Philosophy behind trading Commodity Futures

You guys have it backwards, I think.

Regardless of how much it costs the station to refill his tank, he has every expectation of passing those costs on to the end user. If prices subsequently goes up beyond expectations, he has extra profit. If prices drop, he may take a small loss. Over time, he will come out exactly even.

All this talk about "extra cash" to fill the tank... I *think* you're expressing concern about some kind of cash flow issue? I'm not in the gas station business, but I have been involved in numerous others. I can't imagine the refiner wouldn't be offering the gas station this product on net terms.... Ie, the station would hqve 30-60 days to pay for product delivered. It would be standard business practice. Not at all a real issue that would affect costs to end users.
 
You better get Obama and his vison out of the White House and vote Libertarian then...

ES

P.S. By the way I agree with everything in your post below, even though you may or may not agree with me.

Quote from logic_man:

Yeah, here's an opinion. No one cares if you can find "justifiable cause for speculators".

You're just not that important and never will be. Get over it and move on with your life because speculators aren't going anywhere. There's a ton of things I don't find "justifiable" (including this thread), yet, somehow, some way, those things continue to exist. It's called "reality".

You're using all kinds of loaded terms to describe what speculators do, like "justifiable" and "distort" as though they have any objective meaning or, even if there is distortion, that it is anything beyond marginal relative to the price that would exist without speculators. Do you think oil would be priced at $5/bbl without speculators? $95? If the tradeoff I have to make is that oil be priced a few bucks a bbl more than it would otherwise be, but I get to live in a world where a man is free to risk his capital on a trade rather than have a panel of price-fixing bureaucrats tell him what the price will be, I'll pay the few bucks extra per bbl every time because at least there is some level of transparency in a market price, unlike a fixed price, which might only exist because some theory says that is the right price, reality be damned.

Markets are not just about physical commodities, but about information. If a speculator, despite not having the tangible economic need to accurately price a commodity because that commodity is unnecessary for the speculator's day to day operations, is nonetheless able to successfully profit from trading that commodity against hedgers, it shows that the hedgers need to become better at information gathering. Look at the relative value created or destroyed by the airline hedging programs for further proof that even entities with massive incentive to understand the future evolution of market prices for major input costs are not able to accurately achieve that objective, while some speculators are and then tell me that the speculator whose forecast is accurate isn't providing valuable information to the rest of society about future price movements. If I see a successful speculator saying prices are going higher, I plan accordingly. Just because that might not be the message the rest of the world wants to hear or act upon doesn't mean anything. And, again, for every speculator who profits grandly there is a losing speculator or hedger on the other side of that bet and plenty of speculators lose to hedgers. Who are you to step in between those willing counterparties and tell them they have no justifiable reason to be transacting?
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Quote from ElectricSavant:

You better get Obama and his vison out of the White House and vote Libertarian then...

ES

P.S. By the way I agree with everything in your post below, even though you may or may not agree with me.
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I have been a long-time supporter of libertarianism in politics. I think that the libertarians should take over the GOP, though, as a matter of tactics, rather than be a separate party, just like the Communists have taken over the Democratic party.

The problem with the GOP is that it talks free markets while voting for bank bailouts to stop the operation of market discipline. It's a terrible form of hypocrisy and terrible policy. If you don't have the backbone to say "no" to your buddies who got themselves in trouble by making bad bets, then you are no friend of the rest of us who support free markets under all conditions, not just ones favorable to our own personal situation.
 
There is NO credit to be had in the downstream business, even refiners have a hard time getting all the credit they need. It is very tough and higher prices and margins are justified given the risks all around.

Quote from heech:

You guys have it backwards, I think.

Regardless of how much it costs the station to refill his tank, he has every expectation of passing those costs on to the end user. If prices subsequently goes up beyond expectations, he has extra profit. If prices drop, he may take a small loss. Over time, he will come out exactly even.

All this talk about "extra cash" to fill the tank... I *think* you're expressing concern about some kind of cash flow issue? I'm not in the gas station business, but I have been involved in numerous others. I can't imagine the refiner wouldn't be offering the gas station this product on net terms.... Ie, the station would hqve 30-60 days to pay for product delivered. It would be standard business practice. Not at all a real issue that would affect costs to end users.
More...
 
