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wow, this is cool to see. $50 a barrel? man its $100+ today. this is cool to see the post.
your post is 2 years old but i think it is going to $2oo a barrel and we will see $7 a gallon in US which will bring down the economy even faster. bummer
OIL is not a bubble. if it is, its artificially created. there IS not peak oil too. there is plenty. if there is a shortage it is artificially created.
Enjoy cheap oil while it lasts, which won’t be much longer, Bloomberg reports. Record OPEC cuts are “leading traders to bet that $50 crude is two months away.” A leading London hedge fund manager expects $60 barrel this year, while the venerable T. Boone Pickens predicts $75.
Via Stock Research Portal (http://www.stockresearchportal.com)
Do you agree oil is a buy now?
i thought the bubble was just about to pop when oil brushed $38 a barrel the other day... but it's back to $50... where do you see it at the old of 2009?
<font size=14> Hey what's up with that?
Kazakstan is the greatest country in the world, all other countries are run by little girls. Kazakhstan is number one exporter of potassium, Other Central Asian countries have inferior potassium.
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LOL Oil spekkalators lost limbs ;)
Kazakstan is the greatest country in the world, all other countries are run by little girls. Kazakhstan is number one exporter of potassium, Other Central Asian countries have inferior potassium.
http://smacie.com/randomizer/borat.html
70% of oil market is speculators people that niether produce or consume and do not intend to take delivery ever.
Crude Oil Prices Could Be Easily Manipulated; Helped By Ridiculously Low 7% Margin Requirement for Oil Futures. We Don't Know That Oil Prices Are Being Manipulated, But They Could.
The ridiculously low 7% margin requirement for crude oil futures contracts means that oil producers, big or small, could easily be manipulating the price of oil for their own benefit. That's not to say that pension funds and other hedge players aren't also going steadily long crude oil and other commodity futures. But it is in the obvious self interest of oil producers to have an ever rising price of crude.
For example, suppose the "players" who run Russia (or Iran, or Venezuela or any major or minor producer) decided a year ago to invest $200 million per month as margin to go long oil futures. Margin of $200 million could control as many as 25,000 contracts at $8,000 per contract, which would be equal to 1.3% of notional open interest.Wouldn't adding 1.3% each month to the 1.9 million contracts of notional open interest be enough to produce the crazy oil market that exists now?
Publicly available sources indicate that Russia produces 9.4 million barrels of oil per day, Iran 4.0 million bpd and Venezuela 3.0 million bpd. The increase in oil prices from $60 per barrel to $130 per barrel in the past year for Russia alone has translated into an additional $20 billion per month (9.4 million barrels per day * 30 days per month * $70 increase per barrel = $20 billion). Not only would higher prices mean more cash now but also higher values for what's left. Let's not forget that someone who bought $2.8 billion worth of oil last year at $60 per barrel using $200 million in margin is sitting on a profit of over $3 billion per $200 million investment.
We have no evidence of any kind that oil producers are pumping up oil prices, but they could. If we were producing millions of barrels per day of oil, we would consider going long oil futures, putting up $1 to control $14 dollars of crude, to ensure that prices keep rising.
Our Modest Solution to Oil Price Spike: U.S. Should Divert Money Saved from Ending Strategic Petroleum Reserve Purchases to Go Short Oil Futures.
One obvious way to burst the oil bubble would be to boost the margin requirement for oil futures. Since exchanges and brokers earn big bucks from trading lots of contracts, we therefore doubt margin requirements will be boosted any time soon.
But there is another way to bring the oil mania under control. If it is logical for oil producers to go long oil futures to enhance the future value of their remaining oil, why is it not logical for oil consumers to go short oil futures? Japan, are you listening?
