A Solution to the Speculators Driving up the Price of Oil

[legion]

I was pondering the other night...

Energy traders are pretty much ignoring the underlying supply/demand numbers when bidding up the price of crude. Demand is weak, supply is more than adequate, yet they seem to ignore this and only react to negative news.

The problem is there are too many speculative dollars in the crude futures markets.

Now, I don't want to ban speculators from trading crude futures. They do serve some valuable purposes: they absorb risk and help keep markets liquid. But right now, we have too much liquidity in that market.

What does the Fed do when there is too much liquidity? They raise interest rates to limit the supply and make money more expensive. There are also fractional reserve requirements on banks to maintain minimal liquidity in cash.

In a similar vein, I propose we limit the number of speculative dollars in the crude market to a certain percentage of market capitalization. That means that after the oil producers and refiners, people who never intend to produce or receive only a given percentage of the dollar amounts of future contracts. I was thinking that limiting speculators to 25% would be a good place to start.

[sammyg2]

I don't think the problem is with the amount of $$$ being invested. I think the problem is that we have a group or groups who are controlling the information that is flowing to the speculators and the public, and that information is being manipulated for profit.

I've already written and asked 4 congressmen and two senators to start a congressional investigation to identify the ties between the so-called commodity analysts and the larger investors. I'd bet they are on the payroll.
If these people are being compensated for what they say and when they say it, that is racketeering.
Just the announcement of a congressional investigation would stop these crooks dead in their tracks and would chase away all but the most stupid speculators. those left would lose their butts as the price of crude gets cut in half a bbl in less than a month. Gasoline prices would fall back to $2.50 a gallon by the middle of summer, Inflation would be stopped in it's tracks, the US economy would turn around and start heading the right direction again.
So why wouldn't they want to do it? Are they afraid of these huge and powerful brokerage houses and those who control them?
Yes, they are.

[legion]

You're a lot closer to this than I am Sammy.

A congressional investigation would scare these guys off...for a while. But what's a permanent fix?

[Scott at Pelican Parts]

Good thinking, guys. I just wrote my Congresswoman about this.

[mattdavis11]

We need a Con Con to solve the problem. Rewrite the whole s.o.b., and start with ethics.

[Mule]

Aren't hedge funds a big source of speculator money?

[blk911]

One major problem according to a broker I was talking with about this very subject is foreign money, from oil producing countries, speculating on these futures. They also control the supply side to a certain extent, so looks like they pretty much have the market cornered. Not sure what you do about that.

Any good ideas out there?

[Neilk]

Make it harder to buy and sell futures. Place some kind of rule that forces bidders to at least take deliver of 10% of all crude oil contracts purchases. That would get the speculators out of the game, although some secondary market would pop up to sell those deliveries.

[competentone]

Originally Posted by legion

Energy traders are pretty much ignoring the underlying supply/demand numbers when bidding up the price of crude. Demand is weak, supply is more than adequate, yet they seem to ignore this and only react to negative news.

The problem is there are too many speculative dollars in the crude futures markets.

Now, I don't want to ban speculators from trading crude futures. They do serve some valuable purposes: they absorb risk and help keep markets liquid. But right now, we have too much liquidity in that market.

What does the Fed do when there is too much liquidity? They raise interest rates to limit the supply and make money more expensive. There are also fractional reserve requirements on banks to maintain minimal liquidity in cash.

In a similar vein, I propose we limit the number of speculative dollars in the crude market to a certain percentage of market capitalization. That means that after the oil producers and refiners, people who never intend to produce or receive only a given percentage of the dollar amounts of future contracts. I was thinking that limiting speculators to 25% would be a good place to start.

"Speculation" is not driving the commodities markets to new highs.

Those who actually take delivery by buying or sell commodities are responsible for the prices reflected in the futures for those commodities.

The trillions of dollars the U.S. government has "counterfeited" over the past decades (along with the trillions of dollars worth of other fiat currencies created by foreign governments) are now finding their way into hard assets.

When more and more people do not want to hold their stored wealth in fiat currencies, government debt, CDOs, SIVs, or some other paper-backed "piece of crap" created by corrupt governments or the thieving financial industry, but instead want physical goods, the result is a rise in the price (measured in fiat currencies) of those goods.

Complain to the government about the "speculators" -- the government will love the fact that you've bought into their fiat currency con and are now blaming the "free market" for the rising prices!

[artplumber]

The money has to go somewhere. Just like there was too much money in the stock market, then the housing market, the big investment funds/banks have to get returns for the directors of the funds and all of their investors. This drives them to look for runups. Currently, that is energy. Add the continually weakening dollar, and some element, perceived or real, of limited supply, and you have the ongoing assault on $200bbl oil.

Funnily enough, the dollar is weaker because of trying to save a bunch of @sses from the last blow-up - housing. This will only makes things worse (for the fuel user) in this runup.

[sketchers356]

Sounds like you guys dont want a free market?

Me? Better dead than red!

[sketchers356]

Unless I can't buy gas for my 911.

[billyboy]

From Bloomberg today: Khelil Says OPEC Won't Boost Output Amid Record Oil (Update1)

By Ahmed Rouaba and Maher Chmaytelli

April 26 (Bloomberg) -- OPEC won't consider increasing crude output before September, even amid investor concern that record oil prices may cause a global economic recession, according to the group's president, Chakib Khelil.

