The Truth About Commodities, including Oil - Complete Speculation

The 'truth' I suggest is not something high on the minds of many ETers. And the 'truth' about oil speculation, as about any speculation, for the dear and sweet little minds of many is that they have not seen very much in their short lives to date. It means if you've bought something as a speculative stockpile you have to sell it - SOONER OR LATER. Now if X zillion barrels of oil has been bought allegedly as speculation, then, yes, follow this little ones (in particular), X zillion barrels of oil (on CL, ICE WTI or whatever) have to be sold. So what does that mean? It means the shit hits the fan and the very high price takes a big dive. Happiness is restored in the great and wide universe of small minds. And their attention can move back, possibly to something which will actually help themselves - how about getting to know how to trade a market with outstanding success?:eek:
 
He said speculation was driving this move, and they are stunned at the current price. They have not seen any significant increase in demand, and the market is well supplied. He points out the recent Saudi announcement to increase production by 300,000 barrels caused a spike in the price. He said the price is being set in NY and London, they have nothing to do with it, and it could just as well be $40. There is no oil shortage, there will be one in 10 or 20 years though. This is the Goldman Sucks lets make money scam oil shortage. :D
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I would be very pleased to take every last drop of Libya's oil production at $40 if they're willing to sell for that, for the next 20 years.

That oil minister needs to put his money where his mouth is.
 
I've been an exchange member and a speculator since the late 70's and the one lesson I've learned is not to make value judgements and engage in hand wringing. Just trade. This bull market in commodities is unlike anything I've seen in many years, and presents many good trading opportunities. Frankly, I was pleased to see Minneapolis March Wheat trade well over $23.00/bu. I was glad to see the Minneapolis/Chicago December wheat spread move like it did. Conditions like these present opportunities of a lifetime. Enjoy it while you can.

http://masteroftheuniverse.wordpress.com/
 
Excellent and Highly Accurate
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Thus what would be the solution as to the financial hit that the third party bag holders are going to take ....

ie similar to the 1986 tax reform act and real estate...

This is where at the stroke of a pen....legal largesse reveals its unexpected outcomes on either side....
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Obviously, when the majority of the world lives on $200 to $800 monthly ....thus the majority of the world needs relief....and they need it now....not three years from now....

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So just who is it that is going to pull the plug on this one ......

Another huge mess....and this time, the developing world have every reason to complain about unregulated capitalism....

Medicine, food, education, and shelter are human needs and rights....

Capitalism in this form....and Cuban type socialism ....are both very unattractive....

There are better approaches than these....
 
Quote from libertad:

Medicine, food, education, and shelter are human needs and rights....
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How can they be rights and what`s required for them to be provided?
 
Quote from ByLoSellHi:

Commodities Prices: Speculation Exposed
by: Philip Davis posted on: May 21, 2008

http://seekingalpha.com/article/78264-commodities-prices-speculation-exposed


That was a nice dip yesterday!

We were so well covered that we spent the day in member chat discussing World Hunger as we ho-hummed the sell-off, but we did get a little bullish towards the end of the day and started picking off some callers, looking for at least a bounce in the morning but willing to roll down or add to some of our stronger long positions.

The most exciting thing that happened Tuesday was the testimony of Michael Masters to the Senate Committee on Homeland Security (who have sweeping powers) as he spilled the beans and gave the Senate a very detailed inside view of exactly how speculators are the primary cause of high commodity prices.

Don't look for any commentary on this in the WSJ or most media outlets, you would think this entire investigation isn't going on as you watch CNBC wearing their Oil $130 party hats this evening!

What we are experiencing is a demand shock coming from a new category of participant in the commodities futures markets: Institutional Investors. Specifically, these are Corporate and Government Pension Funds, Sovereign Wealth Funds, University Endowments and other Institutional Investors. Collectively, these investors now account on average for a larger share of outstanding commodities futures contracts than any other market participant.

With very bold categories in his presentation like "Index Speculator Demand is Driving Prices Higher" Masters lays out a simple and compelling case that illustrates how over $250Bn of speculative money has poured into the commodities markets since 2003, driving the average cost of commodities indexed up 183% WITHOUT ANY SIGNIFICANT INCREASE IN ACTUAL DEMAND.

It's not just oil, there is a chart on page 4 of his presentation that shows how on Jan 1st 2003 sugar futures stockpiled totaled 2.3Bn pounds. On March 12th of this year, speculators had stockpiled 48Bn pounds of sugar. Soybean oil went from 163M pounds to 4.5Bn pounds, corn from 242M bushels to 2.4Bn bushels, coffee from 195M pounds to 2.4Bn pounds. wheat from 166M bushels to 1.1Bn bushels. Even cattle and hogs have had 10-fold increases in speculation. This is your "demand," 10 month supplies of commodities removed from the markets over 5 years and held by speculators who point to the "demand" as evidence of a tight supply - A TOTAL CROCK!

Speculators "consumed" as much additional oil as China in the past 5 years (848M barrels) while gasoline stockpiles have risen from 1.1Bn gallons to 3.5Bn gallons and natural gas stored by speculators has gone up from 331M BTUs to an insane 2.3 Billion BTUs. Aluminum - 10x, Nickel - 5x, Zinc - 10x, Copper - 7x, Gold - 10x, Silver - 15x — Madness!

In fact, Index Speculators have now stockpiled, via the futures market, the equivalent of 1.1 billion barrels of petroleum, effectively adding eight times as much oil to their own stockpile as the United States has added to the Strategic Petroleum Reserve over the last five years.