Quote from heech:

You guys have it backwards, I think.

Regardless of how much it costs the station to refill his tank, he has every expectation of passing those costs on to the end user. If prices subsequently goes up beyond expectations, he has extra profit. If prices drop, he may take a small loss. Over time, he will come out exactly even.

All this talk about "extra cash" to fill the tank... I *think* you're expressing concern about some kind of cash flow issue? I'm not in the gas station business, but I have been involved in numerous others. I can't imagine the refiner wouldn't be offering the gas station this product on net terms.... Ie, the station would hqve 30-60 days to pay for product delivered. It would be standard business practice. Not at all a real issue that would affect costs to end users.
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I think at the moment you are thinking like a trader. "You loose a litle money here, make a little there. Come out at about break-even."

Retail is a differnet mentality. Lots of retailers are in the cituation where running costs (like renting a shop and paying the staff) consume a large part of the profit. Also it's not the business where participants are very well capitalized. So, if they are not making money for a month, running costs pile up and it's a near-disaster situation.

As an example of widening margin as a result of encreased volatility, think of bureau de change. Yes, you may speculate that it's possible for these businesses to hedge their currency risk in real time with online brokers... or that they loose something during the day because they do a wholesale transaction to balance the books just once per day, profit and loos will ultimately net each other. In practice, when the volatility in exchange rates increases, bureau de change increase the spread between "buy" and "sell" rates. It's concievable that there is great potential for innovation in this area... but so far I have only seen approach that it's the customer who pays upfront for any risk.
 
Just to illustrate that sales is a totally different mentality than investing or trading... In a recent episode of a British TV show The Apprentice, Alan Sugar (the renound entrepreneur who is choosing an "apprentice") passionately argues that not making money for a couple of hours is reason for immediate action.

Notice, he is talking of not making money for hours, not for weeks or months.

In conclusion, retailers buy stuff in order to immediately sell it at a higher price. If for some reason they can't sell it or have to sell at a loss, it's a reason for immediate concern. Thinking that market price fluctuation will statisctically lead to break-even or profit is radically against retailers' mentality.

So, if a gas station owner sees he is not making money due to price fluctuations he is immediately compelled to raise prices enough to start making money.
 
After reading and re-reading this thread, it dawned on me that the ultimate purpose of speculators is to reduce the risk of real producers. It is an answer to the "pondering" question that benwm brought up on page 2.

Producers, i.e. farmers and miners, constantly faced with speculations. What to plant for next season. What if their mines do not pan out as predicted. What if their crops got destroyed by disease. After those hard toil and risky labor, the last thing these producers want is to get low-balled by a gang of big consumers. Speculators help lessen the influential pricing power of these big consumers.

As Covertibility brought up, some speculators do get carried away. With their greed fixated for big profits, they gouge the price and hoard tons of oil inside ship tankers (search Norwegian Tycoon news). However, other speculators would recognize this, and short it down to bring the balance back to the market. Although this mechanism is not always timely, but it is more efficient than solely relying on bureaucrats to do such balancing act. Hopefully, the upcoming CFTC new ruling on position limit would help lessen this abnormal imbalance.

With that being said,

I am sure the questions brought up in this forum are not only the concerns of Politicians (thanks for equating me with them by the way), but also the questions pondered by your spouse, your kids, your kid's school teachers, your old faraway friend, or other non-traders in your circle. Now I can explain to my wife with ease on what role speculators have in the economy.

As such esoteric philosophical discussion requires debate, there is no healthy debate without honesty. Alas, honesty does offend people sometimes, especially those who hide much baggage behind their conscience.
Quote from FightTheFuture:
Perhaps there could be a reference section of ET whatever, that these people can be referred to on the role and importance of the speculator, trader and even markets. ...
Some very good posts here that took a lot of time to write.
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Yes. I agree with you on both points. I have searched for such writing before, but could not find any. Hopefully this thread could serve as one. There are many well-thought posts on this thread.
 
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