The U.S. recently suspended its daily purchases of 70,000 barrels of oil for the Strategic Petroleum Reserve. Why not use the savings of roughly $275 million per month to short oil futures (70,000 barrels per day * 30 days per month * $131 per barrel = $275 million)? That $275 million would be enough to short 34,400 contracts per month. The U.S. has more than 700 million barrels of oil in the Strategic Petroleum Reserve, which is about 1/3 the notional open interest of oil futures. In essence the U.S. would be offering to sell at a high price the crude it bought at much lower prices. For the future, would the U.S. be better off with lower oil prices or more high-priced oil in salt caverns?
The TrimTabs-BarclayHedge Hedge Fund Flow Report indicates that $1 billion per month flowed into commodity hedge funds in the first three months of 2008. If half of that $1 billion, or $500 million, is invested in oil futures, it is enough to go long 62,500 contracts, which would be equal to 3.3% of notional open interest. But what if oil users shorted enough contracts to counteract that $500 million?
The world consumes 85 million barrels of oil per day. At $131 per barrel, the world is paying $11 billion per day, or $334 billion per month, to oil producers. If oil prices fell back to $80 to $90 per barrel--prices at which almost all alternative energy schemes are profitable--the world would save $105 billion to $129 billion per month on its oil bill. Is that savings not worth shorting $500 million in oil futures per month?
Alison Simard President, West Coast bureau Stern & Co.
Raising Margin Requirements May Spike Oil Prices Higher
by: Mack Frankfurter posted on: May 27, 2008
Commodity pricing theory mainly focuses on the transference of a “risk premia” from risk-adverse hedgers to speculators. This insurance-like context was first proposed by Keynes (1930) in his theory of normal backwardation. Essentially, Keynes believed that hedgers have to pay speculators a risk premium to convince them to accept their risk.
Dr. Richard Spurgin (2000) explained it in the following way. There are four types of participants in futures markets: short hedgers, long hedgers, speculators and arbitrageurs. Short hedgers are commercial producers and long hedgers are commercial consumers.
Arbitrageurs perform a special function, and exist to ensure consistent pricing across different types of instruments relating to a particular asset and its relationships (e.g., cash, futures, forwards, options, etc.).
[Note: A discussion of commodity pricing theory as it relates to price convergence between the futures and spot price is a technical topic and overly complicates the purpose of this article. Suffice it to say that the futures-spot convergence is the principal objective that validates the futures markets’ economic purpose.]
Speculators, on the other hand, are assumed to “hold the difference between the long hedger, short hedger and arbitrageur positions.” Accordingly, speculators are key to ensuring the futures markets operate smoothly, as shall be illuminated by Dr. Spurgin’s “hedging response function.”
The hedging response model is intuitive and serves as a good basis for understanding the functionality of the commodity futures market, as well as for formulating legislation and regulations that promote the economic purpose of these markets without hindering innovation or normal speculative activities.
According to Dr. Spurgin’s hedging response function, there are four asymmetric scenarios which theoretically produce excess return to speculators, and two symmetric scenarios which are zero-sum:
A) a rise in commodity price (beneficial to producers) generates more initiative from producer short hedgers to lock in higher prices, hence a net short hedging position is established;
B) a rise in commodity price (detrimental to consumers) causes consumers to be more concerned about guarding against margin pressure than producers are concerned about locking in higher prices, hence a net long hedging position is established;
C) a drop in commodity price (beneficial to consumers) generates more initiative from consumer long hedgers to lock in lower costs, hence a net long hedging position is established;
D) a drop in commodity price (detrimental to producers) causes producers to be more concerned about guarding against margin pressure than consumers are concerned about locking in lower costs, hence a net short hedging position is established; and
E) a symmetric response results when the transaction is ‘speculator versus speculator,’ or
F) a ‘long hedger versus short hedger.’ Theoretically, the majority of futures transactions result in a symmetric response, and therefore it is the “net” hedging response that is of most interest.
In accordance with Dr. Spurgin’s hedging response model, speculators fulfill an economic purpose by plugging the asymmetrical difference between a net long or net short hedging response. This is the reason why speculators provide an economically important role in the functionality of these markets.
