Should crude oil be traded on the financial markets?

Here's a great compilation of articles if anyone is interested...


http://www.energybulletin.net/node/52460

BBM

It is amazing how many articles the Wall Street guys can come up with to justify the never ending price climb. After all the talk about diminishing resources they can move on to deal with the limited refining capacity of our world (a good topic every spring) and then they will probably discuss China which has been stock piling crude oil like World War III is going to erupt next week. We are supposed to nod our heads and be thankful to them that crude has not reached $200 a barrel yet.

Now to the real world. Crude's May contract ended today at $85.51. This is a May of 2010 contract expiring in five weeks which means the very immediate present. So if we have to consider only the current existing conditions of limitless supplies, low demand due to the slower economies, high existing reserves and very low interest rates what justification is there for the price of oil to top $40 (the price level of 15 months ago)? Nothing but greed.

Here is a report of today's oil trade which demonstrates well the psychology of our savvy traders and analysts:

http://www.marketwatch.com/sto...ght-gains-2010-04-15

In 2008 demand for oil in the US went down 1.1 million barrels a day which translates to a 5.4 percent drop. Let us be generous and assume that the world's demand shrank by a full 10% in 2008. In the same time oil lost $100 per barrel, a 75% drop from its lala land prices. I doubt very seriously if anyone can find an honest expert who could explain this huge plunge without using the terms 'bubble' and 'price gauging'.

Wall Street is an easy target when looking for scapegoats.
The fundamentals of supply and demand speak for themselves. Since 2005, world oil production could not be increased beyond 86.5 million bbl/day. This, despite strong price incentives to do so.
Do you not think that oil producers would have brought on more supply if the had it? Why didn't they?
Pull your head out of the sand, and educate yourself on Peak Oil.
Look at where all the new demand is coming from...

http://www.energybulletin.net/node/52473

Just because demand in the U.S. is stagnant or dropping, does not mean that overall world demand is not increasing. Last year, China's automobile sales surpassed U.S. auto sales for the first time ever. This trend is to continue this year and for God knows how long.
The U.S. has been the world's oil glutton for many decades. They represent only 5% of the world's population, yet they use 25% of the world's oil resources. They are fighting multiple wars in their attempt to preserve their hegemony in the Middle East, and to ensure future access to the reserves in that region. The cost of these wars will eventually break the U.S. both financially and politically.
Since the recession, U.S. oil demand has dropped from 21.5 to 18.9 million bbl/day, (about 12%). Total world oil demand is off by about 4 million bbl/day (about 4.6%). When the Great Recession hit, oil traders could see that demand was going to drop, so they all dumped their positions and the price plummeted. The panic caused overshoot, and a bottom price that was too low. That didn't last long.
Now that oil prices are climbing again, everyone starts blaming speculators. Funny.
The U.S. is in a real bind. Their economy is designed to operate on cheap oil. That is now a thing of the past. The last time the U.S. experienced a recession was after the 9/11 attacks. Oil was trading under $20US, so it wasn't that hard to get their economy going again. Now they are facing a much deeper recession, and oil prices are at $85US. Try restarting the U.S. economy under those conditions. No wonder they are bitching.
The Yanks are on their way down, and the BRIC countries are on their way up. Get used to it...

BBM

CFMF,

Thanks for the upcoming new 'world order' preview though I could easily do with a less condescending attitude on your part. Manners are free but for some reason are in a short supply with you (and I am trying to up the demand).

Few short points:

* You are still not able to explain the cause of a price drop of 75% when world oil demand shrank by only 4.6%. Where did that $100 price cushion come from ($35 to $135 and back to $35, remember producers could still make money selling crude at $22 a barrel) and how come it evaporated so fast?

* In your own words (thanks for doing my work): ".. oil traders could see that demand was going to drop, so they all dumped their positions and the price plummeted" This is a perfect description of a heavily speculated market. Now are you trying to tell me that prices plummeted because of traders unwinding their positions and prices did not rocket up because traders had assumed those positions? That is exactly my point; without heavy speculation on our financial markets prices would not have gone so high or so low and to use your own words again: "The fundamentals of supply and demand (would) speak for themselves". I am all for it!

* You are wrong maintaining that oil producers could not up the supply in 2007. On the contrary, they were trying to pump and sell as much as they could at those ridiculous prices and doing so created a glut (see the quote of the Saudi oil minister in my previous post). Can you point out at any economy, any industry or even a gas station that had to slow down in 2007 because of lack of oil supply? I can come up with a very long list of businesses and industries which had no choice but slow down because of those heavily speculated energy prices.

* Perhaps the very recent story of securities fraud charges brought against Goldman Sachs will tamper your blind trust in the wizards of our financial world, the same guys who keep telling us that high energy prices are a good thing for our markets.

http://www.huffingtonpost.com/...-charg_n_540934.html

Have a good weekend,

Haim

I am tired of wasting my time on people like you.
Have a nice day.
BBM

I received it today from Money Morning's investors letter (written by Peter Krauth the founder of Global Resource Alert) to spoil my Sunday:


"THE $4.68 TRILLION "TRADE" THAT CAN HAND YOU 15 TIMES YOUR MONEY...

I was working late on the night of March 14 when I first came across the U.S. government FR Y-9C report.

For the first time, this obscure document gave me a glimpse inside the secret operations of the world's most powerful banks. The same ones you hear about on the news every day.


