARGE effect on the market. So they are speculators that are controlling large percentage of the futures market and they have no direct effect on supply and demand (Officially they do not). They don't care what the product is or which direction the price is going.

The best thing is if they are wrong and if the price of oil drops to the floor they will be covered by the federal government for making stupid decisions because it has happened before. All the higher ups will get their bonuses, and it is business as usual.



If your complaint is that the financial institutions get too much subsidies (visible and invisible) from the government - then I agree 100%. I still do not see how their activities can raise and sustain high price of any commodity (though I grant you that they can create shocks with sufficiently large positions).
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Any company who may be affected by commodity prices has a duty to protect itself by buying or selling futures in that commodity (the same as foreign currency exposure) The fact they do not tells me they are incompetent, uncapitalised or lying to to the consumer. Blaming just speculators is naive. It is a lot more complex than that.
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"Speculation" is possible both by buying and selling the actual commodity, and by participating in derviatives based on the commodity.

Neither real nor derivative trading is intrinsically bad, but there is a danger of interactions between the two, because derivates allow for very high "leverage".

If regulators or other "players" in the production, distribution, and consumption of the market collude with the traders, they can transfer money from the weaker players to the stronger. The closer a commodity is to a "necessity" (inelastic demand) the more practical it is to use "choke points" to induce short-term distortions to the market. derviates markets offer a convenient way to execute the transfers, since they don't require the inconvenient transfer of large amounts of "low value per volume" product.

Any market where the prices do not accurately reflect the true balance between production costs, supply, and demand is specially vulnerable to this kind of thing. Think of it as a potential (likely) side effect of subsidies: the powerful players attempt to get access to the difference between the real price and the price the consumer pays.

"The people" expect (hope for) unbiased regulations to discourage this kind of thing. "Vested interests" lobby for Government inefficiency in areas where "excess" profits are available. The war won't end soon ...
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Thinking of selling your house?

Its worth $50 according to comparisons with other recent sales.
You'll be happy with $55?

But now you hear that next month someone will pay $90 for such a house.
How much are you prepared to sell you house for now?

I think the effect in changes to current prices by future prices in such a circumstance is clear.
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pwn3d wrote:
Quote:

[q]
The speculation, according to the report, cost the average consumer an extra 83 cents a gallon in May, amounting to a more than $1 billion premium across the country.

Good! Cheers for that, squeeze those murderers.
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Mondainai wrote:
[q="pwn3d"]
Quote:

Quote:

The speculation, according to the report, cost the average consumer an extra 83 cents a gallon in May, amounting to a more than $1 billion premium across the country.

Good! Cheers for that, squeeze those murderers.


I do not agree with the language - but I have to thumb the post that says that in the long run high energy prices are a *very* good thing (and that is even without putting too much credit in AGW).
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Theory about market actors being able to exploit scarcity and demand is perfectly viable to me.
http://en.wikipedia.org/wiki/Artificial_scarcity
 
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Hmmm ... IMF is on the oil scarcity camp:

Quote:
The persistent increase in oil prices over the past decade
suggests that global oil markets have entered a period
of increased scarcity. Given the expected rapid growth
in oil demand in emerging market economies and a
downshift in the trend growth of oil supply, a return
to abundance is unlikely in the near term. This chapter
suggests that gradual and moderate increases in oil
scarcity may not present a major constraint on global
growth in the medium to long term, although the wealth
transfer from oil importers to exporters would increase
capital flows and widen current account imbalances.
Adverse effects could be much larger, depending on the
extent and evolution of oil scarcity and the ability of the
world economy to cope with increased scarcity. Sudden
surges in oil prices could trigger large global output
losses, redistribution, and sectoral shifts. There are two
broad areas for policy action. First, given the potential
for unexpected increases in the scarcity of oil and other
resources, policymakers should review whether the current
policy frameworks facilitate adjustment to unexpected
changes in oil scarcity. Second, consideration should be
given to policies aimed at lowering the risk of oil scarcity.


http://www.imf.org/external/pubs/ft/weo/2011/01/pdf/text.pdf
 
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