One Method to Flush Out Oil Speculators: "Liquidation Only" Restriction

M

maxni

http://www.nakedcapitalism.com/2008/06/one-method-to-flush-out-oil-speculators.html

In one instance, however, the speculation premium was "successfully" tested - in the silver markets in 1980 when the Hunt brothers attempted to corner the market. As silver approached $50 an ounce in January 1980, the commercial participants asked for relief from the enormous margin calls from ever-rising prices. The CFTC and the Comex (the predecessor to the Nymex) responded effectively by imposing "liquidation-only" trading -- traders were allowed only to close existing positions and not permitted to initiate new positions.

This forced purely speculative positions to be closed rapidly, as they could no longer be "rolled" into future months at expiration. This caused the price of silver to drop by $12 the day after it was imposed, a decrease of over 20%! Over the course of the next three months, as contract months expired, the price dropped over 50%.
 
Quote from maxni:

http://www.nakedcapitalism.com/2008/06/one-method-to-flush-out-oil-speculators.html
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First, speculators are not the cause of oil prices.

2. High oil prices are part of the economic cycle, you can't fight oil prices without harming free trade.

3. Speculation works both ways, amplifying bull and bear markets.

4. Physical speculators can only amplify bull markets (they buy to store, to sell later at higher prices.
Physical speculators can't short sell, thus delaying price fall.
 
Quote from maxni:

http://www.nakedcapitalism.com/2008/06/one-method-to-flush-out-oil-speculators.html

In one instance, however, the speculation premium was "successfully" tested - in the silver markets in 1980 when the Hunt brothers attempted to corner the market. As silver approached $50 an ounce in January 1980, the commercial participants asked for relief from the enormous margin calls from ever-rising prices. The CFTC and the Comex (the predecessor to the Nymex) responded effectively by imposing "liquidation-only" trading -- traders were allowed only to close existing positions and not permitted to initiate new positions.

This forced purely speculative positions to be closed rapidly, as they could no longer be "rolled" into future months at expiration. This caused the price of silver to drop by $12 the day after it was imposed, a decrease of over 20%! Over the course of the next three months, as contract months expired, the price dropped over 50%.
More...

Note that in this case, the back months were trading at a 30-40% discount to the front month. The market was thus already telling you that spot & front month prices had an enormous speculative premium.

In oil, futures for delivery even in 2013 are not trading at an unusually large discount. So the market is saying - quite unlike the silver bubble - that these prices are likely to be sustained for years, rather than being the result of short-term speculative excess or a short squeeze.
 
1) I believe the Hunt Brothers wanted to force delivery from the short-position holders in order to acquire more silver. That may have been the "final straw" in bringing about the liquidation-only market.
2) If a large long-position holder in crude oil were to attempt to force a huge delivery on an expiring contract, the NYMEX would have to consider declaring a liquidation-only market so as not to destroy the contract and itself if unmanageable margin calls and defaults were to occur.
3) Futures contracts are best used for risk management, not merchandising.
 
Gee... no government official come out and talk about depreciation of dollar is the cause of higher oil price.

It is not a co-incident that when dollars decline, oil goes up.
 
cftc has not used these powers since 1980

and they were usually used when there was concern about manipulation in an expiring contract
 
Quote from Cutten:

Note that in this case, the back months were trading at a 30-40% discount to the front month. The market was thus already telling you that spot & front month prices had an enormous speculative premium.

In oil, futures for delivery even in 2013 are not trading at an unusually large discount. So the market is saying - quite unlike the silver bubble - that these prices are likely to be sustained for years, rather than being the result of short-term speculative excess or a short squeeze.
More...

don't use logic against the guys who believe speculation controls oil. they want to believe! :p
 
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