Demand for futures contracts can only come from two sources: Physical Commodity Consumers and Speculators. Speculators include the Traditional Speculators who have always existed in the market, as well as Index speculators. Five years ago, Index Speculators were a tiny fraction of the commodities futures markets. Today, in many commodities futures markets, they are the single largest force. The huge growth in their demand has gone virtually undetected by classically-trained economists who almost never analyze demand in futures markets.

I urge you to set aside the time to read this full report, it is an excellent presentation of pretty much everything I've been "ranting" about for 2 years put together by a guy who trades commodities for a living and is, as I am, totally fed up with the destruction of our economy and the suffering that is being caused by this rampant commodity speculation. In order for Goldman Sacks to make $1Bn, every driver on Earth needs to pay another $1 per gallon for gas this year - is that an efficient market? If all 2Bn of us just send GS a check for .50, THAT would be efficient. Unfortunately, as we discussed last week, Goldman's partners in crime who got together and formed the ICE back in 2003 (when all this started) also want their Billions - no matter what it costs you.

One particularly troubling aspect of Index Speculator demand is that it actually increases the more prices increase. This explains the accelerating rate at which commodity futures prices (and actual commodity prices) are increasing. Rising prices attract more Index Speculators, whose tendency is to increase their allocation as prices rise. So their profit-motivated demand for futures is the inverse of what you would expect from price-sensitive consumer behavior.

When Congress passed the Commodity Exchange Act in 1936, they did so with the understanding that speculators should not be allowed to dominate the commodities futures markets. Unfortunately, the CFTC has taken deliberate steps to allow certain speculators virtually unlimited access to the commodities futures markets.

Masters closes with the key issue, that:

The CFTC has granted Wall Street banks an exemption from speculative position limits when these banks hedge over-the-counter swaps transactions. This has effectively opened a loophole for unlimited speculation. When Index Speculators enter into commodity index swaps, which 85-90% of them do, they face no speculative position limits.

The really shocking thing about the Swaps Loophole is that Speculators of all stripes can use it to access the futures markets. So if a hedge fund wants a $500 million position in Wheat, which is way beyond position limits, they can enter into swap with a Wall Street bank and then the bank buys $500 million worth of Wheat futures. In the CFTC's classification scheme all Speculators accessing the futures markets through the Swaps Loophole are categorized as "Commercial" rather than "Non-Commercial." The result is a gross distortion in data that effectively hides the full impact of Index Speculation.

Additionally, the CFTC has recently proposed that Index Speculators be exempt from all position limits, thereby throwing the door open for unlimited Index Speculator "investment." The CFTC has even gone so far as to issue press releases on their website touting studies they commissioned showing that commodities futures make good additions to Institutional Investors' portfolios.

This is how the current administration, through the "Enron Loophole" and other directives to the CTFC, has perverted an organization that is supposed to be CONTROLLING speculation and turned them into more than an enabler, but an actual cheerleader for the commodity markets. You would think this would be news but the same people who are sucking over $2Tn a year out of our pockets (over and above what we paid for the same commodities 5 years ago) are also the people who control the mainstream media and the very government that is listening to this testimony.

In order to put a stop to this YOU have to act. YOU have to get mad, YOU have to tell people what is happening because no one else is doing it are they? Feel free to copy this, Email it, print flyers - whatever - this is something that needs to be talked about and what better time than the day oil hits $130 a barrel while you drive less than you did last year, when it was $51.03 in January!
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A couple of observations:

(1) Anytime that market action seems to be extreme and adversely affects governments we seem to frequently get these calls about the 'evils' of speculation. The same thing happened when Soros attacked the pound. It was all the fault of the 'evil speculators'. The same issue seems to be occuring again.

(2) That is not to say that speculation has not contributed to the price of oil today. However, speculation is only a minor factor in the price rise of oil. The main factors are fundamentally driven as oldtrader quite rightly points out. Let me expand a little on this theme:

Demand: the growth in oil demand since 2003 has been in the newly industrialised countries. Asia and the middle east accounted for 60% of the increase in petroleum use between 2003 and 2006. China has been particularly notable in this respect with a petroleum consumption rate of 7.2% annually between 1990 and 2006. There is also huge potential for this growth to continue when you consider that
during 2006 China used 2 barrels of oil per person compared to 25 for the US and 6 for Mexico. In addition, in 2006 there were 3.3 passenger vehicles per 100 people in China compared to 77 for the US. In short, there is massive potential for the current oil trends to continue.

Supply: There is evidence to suggest that while global demand has been increasing supply has been stagnating. Further information on this can be found at the following website:

http://www.theoildrum.com/node/3236


In addition, we have the following supply information to support this view of stagnating supply:

*Production at China's biggest oil field, Daqing, has been declining 2.2% per year since 1995
*Chevron reported in 2005 an average decline of 4% in its oil fields
*21 biggest oil fields in Texas have had declining production of 7.5% on average per year since the peak in 1974-1975


Thus, the majority of the move has been driven by fundamentals (increased demand and declining supply) with a minor role played of late by speculation.
 
Quote from ByLoSellHi:

Commodities Prices: Speculation Exposed
by: Philip Davis posted on: May 21, 2008
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The fault of the meteoric commodity rise can be placed squarely on the Fed's shoulders. By setting interest rates artificially low and by pumping money into the system like there is no tomorrow, the Fed is the root of the commodity problem. If the US would have the courage to raise rates, watch how fast the commodities would drop. I wouldn't hold your breath though - nobody in the US has any cojones apparently.

I.e., even if there is no fundamental demand for commodities, I am sure going to place my money in them while the Fed continues to debase the currency.
 
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