Until recently, the giant Wall Street banks closely guarded the data on their assets and trades.

But that all changed when the largest investment banks, like Morgan Stanley, became bank holding companies.

When they did, federal law required them to file Form FR Y-9C.

Few analysts have seen or studied this obscure document. And rest assured... the Big Banks don't want you to see it either.

After days pouring over every filing, going back over eighteen months, what I found was astounding.
The largest banks in the world now have over $4.68 trillion dollars moving into one "trade."
Morgan Stanley has approximately $1.297 trillion in this deal.

Bank of America is in for over $2 trillion.

JP Morgan is in for an additional $665 billion.

And Goldman has $721.9 billion at stake.
All together, it's nearly 3 times more money than the national deficit... and twice as much as China's total foreign reserves...

It's more money than the entire Gross Domestic Product of Canada, India, Mexico and Australia - combined.

The Biggest Bank Manipulation in Generations

When I first came across the FR Y-9C, I knew there had to be a lot more to the story than what these banks were willing to admit in public forms. And I was right...

What these giant banks are trying to pull off goes beyond anything I'd ever read or seen...

How is it that a bank like Goldman can predict that crude oil prices will hit $90 a barrel in the coming months? (It's almost there already.)

And how can they predict an oil shortage in 2011 - expecting the price of crude to hit $110 a barrel?

Simple. These institutions have practically guaranteed this will happen... because they're taking millions of barrels of oil off the market... at the same time they're trading it.
JPMorgan has a supertanker floating in the Mediterranean... and another ship off the coast of Northwest Europe, each storing a million barrels... plus storage tanks in Hardisty, Alberta holding two million barrels - and additional storage tanks in South Korea, Singapore and Denmark.

All together, the three biggest banks control the equivalent of about half of the entire reserves of Light Sweet Crude in the US Strategic Oil Reserve."

These don't sound like particularly big stockpiles when you consider that the global consumption is around 100m barrels per day. They're hardly cornering the market. Furthermore, unless the market manipulating conspirators just keep stockpiling more and more oil (where will they put it?) the market will return to equilibrium, and even undershoot once the oil is released back into the market. At worst, they're making a bet that the price will go up. If you believe that they can and will actually cause this to happen, make the same bet and retire.

winky

Exactly!

Best,
BBM

Winky,

I don't know how impressive those numbers are, but they clearly show the heavy involvement of the investment banks across the whole spectrum of oil production, storage, piping, marketing and trading. Their stake in oil prices is huge and they are very interested in keeping them up.
I agree that it would be difficult for them to influence prices for the long term just with their storage capacity but they will try anything. The easiest way for them to manipulate prices, and they have been doing that with their huge amount of cash, is through trading oil futures. That was the exact point of my topic to begin with.

Perhaps we should take a pause till the next financial genius comes and discovesr the golden opportunity to make fortunes in trading drinking water. After a couple years of a bull market and heavy investments by the banks we could discuss if the price of $10, $20 or $100 for a barrel of drinking water is manipulated or just reflects the equilibrium of supply and demand.

CFMF,

I am surprised that with your beliefs (which I fully share with you) in the dwindling world oil supplies that unquestionably drive the price higher, you don't care at all to be angry at the institutions who hike the price to unrealistic levels just for their own enrichment.

Read what the CFTC Interim Report on Crude Oil has to say on the effects of speculation in the oil markets. I have read it in it's entirety, but you may want to skip down to page 31 for the conclusions...

http://www.cftc.gov/ucm/groups...rtoncrudeoil0708.pdf

Best,
BBM

I thought things over, and I now suggest that you read the whole article so that you will have a better understanding of how the oil markets actually function.

Best,
BBM

quote:

Originally posted by CFMF:
I thought things over, and I now suggest that you read the whole article so that you will have a better understanding of how the oil markets actually function.

Best,
BBM

Thanks. I was going to do it anyway but I am running out of time this afternoon so it will have to be later.

Those graphs on your topic were very interesting.

http://www.energybulletin.net/node/50722

Looking at the chart Figure 1. Petroleum expenditures as a percent of DGP in the U.S. and real oil prices, do you think that when (2006) the price went above the petroleum expenditure bar we were seeing prices hikes beyond real supply and demand? I would have loved to see this chart updated to today with the GDP starting going up and oil already at $86.

Have a good Sunday,

Haim

quote:

Originally posted by Haim Ronen:
you don't care at all to be angry at the institutions who hike the price

No. Quite the opposite. High prices will provide incentive for alternatives to be developed. Governments of the world are so focussed on re-election and short-term popularity that they are patently unable to make the tough decisions required to ensure the long-term outcomes are as favourable as possible.

I saw some great news that in Taiwan, housing is so expensive that couples are choosing to defer (sometimes for good) having children. Fertility rates are just over 1. The next generation will be only half the size of the present one. This is positive recognition that scarce resources (in this case, land) cannot be infinitely exploited. If the rest of the world would only follow suit we would be well on the way to reducing the world's population by the 95% required for a sustainable future.

Economic forces are the only ones that seem to be working towards the goal of reduction of consumption. Political initiatives have thus far been a dismal failure. Witness the recent failure of courage on the part of Australia as they yet agin failed to take any meaningful action on climate change.

As for the banks enriching themselves, if you know that they are onto a good thing, buy some options on their stock. Don't get angry, get even (richer).