Should crude oil be traded on the financial markets?

On the way home this morning i filled up my tank: 41.52 litres of diesel which cost over uk£50 : (
( That's £1.21 per litre )

quote:

The question is would the world be much better off if crude oil was not allowed to be traded on the financial markets?

I suppose it's just another way for the 'rich and powerful' make their money from the masses. If it wasn't oil it would be something else. At least they can't presently screw us for interest rates, and that was costing me even more.

Don't know what the answer is really... short of revolution! : >

(perhaps a green coloured one this time? ...rather than red!)

Debs

Trading is as old as man himself, you had a hunk of surplus meat & you swapped it for some grain, you had a berry tree & you sold picking rights forward in exchange for the rights to fish in someone else's stream.
Modern trading as in "The City" has been around since sailing ships bought home spices from wherever.
These days its hedge funds, forward buying, trading on paper rather than barrels of whatever
And don't forget that UK is an oil producer & Brent Crude is one of the two oil standard types quoted. The various governments have arguably screwed it up over the years, but that's another story & not caused by the trading markets.

We need a world trading system to secure world supplies, we need the commodities markets, the stock exchanges & the wheelers & dealers who just happen to get richer than you & I in the process.
Don't hold it against them, they just had the opportunity, you didn't. But don't make the mistake that these people are from old money families; many (most) are ordinary smart kids some from working class backgrounds who just where at the right place at the right time, but with a work/life expectancy before burn out that is measured in single digits.

We need this trading system to work & work well to get this planet & this country back out of the mess & into the place it should be on the world market. And that to say nothing about yours & my savings & investments, its all part of the modern day pack of cards.

Speculative trading works both ways. When the long positions (rights to oil in the future via an almost endless assortment of financial instruments) are being unwound (as they inevitably are) the prices are depressed below the physical market equilibrium. Trading the non-physical commodity in financial markets neither raises nor lowers the average long-term price. The effect of speculative trading on the volatility of the short-term price is not as clear.

The question about whether the world would be better off is another question. Anything that drives the price of fossil fuels closer to their true cost (which includes the direct long-term consequences of their consumption which are virtually unaccounted for in the current markets) is a very, very good thing for the world. It will drive down demand and that can only be a good thing in the long-term.

Winky

The trouble with your assumption is the world would not be better off at all...
People still need fuel and will buy it at any cost because they need it to use (as long as they have the money to afford to pay the silly high costs of course). Meanwhile the speculators, who are making the prices rise by their 'speculation' will make easy money and wheelbarrow off millions of $ for their selfish selves. The world won't benefit a hoot, just more stock-traders & bankers getting even richer!

: (

Debs

Debs, there are a number of points of view & I am not saying any is more right or wrong than others.
Traders in this case (not bankers) might get rich & that is one of those things that this post seems to be the cause of contention. Personally I say good luck to them, wish I had some of it.
Its the competitive element of commodity trading - that is both buying & selling thru the market & placing huge orders for future use - that keeps prices balanced, yes it gives opportunities to make a lot of money but the upside is balanced by the downside & in some cases huge personal losses.
Take oil out of this system (not that it could ever be done) & we get faced with the whims again of OPEC price fixing & the obscenity in the extreme of even more growth in the coffers of some of those ruling families.
A trader making or loosing a few 100,000 p.a. is nothing compared to those people who make that & more per per hour for 100% sweet FA.

quote:

Originally posted by naim_nymph:
On the way home this morning i filled up my tank: 41.52 litres of diesel which cost over uk£50 : (
( That's £1.21 per litre )

quote:

The question is would the world be much better off if crude oil was not allowed to be traded on the financial markets?

I suppose it's just another way for the 'rich and powerful' make their money from the masses. If it wasn't oil it would be something else. At least they can't presently screw us for interest rates, and that was costing me even more.

Don't know what the answer is really... short of revolution! : >

(perhaps a green coloured one this time? ...rather than red!)

Debs

Screw us for interest rates - tell that to those with savings and/or pensions maturing.

Speculators - don't always make money, they can also be punished for the risk.

I guess a 50% tax rate is just another way for the masses to leech off the 'rich and powerful'.



If oil is required and people are willing to sell, there is a market. Whilst there is a market there will be opportunities re pricing to make/lose money.