``OPEC will not increase crude oil output,'' Khelil, who is also the oil minister of Algeria, said in an interview today in Algiers. ``Supply is more than sufficient in the international market. Prices are not the consequence of demand and supply, they are the consequence of speculation.''

The Organization of Petroleum Exporting Countries, which controls more than 40 percent of the world's crude supply, doesn't meet again until Sept. 9 to review its production ceiling. Khelil said there was no plan to meet before then.

[speeder]

Old Khelil is 100% right this time. It has nothing to do with supply and demand. Has the S/D ratio changed 50% since one year ago?

[competentone]

Originally Posted by speeder

Old Khelil is 100% right this time. It has nothing to do with supply and demand. Has the S/D ratio changed 50% since one year ago?

Edit: Price change does not directly correlate with supply/demand changes -- if 50% more of a commodity is needed because of changes in the economy, a "50%" increase in the price of that commodity would not be the result. Because oil may have risen in price by 50%, does not mean that there has been some equally large change in the supply or demand. In fact, with most commodities, extremely small changes in supply or demand, result in very large percentage changes in price. (This has to do with the subject of "elasticity" in the supply-demand picture.)

And things have changed with the "supply and demand" of the fiat currencies being used to purchase oil and other commodities.

In browsing online I found this brief article:

http://www.ozcopper.com/?p=78

Quote from the article (written in March):

Meanwhile, money is flowing like mad all over the world. Money supply is up 16% in the U.S. but it’s even more in other countries… it’s soaring 42% in Russia, 21% in India, 18% in China and so on.

And with the whole world worried about a U.S. recession, as well as the domino effects of the subprime mortgage meltdown, which has already tallied up losses of around $200 billion (so far only half of what’s expected), the money’s going to keep flowing, all in a concerted effort to avoid a recession at all costs.

You see, a recession could turn into a deflation, accompanied by massive bank failures, and that’s something no one wants. Sure, all this money is fueling inflation and the commodity boom. And yes, lower interest rates are making the U.S. dollar super unattractive and driving it to new all time record lows, but low rates will help the economy.

The bottom line is that this inflation option is a whole lot better than the deflation option, and that’s what the Fed and the world’s central banks have chosen to do. They really have no other choice.

The rest of the article does discuss world-wide demand, and supply risks, for commodities.

[competentone]

This is not "speculation":

BP closed the Forties Pipeline System, carrying 40 percent of the U.K.'s oil output, after a strike at the Grangemouth refinery cut power supplies to the network that delivers 700,000 barrels daily. Five police were killed and guns and ammunition seized in yesterday's attack in the Niger Delta where output has already been halved by strikes and attacks on pipelines....
*****
Nigeria is losing about 50 percent of its output after staff at Exxon Mobil Corp.'s operations went on strike April 24 and militants attacked a Royal Dutch Shell Plc pipeline later the same day.

Nigeria pumped 1.96 million barrels a day in March, according to Bloomberg estimates. Recent attacks on Shell-run pipelines, including the latest one, are cutting oil flows by about 140,000 barrels a day, the country's oil minister H. Odein Ajumogobia said April 25. The Exxon Mobil strike is halting about 765,000 barrels a day, according to union estimates.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aPx0VvNedgHs&refer=worldwide

[Rich76_911s]

Originally Posted by Wayne at Pelican Parts

How do you sell Oil short? I'm looking to do that now...

-Wayne

You could use an ETF like the USO which is:
An ETF that seeks to reflect the performance, less expenses, of the spot price of West Texas Intermediate (WTI) light, sweet crude oil. The fund will invest in futures contracts for WTI light, sweet crude oil, other types of crude oil, heating oil, gasoline, natural gas and other petroleum based-fuels that are traded on exchanges. It may also invest in other oil interests such as cash-settled options on oil futures contracts, forward contracts for oil, and OTC transactions that are based on the price of oil. The fund is nondiversified.

Learn more here:
http://www.unitedstatesoilfund.com/

My suggestion would be to look into option strategies rather than outright shorting the underlying. Look into put buying strategies, or sell the USO short and buy upside calls as protection.

Going outright short is probably the right thing to do in the long run, but unless you are really good at timing when to go short you can get run over quickly. Options are a much safer way to play than outright shorting.

Rich

[billyboy]

http://www.bloomberg.com/apps/news?pid=20601087&sid=aDZej7GJjpjM&refer=home

[competentone]

Originally Posted by billyboy

http://www.bloomberg.com/apps/news?pid=20601087&sid=aDZej7GJjpjM&refer=home

I just skimmed the article quickly; one glaring inaccuracy I noted was the comment "Copper and gold reached their highest prices ever this year...."

I'm not sure what the inflation-adjusted prices for copper are, but I know gold would have to reach about $2200/oz before it reaches its highest price ever on an inflation-adjusted basis.

To look at the "price" of anything, over the long term, without adjusting for inflation, gives an inaccurate picture of "price."

It is interesting to note the farmer the article quotes; if farmers are not hedging in the futures markets because the spread between futures prices and cash prices (at the local facilities they would actually be selling their grain to) puts too much risk into the transaction, the grain markets could certainly be getting heavy with speculator activity.

[MRM]

I disagree with the premise of this post. I do not think speculators are driving oil prices contrary to supply and demand. I think the fundamentals have changed and that demand is driving price increases. We'll know in a few years. Probably too early to tell now.