Why is it that market-worshipers claim fundamentals are responsible for equity prices, but speculators are to blame for Oil prices?
Bill King goes even further: "There is a fervid, global crusade, especially by politicians, to pin escalating oil prices on speculators."
On the other side of the argument, George Soros warns Speculators are largely responsible for driving crude prices to their peaks in recent weeks. And Germany has called for ban on oil speculation altogether. (See John Authors video here)
My own view is that speculators have contributed to the price to
some degree, but the tight supplies and freefalling dollar get more
blame.
This weekend, John Mauldin looked at a variety of factors impacting oil prices, and if you missed it over the long weekend, its worth a few minutes of your time.
Rather than adding to the noise, lets look at a few charts — both pro and con — that may reveal some insight as to the impact of speculators.
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The Impact of Commodity Index on Spot Prices
Commodity Prices and the Weak Dollar
Not Widely Traded Commodities
This is only a brief survey, and I’m sure I missed some worthy links — please add related articles in comments . . .
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Sources:
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
George Soros: rocketing oil price is a bubble
Edmund Conway,
Telegraph, 12:53am BST 27/05/2008 http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/05/26/cnsoros126.xml
Germany in call for ban on oil speculation
Ambrose Evans-Pritchard
Telegraph, 12:53am BST 27/05/2008 http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/05/26/cnoil126.xml
Whither the Price of Oil?
John Mauldin
Thoughts from the Frontline, May 23, 2008
http://www.frontlinethoughts.com/printarticle.asp?id=mwo052308
Related:
Masters Capital Management
Committee on Homeland Security and Governmental Affairs May 20, 2008
http://hsgac.senate.gov/public/_files/052008Masters.pdf
High Oil Prices Spur Thoughts About Bubbles,But This Might Be Misguided
WSJ, May 27, 2008;
http://online.wsj.com/article/SB121175335973420383.html
Energy Watchdog Warns Of Oil-Production Crunch
WSJ, May 22, 2008;
http://online.wsj.com/article/SB121139527250011387.html
Understanding crude oil prices
Econbrowser, May 24, 2008
http://www.econbrowser.com/archives/2008/05/understanding_c.html
Commodities Investment Bubble May Burst by Yearend, Lehman Says
Bloomberg, May 16, 2008
http://www.bloomberg.com/apps/news?pid=20601081&sid=aNpLC6_ZrK0k&
Some people blame supply/demand. Other people blame speculators. Then others blame a weak dollar. Each camp is entrenched in their position. Why can’t it be a combination of all three?
IMO this is just the case. All of these factors are responsible for the rise of oil. I think the real question is which one of these factors will prove the most influential in the longterm.
Maybe there’s a bit more to it. Maybe American manufacturers are unable to take advantage of a low dollar. If they had, things would have evened out a bit. I mean, exports and corporate earnings would have, should have improved, forcing the speculators out of commodities and back into the stock markets.
So maybe the price of oil is an indicator of the weak fundamentals of American manufacturers.
John Hussman has a rational comment in his weekly comment Link Here wherein he states:
“Speculative bubbles occur in financial and commodities markets because rising prices become the justification for rising prices, but there is almost always an accompanying “story” that encourages traders to transform long expectations about the future into an immediate and present urgency to buy.”
As an ex-CBOT employee who’s seen a lot of bubble charts, he’s convinced that oil has reached the bubble stage, noting that only a year ago, oil was in the $50/bbl price range and China and other emerging markets didn’t just appear out of nowhere. He also notes that timing and prices of the last stages of bubbles are impossible to predict. But, as manager of a conservative fund who has managed to avoid the crashes of the past decade, he’s sold his long positions.
I would also recommend his May 5 column as a good reminder of how we’ve seen it all before in the markets, no matter what CNBC would have us believe.
The speculation vs limited supply question assumes a free and competitive market. Absent that, other factors may be at work. I don’t believe there is a free, competitive market in oil. I think there is a monopoly that controls a core supply and a lot of other players who go along for the ride because they make good money that way. It is a monopoly by tacit agreement.