Cheers,
OW

quote:

Originally posted by Haim Ronen:
"Crude oil for May delivery, the most active contract, added 22 cents, or 0.2%, to settle today at $86.84 a barrel (a 17 month high) on the New York Mercantile Exchange."

These days crude oil is being heavily traded by a whole array of financial institutions all over the world. On top of sheer speculations, this commodity is being hotly pursued also to be used as a hedge against inflation and currency fluctuation. Unfortunately,(and to the delight of the oil producing nations and companies) all this 'interest' in crude oil futures propels it to a much costlier level, way beyond the realm of supply and demand prices.

The end result is much higher (and unjustified) energy costs for all of us which constantly drain economies as well as individual resources.

The question is would the world be much better off if crude oil was not allowed to be traded on the financial markets?

Haim,
shouldn't the question rather be what are OPEC doing? You could also argue that there is nothing wrong with trading oil if you are a user or a producer, the difficulty lies in stripping out the purely speculative trader - but aren't they keeping the market efficient? But to my original point, shouldn't someone be keeping OPEC honest or why do they exist?
Best
Huw

PS - was it India that restricted the trading of rice futures? Can't think of another example where trading was limited to producers and consumers

quote:

Originally posted by naim_nymph:

People still need fuel and will buy it at any cost because they need it to use (as long as they have the money to afford to pay the silly high costs of course).

Sorry Debs. A lot of fossil fuel consumption is optional. We don't need most of the crap we buy, nor to make most of the journeys we do. We don't need that enormous house in the 'burbs with the family room, the recreation room, the media room and the lounge room (and its associated heating/cooling/commuting bills). We don't need that new Lincoln Navigator. It is a choice. It really is.

If prices are higher, people will make different choices. They will consume less, simply because they can't afford to consume as much. We cannot afford to buy fuel "at any cost". My point is that the cost at the pump (which people bitch about constantly) is nowhere near the true cost of consumption nor anywhere near the cost in the future as resources become increasingly more expensive to extract. Make no mistake, fuel is far cheaper than it should be, not more expensive.

Few comments:

The fact the we live in capitalistic societies does not exempt us from using our own brains to question time and again the validity of the everlasting claim of the golden financial wizards that what's good for the markets must be very good for the country.

The idea that trade is always beneficiary to us regardless to what (commodity), who (is doing the trading) and in what capacity (risk) is simply wrong. To find disastrous trades we can go back 300 years and look at the slaves trade or we can examine the unregulated over-the-counter derivatives trade of recent years which brought the financial systems and the world's economies to reach the brink of disaster.

Trade does not always regulate prices for the simple reason that the sides involved are mainly interested in realizing a profit, usually the bigger the better. When greed takes over and spills into illegalities the consequences can be devastating. One of the most notorious cases of abuse were the ENRON boys who "helped" to regulate the price of electricity in California and along the way bankrupted the state to the tune of billions of dollars and even caused a numerous deaths. These guys diverted electricity away from California to other states to increase demand and raise rates and then re-routed back the same power to California at much higher prices. For the same reasons they also managed to convince power plants to shut down which created disruption of power at peak hours. People died in road accidents due to malfunctioning traffic lights and in stranded elevators from heat in midsummer. The sad end of the story is that instead of going to jail those criminals walked away pocketing hundreds of millions of dollars.

Going back to oil, legitimate trade is taking place among companies who constantly use the commodity. Southwest Airlines saved millions of dollars in operating cost when they bought oil futures before the prices shot through the roof. On the other hand, United Airlines lost millions by buying the same futures just before oil prices plummeted. The point is that having the right investment tool does not guarantee a profit.

The part that I dislike the most in oil trading and which affects us the most is the heavy involvement of huge investment banks and hedge funds. They trade crude oil because its price moves, and more importantly, that price can be moved, what I call manipulation. The nature of the beast which we call investing is basically to buy and then to buy some more, increase demand and cause the price to shoot higher (same story for stocks, bonds or commodities) and when a nice profit can be realized to sell the asset to a less sophisticated buyer (the public?).
The oil companies love this game and excel in speed variations and creativity. They up the price real fast when crude shoots up and are very slow to lower their prices when the opposite occurs and the crude goes down. Their creativity comes to play when they tack on top of everything else another 15% price increase which they call 'risk premium' to cover events of oil supply disruption (like an attack on oil fields). Well, that's a lot of bull because we keep paying that extra premium every day that nothing happens and when a minor incident really occurs (like a weekend tribal war in Nigeria) they still raise the price more on us.

