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A Few Speculators Dominate Vast Market for Oil Trading By David Cho Washington Post Staff Writer Thursday, August 21, 2008; Page A01
Regulators had long classified a private Swiss energy conglomerate called Vitol as a trader that primarily helped industrial firms that needed oil to run their businesses.
But when the Commodity Futures Trading Commission examined Vitol's books last month, it found that the firm was in fact more of a speculator, holding oil contracts as a profit-making investment rather than a means of lining up the actual delivery of fuel. Even more surprising to the commodities markets was the massive size of Vitol's portfolio -- at one point in July, the firm held 11 percent of all the oil contracts on the regulated New York Mercantile Exchange. The discovery revealed how an individual financial player had gained enormous sway over the oil market without the knowledge of regulators. Other CFTC data showed that a significant amount of trading activity was concentrated in the hands of just a few speculators.
The CFTC, which learned about the nature of Vitol's activities only after making an unusual request for data from the firm, now reports that financial firms speculating for their clients or for themselves account for about 81 percent of the oil contracts on NYMEX, a far bigger share than had previously been stated by the agency. That figure may rise in coming weeks as the CFTC checks the status of other big traders
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Using swap dealers as middlemen, investment funds have poured into the commodity markets, raising their holdings to $260 billion this year from $13 billion in 2003. During that same period, the price of crude oil rose unabated every year.
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To build up the vast holdings this practice entails, some swap dealers have maneuvered behind the scenes, exploiting their political influence and gaps in oversight to gain exemptions from regulatory limits and permission to set up new, unregulated markets. Many big traders are active not only on NYMEX but also on private and overseas markets beyond the CFTC's purview. These openings have given the firms nearly unfettered access to the trading of vital goods, including oil, cotton and corn.
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A second turning point came when Congress passed the Commodity Futures Modernization Act of 2000. The law formally allowed investors to trade energy commodities on private electronic platforms outside the purview of regulators. Critics have called this piece of legislation the "Enron loophole," saying Enron played a role in crafting it.
I can only marvel at the audacity of these people. This is as clear an example of getting something for nothing as can be. I wonder when this bubble will burst. Hopefully crude oil prices will come down when it happens.
If financial investments are worthless for short-term returns, as they are in much of the world now (they're on sale and an incredibly good deal right now for longer-term investors), then wouldn't you put your money into commodities as well?
At any rate, here's an interesting comment from Financial Times on the falling oil price.
Obviously, supply constraints isn't the reason for the increase in Crude. If you look at the days of supply from the Energy Information Administration, we have more days of supply than we did in 2004/2005.
OIL will be $30 dollars a barrel a few months after Bush leaves office
Where do they get these people from? I'm so sick of the worthless noise that gets posted daily in here. I'd be dumping dollars and buying commodities. Join the damn club. Paper is worthless.
Where do they get these people from? I'm so sick of the worthless noise that gets posted daily in here. I'd be dumping dollars and buying commodities. Join the damn club. Paper is worthless.
Enjoy being able to say paper is worthless for now. It may be punishable by jail or even a capital crime in the near future to say so or to not accept it for transactions.
First of all there are speculators on both sides of the market. There are speculators that are long oil contracts and speculators that are short oil contracts. No one can buy a contract unless someone is willing to sell a contract. Moreover someone can buy all the oil contracts in the world but they have to sell them before the contract expires or take delivery of the oil which they don't have the ability to do. So if the demand is not there for the oil the speculators would be forced to sell. Contracts expire monthly and quarterly, meaning that speculators that are long have to get out of the contract or take delivery. Which means prices would go down as much as they went up at the end of the month if there was no demand. Also, if this company is really as long oil contracts as the article says that got creamed when the market went down 20% over the last month.
Finally chuck 22b shows a chart labeled "Crude Oil Ending Stocks", it shows the stock supplies increasing since 1900. That is meaningless unless you look at a chart that shows the increase in daily demand for oil which is increasing faster than supply. The other chart that shows the number of days of crude oil on hand is also incomplete. The oil market is a global market. Instead of US charts take a look at the global charts of oil on hand and daily usage. There is no disputing it, global demand for oil, especially from China and India are sky rocketing. That has created a demand and supply imbalance causing prices to go up. Unless more oil is found or a alternative becomes marketable the price will go up.
Prices can not go up without demand, or decrease supply, it is that simple and to blame it on speculators is ignorant.
First of all there are speculators on both sides of the market. There are speculators that are long oil contracts and speculators that are short oil contracts.
And usually people do both to offset losses.
Quote:
Originally Posted by all the truth
No one can buy a contract unless someone is willing to sell a contract. Moreover someone can buy all the oil contracts in the world but they have to sell them before the contract expires or take delivery of the oil which they don't have the ability to do.
It isn't necessary to buy oil every day, every week or even every month. If I have a 6 month stock pile of oil (and I'm not talking about the Strategic Reserves) I can sit on my stock-pile until the prices drop.
Quote:
Originally Posted by all the truth
So if the demand is not there for the oil the speculators would be forced to sell. Contracts expire monthly and quarterly, meaning that speculators that are long have to get out of the contract or take delivery. Which means prices would go down as much as they went up at the end of the month if there was no demand. Also, if this company is really as long oil contracts as the article says that got creamed when the market went down 20% over the last month.
He says "11% of all contracts" but notice how he fails to state the total number of contracts on NYMEX (probably because it would unimpressive and not frighten people).
Quote:
Originally Posted by all the truth
Finally chuck 22b shows a chart labeled "Crude Oil Ending Stocks", it shows the stock supplies increasing since 1900. That is meaningless unless you look at a chart that shows the increase in daily demand for oil which is increasing faster than supply.
While demand in the US might be declining, the demand in the UK, Indoesia, Malaysia, and Singapore increased, as evidenced by the fact that the became net importers of oil, instead of net exporters, between the last half of 2007 and the first half of 2008. And everyone forgets about the 0.9% decline in Russian production during the first half of 2008. It might only be 0.9%, but that's 0.9% of 84 Million/barrels per day.
Quote:
Originally Posted by all the truth
The other chart that shows the number of days of crude oil on hand is also incomplete. The oil market is a global market. Instead of US charts take a look at the global charts of oil on hand and daily usage. There is no disputing it, global demand for oil, especially from China and India are sky rocketing. That has created a demand and supply imbalance causing prices to go up. Unless more oil is found or a alternative becomes marketable the price will go up.
Well, people on this forum tend to be somewhat ethnocentric. They only view things in terms of how it affects the US. Other people on the planet are supposed to be demure and exist only to produce things for the US, not consume them.
Quote:
Originally Posted by all the truth
Prices can not go up without demand, or decrease supply, it is that simple and to blame it on speculators is ignorant.
I can ask $148/barrel but if no one is willing to pay the price, and if they don't need to because they have sufficient stock, then I'm screwed.
OIL will be $30 dollars a barrel a few months after Bush leaves office
How'd you come to that conclusion? Feel free to explain away.
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Get real speculators do not control the market