Of course those dumb ass finger pointing Morons we elect blame someone…. as they whistle past the graveyard of the things they need to do like ballance the budget. It’s what they do best… As opposed to … taking some kind of action.
I stick with my thesis that our government caught in gridlock, is the best thing for everyone.
I hate the weak dollar graph with the two axis illusion they have going on. Oil axis has 350% increase while the currency axis has only a 33% increase.
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BR: That implies a correlation of 10 to 1 . . .
The tell-tale sign of a growing bubble:
Prices going up 10% a month, everyone denying it’s a bubble and no one agreeing on any explanation.
At the end of the day, when you’ve got input prices rising faster than output prices, you’ve got a problem.
Speculators have ruined the Lladros and NHL team towel collectibles market for me, too.
While the dollar’s blowout hasn’t helped, I’m fuming at the spec Florida condo buyers plying their well-oiled machines to the rare Hello Kitty stickers trade.
So I’m forced to sit on my complete works of ‘Boy’s Life’ until Sotheby’s gives me the pre-auction guarantee I demand.
The question of whether or not this is a bubble rests on whether or not we will really have supply problems shortly. Oil is not a tulip, not tech, not even housing. It is the life-blood of the economy. Everything is oil based in this economy, perhaps more so than in the 70’s. If there were a very limited supply of land in the world and people’s panic about houses were reality based, then housing would not have been in a bubble. My guess, oil will not go down significantly until the actual supply and future supply is determined. I doubt that will happen, may never happen. It may not go up from here. But Buffet, Soros, Hussman, they are all wrong.
Oil prices have to be driven by supply/demand fundamentals. It seems to me that if it was a spec bubble, the secs would be looking for places to store the oil that they were stuck with, but this has not happened. Therefore, they can buy futures contracts with abandon, secure in the knowledge that someone will buy out there position prior to delivery.
The John Mauldin article, “Whither the Price of Oil?”, is a comprehensive overview of the various oil price theories currently being tossed around.
If you have an interest in this subject it is well worth taking the time to read it.
One thing he talks about is the oil that is being held in storage in sea-going tankers. He doesn’t, however, quantify the amount nor put the amount in perspective to the total oil market.
Does anybody have an estimation of how much oil is in these tankers?
using same logic-nobody complained when speculators were driving home prices up not only 2-5 years ago but also in the 70’s
driving the equity markets and housing markets up was applauded.
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Oil Speculation Explained
This guy has some answers and explanations about the price of oil that sound much more realistic than lap dog ‘peak oil’ or ‘supply and demand’.
Also, I’m at a loss to understand why a 10 to 1 ratio is significant with respect to your reply on the earlier observation. It sound like a correlation between goose droppings and rain drops.
larster:
You just answered your own question. Speculators don’t have to store oil. They just buy futures contracts and the like. It’s a very dicey game(since they have to sell the futures before they are supposed to take delivery), but no one ever said the markets(whether stock or commodities) were/are risk free.
I’m not sure why people are trying to downplay the roles of institutional speculators who are changing the nature and structure of the futures markets.
As I speculate here, institutional speculators and the governments of producing countries are more to blame for the rise in oil prices than Big Oil.
I”m wondering what will happen when politicians around the world increase their attacks on the institutional speculators. I’m thinking oil prices will drop as institutional speculators are either legislated out of the commodities markets or withdraw voluntarily in an effort to avert bad PR.
I’ve seen a lot of speculation about speculators the past couple months but none of it provides a complete mechanism by which a futures contract _directly causes_ a rise in spot price: speculation as a mechanism for increased volatility, yes indeed; as a mechanism for upward bias in spot price because more producers take the other side of the trade, agreeing to deliver at higher prices while less inclined to dump into a lower spot market, okay sure; even some conspiracy between major commercial actors and producers to take advantage of a steady stream of index money, yeah why not.
But the only direct link I’ve seen seems restricted to less liquid markets (usually agricultural, not oil or gold, or even wheat or corn) and that is a set of rules that favor determining spot by referring, at least in part, to near contracts.
