Speculative Fiction

[level_head]

There is a widely promoted notion that oil prices are being driven up by speculators. This is just wrong, but it does allow blame to be shifted from where it belongs.

(I've been involved in futures trading as a field of study for more than thirty years. The other software running on my machine at the moment is futures analysis.)

Zero Sum Game

Comments

[marmoe]

For the visually inclined (like myself ;-) ), here is a link to a plot of crude oil price in USD and EUR.

A question for info: Has the volume of trade in the oil future market changed significantly since the subprime fiasco? So is it just the price that has changed or are there noticeably different player on the market now?

[marmoe]

Maybe I should have actually included the link. ;-)

Here it is, one of the first google hits.

http://i122.photobucket.com/albums/o263/Daneelo/ET%20graphs/OilEuros/CrudesED_Long_2008-03-18_BIG.gif

[level_head]

Volume is up substantially over the last several years -- as can be seen here, for example -- but it's fairly flat over the last year or so. The dramatic rise of interest in the market seems tied to a ... dramatic rise of interest in the market, and not specifically mortgage-related issues.

But more volume, and more open interest, is good. It prevents the sort of thing that the pundits are ostensibly concerned about.

I see a number of references to the futures market being "unregulated" -- it's amazing to me, being moderately familiar with the regulations and having obtained licenses under them going back to the 1980s.

===|==============/ Level Head

[rainonlevs]

Well, there's a difference between un-regulated and under-regulated, isn't there? :^)

I haven't seen anyone saying that commodities in general are un-regulated, but I have seen people talking about loopholes and dark areas where there isn't enough regulation to prevent abuses (see other comment).

[rainonlevs]

Well put! Its good to see someone taking the time to explain how commodities work instead of just playing the "He said, She said" game. There are certainly other factors in the equation that have a very significant effect on the current oil prices, including the waning dollar and the actions of the producers.

In the more detailed accounts though, I'm seeing a focus on international trading and loopholes in regulations there that are being used to drain profits out of the system. What are your thoughts on that?

Also there was a point made in Congress that many speculators are now also taking delivery of the products, which allows them to drive the prices up even further before passing them on to buyers. The example was given of an investment firm in New England that controls a majority (80%?) of heating oil there. Do you think this should be regulated?

[level_head]

Also there was a point made in Congress that many speculators are now also taking delivery of the products...

Well, those aren't speculators, they're buyers. The market originally existed for that purpose. And considering we're talking about hundreds of billions of dollars here, it's surprising to me that "many" are having that oil delivered. ];-)

If someone wants to buy oil now and resell it later, thinking it will be more expensive then, go for it! He's accomplishing what the futures market does, but he's doing it with a thousand times the effort and exposing himself to transport risks in the process.

If the US announces that it's serious about pursuing resources, prices will drop radically and immediately (as they did before) -- and will leave such persons (and of course exactly one-half of the trading positions) at a loss.

Taking delivery for speculative purposes seems absurdly risky in a commodity where there's already a futures market

[sir_dave]

When I hear of the idea that the cause of all this is 'speculators', a number of ideas go through my head