Anecdotally, “Scenario B” seems to be the current predominant “hedging response function” in the oil markets. If that is the case, then the question is, who are the “long hedgers” that are reflexively reacting or producing higher prices?
There is evidence to suggest that a major constituency in this regard is the financial “investors” seeking to hedge inflationary expectations vis-à-vis commodity index funds. Another key constituency according to various news media accounts has been international governments who are ensuring they have sufficient stockpiles of a particular commodity (e.g., strategic oil reserves). This is in addition to traditional commercial long hedgers who can add to upside price pressure, as well as speculators engaged in “trend-following” strategies.
However, the lynchpin is that if the hedging response is “Scenario B,” then on a net basis it is speculators who are actually the main sellers of futures contracts versus long hedgers.
Speculators who are short (i.e., selling futures) are betting against the bullish trend on the speculation that prices will drop. But in order to be enticed to do so, they must be paid an excess premium for making such a bet, resulting in upward price pressure. That is the likely reason why we have been seeing oil prices consistently rise.
If one agrees with this analysis as well as the viability of Dr. Spurgin’s model to provide insight into the workings of the futures markets, then the next logical question is whether the categorization of various constituencies accurately reflects a bona fide hedger or more accurately speculators.
For example, should index funds continue to be categorized as a commercial, or re-categorized as either a non-commercial, or a separate category? The euphemism amongst veteran futures traders is that index funds represent “dumb money,” and that nobody wants “to get run over by a stampede of cattle.” Yet, an argument can also be made that long-bias index funds provide a “hedge” against inflation. On the other hand, the term “bona fide hedger” implies a commercial that is capable of making or taking spot delivery.
There is an additional scenario referred to as a “market squeeze” which Dr. Spurgin does not discuss in his paper on the hedging response function. For example, commercial short hedgers who initially entered positions at a lower price by selling futures under “Scenario A,” get caught in a “short squeeze” whereby increasing upward pressure forces “short covering” (i.e., buying).
This particular scenario often causes spikes in volatility, similar to what we experienced during February and March of this year in the wheat contract. Again, however, it was speculators who ultimately provide the liquidity which allowed these market participants to exit their positions.
Accordingly, we can arrive at the following conclusion…
It would be reckless and irresponsible for the U.S. Government to force regulators to raise margin requirements under current market conditions, specifically with respect to the oil markets.
In April 2008, U.S. Sen. Byron Dorgan, a North Dakota Democrat, told Congress, “There is an orgy of speculation in futures markets. This is a 24-hour casino with unbelievable speculation.” He and others in Congress have been raising the idea of changing margin requirements that traders must pay up front in order to engage in oil speculation. Dorgan said stock speculation requires a 50% margin, but commodities like oil demand a much lower threshold, just 5% or 7%.
According to Senator Dorgan’s and other Congressional members’ analysis/opinion/rhetoric, excessive speculation is driving prices up, not fundamental demand-supply factors. If this is the case, then increasing margin should theoretically bring about an exodus of speculators from the futures market, causing oil prices to come back down.
But as our analysis reveals using Dr. Spurgin’s model, the oil market currently indicates that there is a net hedging response where long hedgers are willing to pay short speculators excess premia to enter into a contract. As Michael Masters posited, the predominant long hedgers may very well be the commodity index funds. Yet it should also be noted that these same index funds will not be materially impacted by an increase in margin because they are fully-funded.
Hence, while the hedging response function may or may not be causing the market to steadily rise, it is prudent to err on the side of caution. If our thesis is correct, then raising margin requirements will result in a disastrous short covering rally.
At $135 a barrel per oil, we are beginning to see indications of demand destruction. It may in fact be the case that threats from Congress are already having a detrimental impact on the oil markets.
Governments and regulators should beware… the law of unintended consequences rules the market!