But the oil futures market is one of the largest and most liquid commodities markets extant and oil actually delivered is a much larger % of market activity than contracts settled for cash (the only way a speculator or index buyer can evade physical delivery of the commodity) and so at the end of the day the only plausible mechanism is the actual consumption and demand for oil as the greater influence on spot.
Greater volatility and the likelihood upward bias has pushed spot above actual demand makes a reversal pretty likely though.
And I do imagine in the meantime the boys in the pit are alternately banging out longs and shorts alike with the arbs picking off everyone in between.
Of course there are “speculators” in various commodity markets. There always are.
But the speculators are not just those people who are sitting in front of computer screens… they include various buyers and sellers of the physical product.
The notion that we can cause a collapse in commodity prices by trying to regulate the actions of futures traders in Chicago is idiotic.
If Bush is smart, he’ll release some oil from the SPR just in time to give us lower gasoline prices during the month of October.
A great reply at CalculatedRisk finally cleared up for me the confusion about commodity speculation and future prices versus spot prices.
So I decide to buy 10M barrels of oil as a futures contract to speculate. As my date arrives, I may actually have to take delivery of this oil. Taking delivery of this oil is expensive! Where the heck am I going to store this? Buy a whole bunch of foreclosed houses and store the oil into the swimming pools?
In effect, the actual buyers of oil on the spot market will have me over fire. They can name nearly any price above the possible storage costs and I will accept because I actually don’t want to take delivery of this oil. But if the physical buyers are willing to buy at prices at these prices, that tells me something more fundamental is driving their decisions instead of my mere gamble.
DL,
My understanding is non-commercial buyers can’t take delivery.
how is gasoline price broken down? crude price,refining, gas company profits, fed and local taxes, etc
Of course they have to blame the speculators. If they didn’t then oil would continue to point the finger of blame at central banking and their unaccountable printing and diluting of dollars. Since politicians are benefiting from the scheme they need to point the finger of blame in order to divert the public’s attention from the true problem. When commodity prices and all other scarce items hyperinflate they are a condemnation on the currency fraud.
When politicians blame and the main stream media keep as quiet as lapdogs about it you know they are in on the gravy train or they are afraid to speak out. It’s how you know who you can trust and if they decide to make things fall apart don’t lose that scorecard
Barry, according to Mauldin, Soros is blaming a spec bubble because of Iran’s rental of oil tankers to store a lot of their heavy crude. Mauldin said Soros compared the situation to 1980, when he flew over New York harbor and saw lots of tankers being used for storage of excess inventory.
But the problem today is very different. Inventories other than Iran’s heavy crude are at average to slightly below average levels in the U.S. and OECD. The reason that Iran’s heavy crude isn’t being purchased is because there is a serious diesel shortage, and heavy crude is not good for making diesel: http://www.bi-me.com/main.php?id=19968&t=1&c=33&cg=4
The problem is that heavy oil is up to 30% asphalt-like “residuals”: http://www.energybulletin.net/44432.html (light oil is roughly 5%).
The article linked to says Merrill Lynch forecasts the diesel shortage to linger on until 2009-2010.
Has anybody checked out whether this guy’s claim that cobalt, manganese and silicon “cannot be easily traded like other commodities” is in fact correct ?
It’s clear this market is being fueled by speculation. Fundementals go out the window when you have a day when oil prices increase $11 per barrel. Show me the fundementals where that makes sense. In using fundementals and pricing for supply and demand oil should be no more then $60-$70 dollars per barrel possibly closer to $80. A price over $130 is close to insane. The amount of money in the commodities market has gone through the roof in recent years as investers have found this market to be a way to deal with a weak dollar. These speculators are highly leveraged and are throwing huge amounts of money into oil to drive their own positions. This is clear to anyone who is actively involved in the commodities market. In looking at the commitments of traders report from the CFTC the signs of speculation are clear. However, like anything else oil prices will see a sharp decrease in the coming months possibly as much as 30%.