One might argue that what goes up must eventually come down just like the crude did when it fell in 2008 from insanity of over $130 a barrel to the $30 level. I would answer that most of the time, because of the massive demands created by our financial institutions, the crude is in a constant climb in a state of being over priced by a varying degrees. The corrections down are sharp and short lived.

To answer my own question, there is no doubt in my mind that the speculations in crude oil and the heavy use of it as hedging financial instrument do not benefit us. On the contrary, to my estimation, all this trading activity beyond the natural forces of supply and demand more than doubles the price of oil. I wish that someone could come up with real numbers to demonstrate to us how much those financial games with this common commodity which is being used by everyone on a daily cost our society.

Wot Haim said. Excellent post.

Hello Haim Ronen,

I'm OPEC, the speculators have gone, I say crude is $130 a barrel - what are you going to do about it?

Cheers,
OW

You people need to educate yourselves on Peak Oil...try reading this...

http://heinberg.wordpress.com/...8-the-end-of-growth/

BBM

Here's another interesting article if you have the time...

http://www.energybulletin.net/node/52361

Enjoy,
BBM

quote:

Originally posted by CFMF:
You people need to educate yourselves on Peak Oil...try reading this...

http://heinberg.wordpress.com/...8-the-end-of-growth/

BBM

What's the problem? The population will be reduced through war - local and global.

Indeed. Kinda makes speculation seem insignificant, huh?

quote:

Originally posted by Huwge:

Haim,
shouldn't the question rather be what are OPEC doing? You could also argue that there is nothing wrong with trading oil if you are a user or a producer, the difficulty lies in stripping out the purely speculative trader - but aren't they keeping the market efficient? But to my original point, shouldn't someone be keeping OPEC honest or why do they exist?
Best
Huw

PS - was it India that restricted the trading of rice futures? Can't think of another example where trading was limited to producers and consumers

Huw,

The question stands as is because unfortunately I believe that our golden boys of Wall Street manage to do a much better job of beefing up the price of crude than OPEC does. We have a better chance (theoretical?) to make a change here if we show people how prices are being manipulated and who benefits from that.

As for OPEC, I wish that some major industries of the western world (computers, construction, health) would organize themselves into Cartels when dealing with OPEC countries to give them a taste of their own medicine.

I know that it is unrealistic to expect everyone to stop speculating in oil, but wouldn't it be nice if all those hedgers against inflation and war turmoils and speculators who are after wild swings and quick profits switch to trade in gold futures instead and leave us and oil prices alone?

Regards,

Haim

But why is an "artificially" high price for oil a bad thing? It is still far too cheap.

quote:

Originally posted by OscillateWildly:
Hello Haim Ronen,

I'm OPEC, the speculators have gone, I say crude is $130 a barrel - what are you going to do about it?

Cheers,
OW

Hello OscillateWildly,

If you are OPEC insisting on $130 a barrel my option would be to look for a non OPEC member country who is willing to sell me the oil at a better rate. If there is none available and everyone else has matched the $130 price I better buy the oil immediately before the speculators have a chance to bid up the market.

But... if you are OPEC you really don't want to ask for $130 because this is the price level where I cut drastically my oil consumption and start looking seriously for other energy alternatives (who knows? I might find some). The rest of the story is well known; shrinking economies, shrinking demand and you find yourself again (a la 2008) peddling your oil for $33 a barrel.

Regards,

Haim

Haim,

You're describing an efficient market. Opec have tried (but mostly failed) to control it. Member countries game the system by over-declaring resources and reserves to gain larger quotas as well as more shady trades to step around the cartel. It is not clear the Opec have been able to systematically bias prices by a significant margin.

Trading is a zero-sum game with pluses and minuses. Yes, traders' commissions are obscene and I'm as jealous as the next person of their Chelsea townhouses, Verbier chalets and Lamborghinis, but it is not demonstrably true that trading in derivatives systematically biases the physical price either upwards nor downwards in the long term. Oil prices are climbing as oil becomes more difficult and expensive to extract and refine and, as we become richer and richer, our demand for it skyrockets.