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Is There An Oil 'Bubble'?
http://www.washingtonpost.com/wp-dyn/content/article/2006/07/25/AR2006072501301.html
By Robert J. Samuelson
Wednesday, July 26, 2006;
Could there be an oil "bubble''? Well, yes. In early 2002 oil sold for roughly $20 a barrel; now it's close to $75. The main cause lies in tightening supply and demand -- and the fact that supply (as the present Middle East fighting reminds us) could be interrupted at any time. Old-fashioned speculation may also have played a role, and that raises the possibility of a bubble. But any bubble would be a peculiar beast, and if it burst and prices dropped significantly, we shouldn't delude ourselves into thinking that this might signal a new era of comfortable abundance. It wouldn't.
In financial bubbles, prices become disconnected from "fundamentals." At the height of the tech bubble, stocks of dot-com companies with no profits (and little prospect for them) sold at fabulous prices. By contrast, oil prices aren't unhinged from "fundamentals." Despite all the griping, gasoline is still affordable. Even at $3 a gallon, it costs Americans only about 4 percent of their disposable income, reports economist Nigel Gault of Global Insight. The same is true globally. At $70 a barrel, global crude sales would total about $2.2 trillion annually; that's still a tiny share of the $50 trillion world economy.
Indeed, it is precisely because people and companies need oil so desperately -- it's essential for almost everything they do -- that any possible scarcity raises prices sharply. In economics jargon, demand is "inelastic." A big jump in prices dampens demand only slightly. Similarly, a big decline in prices increases it only slightly.
For decades, crude was in surplus. In 1985, for example, the world used 60 million barrels daily (mbd) of oil, while countries could produce about 70 mbd. Refineries were also in surplus; in 1985, U.S. refineries operated at 78 percent of capacity. Loss of crude supplies or refineries didn't create scarcities. "Historically, when something went wrong -- and something was always going wrong, a pipeline outage or refinery accident -- the problem was made up somewhere else," says economist Lawrence Goldstein of the Petroleum Industry Research Foundation, an industry think tank. Prices moved by a few pennies or dimes. Hardly anyone noticed.
Now demand is about 85 mbd, and extra capacity is 1 to 2 mbd. Even this surplus is more apparent than real, notes Goldstein. It consists mainly of high-sulfur ("sour'') oil, for which there is scant refining capacity. All refineries are stretched tight. The U.S. operating rate typically exceeds 90 percent of capacity -- a margin needed for maintenance.
Low prices and miscalculation explain the turnaround. From 1985 to 1999, crude prices averaged $18 a barrel. Investment in expensive oil fields and new refineries became unprofitable. Companies cut budgets. They fired petroleum engineers and merged. Exxon bought Mobil; Chevron absorbed Texaco. Meanwhile, almost everyone underestimated oil demand. Driven by China, it grew much faster after 2000 than before.
So prices had to rise. Otherwise, demand might have exceeded supply. But did they have to rise from $20 to $70 a barrel? Here's where speculation may have contributed.
"Speculation" has a bad image. It suggests financial sharpies plundering everyone else. The reality is often the opposite: financial innocents following the latest fad to ruin. That happened with tech stocks. The oil picture is murkier. The big "speculators" are institutional investors -- pension funds, hedge funds (pools of loosely regulated funds) and investment banks. They have purchased oil futures contracts and, in effect, bet that prices six months or a year out will exceed present prices. Since 2002, investment in futures contracts may have quintupled to more than $100 billion, estimates energy economist Philip Verleger Jr.
This may have raised present (or "spot'') oil prices, argues a staff report from the Senate Permanent Subcommittee on Investigations. As investors pour money into futures contracts, futures prices rise. Since late 2004 they have usually exceeded spot prices. On a recent day, the spot price was $74.60 and the futures price for December was $2 higher. This creates an incentive for companies to put more oil into storage ("inventories''), the report says, because it's more profitable to sell oil in the future than today. Oil inventories for industrial countries "are at a 20-year high." Spot prices rise because there's less oil on the market.
