Speculators causing oil price rise....?

[Bigmack]

This guys describes himself as an ex-peak-oiler. Says speculation is the real culprit. Any comments?
Ms. Bigmack
- - - -
Oil price mocks fuel realities
By F William Engdahl

As business and consumers consider the implications for them of crude oil selling at US$130-plus per barrel, they should bear in mind that, at a conservative calculation, at least 60% of that price comes from unregulated futures speculation by hedge funds, banks and financial groups using the London ICE Futures and New York Nymex futures exchanges and uncontrolled inter-bank or over-the-counter trading to avoid scrutiny (see Speculators knock OPEC off oil-price perch, Asia Times Online, May 6, 2008).
US margin rules of the government's Commodity Futures Trading Commission allow speculators to buy a crude oil futures contract on the Nymex by paying only 6% of the value of the contract. At the present price of around $130 per barrel, that means a futures trader only has to put up about $8 for every barrel. He borrows the other $120. This extreme "leverage" of 16 to one helps drive prices to wildly unrealistic levels and offset bank losses in subprime and other disasters at the expense of the overall population.

The hoax of "peak oil" - namely the argument that oil production has hit the point where more than half all reserves have been used and the world is on the downslope of oil at cheap price and abundant quantity - has enabled this costly fraud to continue since the invasion of Iraq in 2003, with the help of key banks, oil traders and big oil majors.

Washington is trying to shift blame, as always, to Arab oil producers and the Organization of Petroleum Exporting Countries (OPEC). The problem is not a lack of crude oil supply. In fact, the world is in over-supply now. Yet the price climbs relentlessly higher. Why? The answer lies in what are clearly deliberate US government policies that permit the unbridled oil price manipulations.

World oil demand flat, prices boom
The chief market strategist for one of the world's leading oil industry banks, David Kelly, of JP Morgan Funds, recently admitted something telling to the Washington Post: "One of the things I think is very important to realize is that the growth in the world oil consumption is not that strong."

http://www.atimes.com/atimes/Global_Economy/JE24Dj02.html

[chill_wind]

1. This is a very interesting and provocative piece- "the bubble is about to burst.."

it raises questions we will never see day in and day out on CNN or from the happy gangs on CNBC.

Goldman Sachs again in the middle

The oil price today, unlike 20 years ago, is determined behind closed doors in the trading rooms of giant financial institutions like Goldman Sachs, Morgan Stanley, JP Morgan Chase, Citigroup, Deutsche Bank or UBS. The key exchange in the game is the London ICE Futures Exchange (formerly the International Petroleum Exchange). ICE Futures is a wholly owned subsidiary of the Atlanta Georgia International Commodities Exchange. ICE in Atlanta was founded in part by Goldman Sachs, which also happens to run the world's most widely used commodity price index, the GSCI, which is over-weighted to oil prices.

As I noted in my earlier article, ICE was the focus of a recent congressional investigation. It was named both in the Senate's Permanent Sub-committee on Investigations' June 27, 2006, Staff Report and in the House Committee on Energy and Commerce's hearing in December 2007, which looked into unregulated trading in energy futures.

Both studies concluded that the energy price climb to $128 and beyond is driven by billions of dollars' worth of oil and natural gas futures contracts being placed on the ICE. Through a convenient regulation exception granted by the George W Bush administration in January 2006, the ICE Futures trading of US energy futures is not regulated by the Commodities Futures Trading Commission (CFTC), even though the ICE Futures US oil contracts are traded in ICE affiliates in the US. And at Enron's request, the CFTC exempted the over-the-counter oil futures trades in 2000.

(...)

It would be interesting for Congress to subpoena the records of the futures positions of Goldman Sachs and a handful of other major energy futures players to see if they are invested to gain from a further rise in oil to $200, not forgetting that 16 to one leverage with which a hedge fund or bank can buy oil futures.

We are hit with an endless series of plausible arguments for the high price of oil: a "terrorism risk premium", a "blistering" rise in demand of China and India; unrest in the Nigerian oil region; oil pipelines' blown up in Iraq; possible war with Iran ... And above all the hype about peak oil. Oil speculator T Boone Pickens has reportedly raked in a huge profit on oil futures and argues, conveniently, that the world is on the cusp of "peak oil". So does the Houston investment banker and friend of Vice President Dick Cheney, Matt Simmons.

[chill_wind]

2. This deserves to be on the GP for wide reading.

K&R

[kristopher]

3. I agree. K&R

It smacks of a campaign with an ulterior motive.

[ChazII]

4. 5th K&R

Hope more folks see this.

[no_hypocrisy]

5. Speculation versus investment

Speculation implies higher profit in less time than invstment, the latter process involving research of a company, its profits, its expenses, its management, the history of its stock price and dividends (if any), holding onto that stock for "a while" to earn a modest profit.

I think it started with the tech bubble in the 90s, wherein speculators got used to fast money. The money then moved to real estate, and the speculation craze is now in oil, grains, and just about anything else that's necessary for a functional society. I'm just waiting for the speculators to discuss health care.

[unblock]

6. which in turn is symptomatic of an excess of capital over investment opportunities

and a direct consequence of "supply-side" crap and many other mechanism to funnel more and more money into the hands of fewer and fewer. this means more money is used as capital for "investments" and less capital is available for the rest of us to spend.

so investments in the u.s. have started to suck as people here only have enough money to maintain their debt levels and pay their increasing daily expenses, and the good investments go overseas, and the excess capital in the hands of the wealthy chases it overseas.

so the house that reagan built turned out to be all about sucking up our wealth and sending it abroad. sure, a few americans got ultra-wealth in the process, how does that help this country if their wealth isn't used here? or, for that matter, the wealthy can just move to a foreign country if it suits them. heck, it might help the monitor their investments better.