Cheap oil has made us richer than ever in terms of the crap we own, and the useless journeys we make, but there are very good arguments that this wealth is borrowed from the future. The era of fossil fuel consumption will be a nano-second in history, spanning a few hundred years in what will be (hopefully) a few million years of human existence on the planet.

Winky

You seem to get it. What's wrong with the rest of the crew?
The world's oil producers have been unable to ramp up oil flows since 2005. Between 2005 and 2008, world oil production (including all liquids) has been stuck at roughly 86.5 million bbl/day. This is despite strong price incentives to increase production. As demand increased during this time, mainly in the BRIC countries, the world oil price skyrocketed.
Speculators do not get involved in markets unless they think they can profit. They got involved in oil markets simply because they know there is very little spare capacity. Between 2005 and 2008, demand outstripped supply; hence the price surge.
Just last week, the U.S. Department of Defense and the Department of Energy stated that by 2012 there will be no spare capacity, and that by 2015, there could be a gap between supply and demand of 10 million bbl/day.

http://www.energybulletin.net/node/52334

Worrying about speculation in the face of Peak Oil is akin to being concerned about farting when you have already shit your pants.

BBM

CFMF - I'm not worried by speculators; look at the World Trade Centre event, who was buying when everyone else was dumping?

Haim - I was trying to make the point that I don't put much of it down to speculators.

Cheers,
OW

In the past, the markets actually worked quite effectively to keep the world oil price low. This was because there was ample supply. The law of supply and demand benefitted the oil importing countries. The U.S. imports 2/3 of the oil it uses, for example.
Things changed in 2005, as mentioned in my previous post.
Due to the economic recession, world oil demand has dropped by about 4 million bbl/day. Demand in the U.S. alone has dropped by 2 million bbl/day. Thus, there is slack in the system (spare capacity) at the present time, hence the lower world oil price.
Unfortunately, this will be short lived, as the spare capacity is taken up by relentless demand growth in the BRIC countries, and the depletion of mature oil fields worldwide.
That's why the U.S. Departments of Defence and Energy are saying what they are. Ironically, back in 2005, the U.S. Department of Defence commissioned a review of world oil supplies which became known as the Hirsch Report. It came to basically the same conclusions regarding the peaking of world oil supplies. It was politely ignored.
It will be interesting to see how things unfold in the not too distant future...

BBM

Winky,

I have to apologize for the length of my posts. I am not trying to hog the space here but I am having difficulties in explaining the non-obvious in few words.

I do not see any efficient oil market. On the contrary, all the indications point to the opposite direction of heavy manipulation. Let us examine the facts and forget the myths of Wall Street.

In the last 18 months the price of the crude oil went up from the mid thirties to the mid eighties, an increase of 240%. During the same time we had an almost non existent inflation, low interest rates, the shrunk economies are just showing us now the first (real or imaginary) sign of upticks, there was a very small increase in demand for oil and even the Dollar got stronger lately.
So what logical and honest justification for the 240% increase is left besides heavy price manipulation?

I could not care less about the day traders, their fancy houses and cars. On the other hand I am concerned about the huge financial institutions (they just got bigger and fewer after the 2008 crisis) which have a clear interest to drive up the price of oil and keep it there due to their heavy investments in it.

Here is an article which mentions some of the controls that Goldman Sachs and Morgan Stanely have over pipe lines and oil storage terminals:

http://moneymorning.com/ppc/J1...Pp_KACFUnW5wod0g2Z_A

On top of the bidding power which they have (and use) with their billions, their market analysts prepare us mentally for future hikes by talking about much higher target prices, expected low supplies and expanding economies.
At the peak of the oil price bubble in 2007 when everyone was so sure that the world was running out of oil the Saudi Oil Minister Ali al-Naimi was asked if his country was planning on production increase. His answer was that he was willing to do it if someone could find him a buyer for the extra oil. The simple fact was that there was a glut of oil at the time and the highly speculative prices were not close to reflecting the actual reality of supply and demand. In those days the experts were talking about target price of $176 for barrel and there were reports from the NY Mercantile Exchange that some oil future options were traded at a strike price of $200.
A new idea that is being pushed by the experts these days is that high energy prices are good for our markets. Common sense would dictate the opposite since high prices increases the cost of doing business (Manufacturing, shipping and so forth) as well as the cost of living our own private lives but we are told that since the oil industry sector is such a large component of our stock indexes (S&P 500 in the US) we should accept it as a positive thing.

