John Authers: Speculators & Oil Price Spikes

"Speculation
appears to be changing the way commodity markets work. A debate is
needed and changes to regulations may be justified. But speculators
cannot take all the blame for the price spike."

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 Source:
The Short View: Commodity speculation
John Authers
FT, May 20 2008 19:54
http://www.ft.com/cms/s/0/3072f8b6-2694-11dd-9c95-000077b07658.html

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What's been said:

Discussions found on the web:
  1. Patrick commented on May 27

    When the stock markets go up, people claim fundamentals.

    When the commodity markets go up, people blame speculators.

    It’s funny—“fundamentals” has such a less loaded connotation than “speculators”. Not because it’s true, but because it’s ironic that those who throw the loaded word around as the convenient excuse (god forbid anyone would address the Dollar) don’t realize their precious stock market is being largely propped up by said commodity prices (nevermind that the distinction between speculator and investor is one that doesn’t exist–i.e., it is a mental construct, not an actual Thing).

    Oh well, they’re welcome to relabel China and India as Speculators if they want; it hardly changes the fundamentals.

  2. Patrick commented on May 27

    P.S. FWIW, I expect a consolidation this week in commodities and the dollar, if only for a few days. They both have great legs (on the upside and downside, respectively) but… it doesn’t really seem ready to take off just yet. Gotta clear out some more of the short/longs IMO.

    After-all, one can’t expect to make 10% EVERY month. ;p

    (volume was down a bit too lately during the oil rally, it seems)

    One more thing (sorry, I’m rambling, it’s 3am and I haven’t slept): someone should mathematically compare the last Gold spike (what, 2 summers ago? late spring, right?) to the current Gold spike (1030 or so, 1-2 months ago). The reason why is that it seems that the last Gold spike took… 1, 1.5 years to consolidate before spiking higher, while this one seems to be consolidating much faster. There is a way to do that precisely but I don’t really have the time (I’m a disgrace to my math degree, so sue me).

  3. druce commented on May 27

    Scales on oil/euro chart mislead:

    Oil is up over 100%, dollar is down only 30% or so.

  4. PHB commented on May 27

    In classic economic analysis, as demand shifts out the supply curve, prices increase. Simple.

    But what we have is a shift in the supply curve that is pulling inelastic American demand along with it. Confusing! When does our rubber band snap? $4/gallon isn’t the tipping point…thoughts?

  5. blin commented on May 27

    PHB,

    According to one of the articles that I read (although I can’t remember the source), Americans were asked ‘At what price of gasoline would you alter your driving habit?’

    The average response was $5.65/gallon.

    I’m not sure what it means, but it is worth remembering this number since it could foreshadow the psychological tipping point for change of behaviour.

  6. Howard Veit commented on May 27

    1. Much trading and speculation takes place off the exchanges, oil products being the outstanding example. It is no longer possible to evaluate what is going on by volume on the various futures exchanges. Many markets have had more contracts than there is product, meaning off exchange “speculation” is rampant.

    2. There is no question that fund trading is moving the commodity markets and they go long or short in lock step because they all use the same
    “proprietary” trading programs, all thought up by the usual suspect genius class that has now virtually taken over the business.

    3. Most ranchers and farmers have complained for at least a century about the speculation that drives prices down near expiration days.

  7. Howard Veit commented on May 27

    1. Much trading and speculation takes place off the exchanges, oil products being the outstanding example. It is no longer possible to evaluate what is going on by volume on the various futures exchanges. Many markets have had more contracts than there is product, meaning off exchange “speculation” is rampant.

    2. There is no question that fund trading is moving the commodity markets and they go long or short in lock step because they all use the same
    “proprietary” trading programs, all thought up by the usual suspect genius class that has now virtually taken over the business.

    3. Most ranchers and farmers have complained for at least a century about the speculation that drives prices down near expiration days.

  8. Michael M commented on May 27

    Don’t look now, but while everyone is looking for the top tick in oil, BAC is close to breaching its 5-year low and sports a 7.4% yield and LEH is trading at its lowest level in nearly 4 years if excluding 17 March, the day where BSC=LEH fear culminated.

    The market, which could be wrong of course, seems to be telling us that LEH could indeed be the next BSC, and that BAC, which started the year as the second largest bank in the world (on market cap) will be hurting very badly (hm, what could that mean for CFC). If one of these stocks drop a few more points, I suspect oil will not be on the market’s mind. Panic will.

    Not saying it will happen. Just saying that the market is very worried about these names, while most people seem to be looking elsewhere. Risk is high.

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