[unblock]

7. 60% of the price is due to speculation?? how on earth can anyone know that??

i'm a wall street analytic professional and i know quite a lot about futures markets and so on, and i have NO IDEA how one could even begin to quantify this sort of thing. so would have to say that the comment itself is, ... well..., speculative.

i'm not saying it's false, but i fail to see what evidence one could possibly derive from the futures market that would clearly demonstrate that prices are far higher than they otherwise would be had the futures contracts had stricter margin requirements, e.g.

futures contracts are essentially symmetric in the sense that for everyone who is long a contract, there is someone else short a contract and it is just as easy and essentially just as risky to bet on prices going down as it is to bet on prices going up.



keep in mind there are many factors pushing oil prices up:
- marked decline in the dollar
- open is stronger than they have been in years
- iraqi oil is still offline
- world demand is growing
- world population is growing
- in the short-run, people and industry can do little to scale back demand (oil is price-insensitive)
- our beloved oilmen in the white house condone the high prices (heck, they engineered it), and their buddies are getting ultra premium rich off this market

notice i didn't even mention peak oil. even if peak oil is true, i agree with the notion that it shouldn't have this direct and immediate an impact on oil prices. but to assume that the run-up is nearly all just based on speculation is to ignore all the other factors.

now for the list of thing pushing prices DOWN:

- ....


i can't think of anything, can you???

[NMDemDist2]

8. there is no supply problem is there? no gas lines, no rationing

if it really was a supply/demand problem wouldn't we be seeing shortages?

speculation seems to fit the facts better.....

[unblock]

11. an actual absence of product is rare

and yet prices fluctuate in other markets as well.

i'd say too few suppliers is also a big factor. makes implicit (or explicit) trusts too easy.

[Kablooie]

9. How about Barak Obama? He might be a factor to push prices down.

He's already mentioned that reasoned controls on economic extremism is needed.

[unblock]

10. that won't affect the market today. he can't do anything until january at best

[many a good man]

12. Author's main point is the price rise NOT due to supply/demand

Engdahl gives some solid figures to back it up.

US recession cause demand to drop by 190,000 b/d
China demand growth minor ~400,000 b/d
Big new oil fields coming online (Khursaniyah, Khurais, Tupi, Bakken, etc)
US stockpiles up 33 bb since January
US demand for gasoline down 5.8%

His hypothesis is that the boys at Goldman Sachs are engineering a bubble to help bail themselves out of the subprime mess. Once the market adjusts for reality prices will once again come tumbling back down to earth. But first they are floating the expectation of $200/b.

I'm sure the other factors you mentioned affect the price, but without these shenanigans the price should be about half current price

[TreasonousBastard]

13. Add to the list...

the amount of fuel used by the military isn't included in domestic demand, and it takes a lot of fuel to move tanks, bombers, and carrier fleets around.

India and China contracted for Iranian oil, keeping it off the market.

Yes, speculators can and do cause bubbles, going back at least to Dutch tulip bulbs and the South Sea Bubble, to say nothing of internet stocks, but bubbles always burst at some point. And bubbles of things that actually have some use seem to tend to burst earlier. (Note the Hunt brothers attempt to corner the silver market and how that ended)

Nope, just as with the housing "bubble" we are dealing with a finite resource and demand being the ultimate arbiter or price. Overall oil demand is largely inelastic right now, and it will take a while for alternatives to surface. Not just alternative fuels, but alternative systems and lifestyles. We are too slowly realizing just how much oil we are wasting and soon enough we will be forced to stop the waste.

[Finishline42]

14. Consoladation of the Oil & Gas Companies

Fewer competitors in the business and most don't have significant reserves. Most of the oil being put on the market is owned by nation states.

I have to wonder why a well that has been producing for a decade or more, that once produced oil for $20/barrel, is now producing oil that sells for $130.

The companies in the business have little interest in keeping prices low. It makes whatever they do own worth much more.

Things that could bring prices down.

Move to electric cars/trucks by States/US gov. Have the US Post Office made a move to convert 50% of the trucks used for daily delivery.

US Dept of Trans. make a commitment to expand public transportation.

Return to 55 mph speed limit.

Prices are going up because there is little risk on the downside. Moves to curtail demand would bring risk into the dynamic.

[unblock]

16. barriers to entry are a big factor

in most industries, sustained excess profits makes others clamor to join the fray.

but how can anyone crack into the oil business short of stumbling upon an unknown field in one of the few places on earth that hasn't already been explored?

allowing "capitalism" with just a handful of players for a critical resource in these circumstances is insane. they have clearly demonstrated that they can and will hold the nation hostage for their own super-wealth.

[Fire Walk With Me]

15. Weren't they going to move the Social Security funds into Wall Street?

And didn't Bush tour the country for six entire months trying to sell the idea?

[Speck Tater]

17. In 2005 world production hit 85 million barrels a day.

It has not gone higher since then. Meanwhile demand is up to 87 million barrels per day.

Anyone still believing we have an oversupply is delusional.

Need proof? That's easy. Wait a few years and see for yourself. All the rosy spin and denial in the world won't slow down the relentless reality of peak oil. As the Republicans are starting to learn, if you keep turning your back on reality, reality will kick your ass.

[Bigmack]

18. Basically I agree with you

And your take on all this has been the way I've seen things for the last few years too - but I was intrigued with the notion that the low "margin requirements," which I hadn't been knowledgeable about in futures trading, MIGHT be contributing an element of speculative pressure into global oil pricing. My prejudice is to never dismiss the perfidious possibilities of speculative capitalists. Ms Bigmack