Winky, I am aware that energy prices are eventually going to go higher. I totally resent the fact that our society is constantly being ripped off by manipulated energy prices which are benefitting few companies and financial institutions. If we have to spend more on our energy consumption I rather have us do it through taxation which should be used positively to explore other energy sources and improve our infrastructure.

Regards,

Haim

Others seem to be picking up the story...


http://www.guardian.co.uk/busi...il-production-supply

BBM

quote:

Originally posted by Haim Ronen:
Winky,

I have to apologize for the length of my posts. I am not trying to hog the space here but I am having difficulties in explaining the non-obvious in few words.

I do not see any efficient oil market. On the contrary, all the indications point to the opposite direction of heavy manipulation. Let us examine the facts and forget the myths of Wall Street.

In the last 18 months the price of the crude oil went up from the mid thirties to the mid eighties, an increase of 240%. During the same time we had an almost non existent inflation, low interest rates, the shrunk economies are just showing us now the first (real or imaginary) sign of upticks, there was a very small increase in demand for oil and even the Dollar got stronger lately.
So what logical and honest justification for the 240% increase is left besides heavy price manipulation?

I could not care less about the day traders, their fancy houses and cars. On the other hand I am concerned about the huge financial institutions (they just got bigger and fewer after the 2008 crisis) which have a clear interest to drive up the price of oil and keep it there due to their heavy investments in it.

Here is an article which mentions some of the controls that Goldman Sachs and Morgan Stanely have over pipe lines and oil storage terminals:

http://moneymorning.com/ppc/J1...Pp_KACFUnW5wod0g2Z_A

On top of the bidding power which they have (and use) with their billions, their market analysts prepare us mentally for future hikes by talking about much higher target prices, expected low supplies and expanding economies.
At the peak of the oil price bubble in 2007 when everyone was so sure that the world was running out of oil the Saudi Oil Minister Ali al-Naimi was asked if his country was planning on production increase. His answer was that he was willing to do it if someone could find him a buyer for the extra oil. The simple fact was that there was a glut of oil at the time and the highly speculative prices were not close to reflecting the actual reality of supply and demand. In those days the experts were talking about target price of $176 for barrel and there were reports from the NY Mercantile Exchange that some oil future options were traded at a strike price of $200.
A new idea that is being pushed by the experts these days is that high energy prices are good for our markets. Common sense would dictate the opposite since high prices increases the cost of doing business (Manufacturing, shipping and so forth) as well as the cost of living our own private lives but we are told that since the oil industry sector is such a large component of our stock indexes (S&P 500 in the US) we should accept it as a positive thing.

Winky, I am aware that energy prices are eventually going to go higher. I totally resent the fact that our society is constantly being ripped off by manipulated energy prices which are benefitting few companies and financial institutions. If we have to spend more on our energy consumption I rather have us do it through taxation which should be used positively to explore other energy sources and improve our infrastructure.

Regards,

Haim

There are a couple of rational responses to a belief that oil prices will be sustainably pushed above market-equilibrium prices.

1) Take a long position in oil. Buy long-dated call options on shares in companies that stand to profit from this forecast market distortion.

For example you could buy a 651-day $60 call on BP (US-based ADR) for $4.80 (according to Morningstar this evening). They are currently trading at $59.46. If the BP goes to $65 in two years, you're in the money (actually, if you take the dividends (forecast at $5.00) into account, the price only really has to hold steady for you to make money by buyinthe actual ADRs). Clearly, the market is not forecasting any dramatic shift. But if you think oil is going to be artificially inflated, get on the right side of the market manipulation that is being forecast.

2) Take a long position in the financial institutions that are apparently going to clean up. 651-day $180 calls on Goldman Sachs are available at $28.25. GS are currently trading at $179.12. Dividend forecasts are a bit stingy at $2.50, though.

My point is that if we KNOW the markets are being manipulated, and that they will be in the future, then, by definition they aren't and they won't be. There are an infinite number of side/counter bets that will ensure that the markets are brought to equilibrium.

This is not to say that markets aren't fixed of course. It's just that it can't occur if we (non-insiders) know about it, because we will then profit from it. And they couldn't have that, could they.