It's unclear how much this sort of speculation has increased prices, if at all. The report mentions estimates ranging from $7 to $30 a barrel. In theory, the process could feed on itself and create a huge bubble. The more speculators bought futures, the more oil would go into storage -- and the more spot prices would rise. At some point, the bubble would burst. Storage would be filled. Unexpected increases in supply or shortfalls in demand could put huge downward pressures on prices, because sellers would need to sell, and (again) demand is inelastic. Some experts, including Verleger, think this possible.
Whatever happens, we should avoid the easy conclusion that speculators have artificially increased oil prices. In truth, they are speculating against real risks -- the risk that oil from the Persian Gulf could be cut off; that hurricanes in the Gulf of Mexico could damage U.S. oil rigs and refineries; that political events elsewhere (in Russia, Nigeria, Venezuela) could curtail supplies. High prices reflect genuine uncertainties.
Oil is essential and insecure. A sensible country would minimize this insecurity by economizing on oil's use (through taxes and tougher fuel regulations) and developing its own resources. We should have redoubled our efforts years ago; we should do so now.
Soros Tells Congress To Pop An Oil Bubble
http://www.forbes.com/2008/06/03/soros-energy-congress-biz-beltway-cx_jz_0603soros.html
Joshua Zumbrun, 06.03.08, 3:50 PM ET
Billionaire investor George Soros told the Senate today that it needs to act now to deflate a speculative bubble in the price of oil. His solution: regulation to bring prices back in line with actual supply and demand.
While admitting he's not a specialist in energy, he said commodity markets bear unmistakable signs of speculative "froth." While much of the run-up in the price of oil is driven by tightening supply and growing demand, especially in the developing world, the entrance of new investors into the energy markets--from hedge funds to university endowments--has flooded the markets with money and caused the price of oil to diverge from fundamentals.
"The bubble is superimposed on an upward trend in oil prices that has a strong foundation in reality," said Soros.
Soros cautioned that regulation can have unintended consequences, such as pushing trading into even less transparent, unregulated markets. One way to control these markets: Increase margin requirements on future purchases, making them less attractive to speculators borrowing money to delve into the market.
Soros also said that if institutions like pension funds cannot be convinced that they are acting as a herd, they could be disqualified from purchasing commodities.
Measures like unleashing the country's strategic petroleum reserve may do little to ease pricing pressure. Why? The massive investment in commodities future markets has effectively created a much larger petroleum reserve.
The falling dollar doesn't help. It pushes down supply even as prices rise. Oil-producing countries have no incentive to convert their oil reserves underground, which are set to appreciate in value to dollar reserves above ground, which are likely to lose their value. Investors have also sought out oil and other commodities as a hedge against a weakening dollar. "The institutional demand is also a flight from currency," Soros said, "The dollar has lost its position as the unquestioned, undoubted store of value. … There is no suitable alternative to it."
The other panelists at the U.S. Senate Committee on Commerce, Science & Transportation agreed that a bubble had developed. Michael Greenburger, a professor at the University of Maryland School of Law and former director of the division of trading and markets at the Commodity Futures Trading Commission, said that the CFTC relies too heavily on regulators in Dubai and London and, as a result, futures markets in commodities have become opaque. Greenburger suggested that Congress should implement an "interim anti-manipulation rule" that would take steps to limit the size of speculative positions.
Mark Cooper, director of research for the Consumer Federation of America, said the response to oil prices thus far has been "the regulatory equivalent to FEMA's reaction to Hurricane Katrina." He suggested that with a $120 barrel of oil, only about $40 was the result of supply and demand, $40 from the effects of OPEC's cartel and $40 from pure speculation.
Soros disagreed that the bubble is that large. "The cost of energy is going to be higher. We have to bite the bullet as far as that is concerned," he said--but agreed that the price of oil was too high and there needed to be limits on the size of speculative positions. He also said the bubble "aggravates the prospects for a recession."
In the long run, however, Soros emphasized that a different approach will be needed: "We must develop alternate supplies of energy other than oil. … There is no escape from that."
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