THE Speculators Thread pt 1 (merged) Archived

[JohnDenver]

The ones who have been complaining the most about speculators and bubbles have been the same people who have been wrong and PO and oil prices.

Lynch, Peter Beutel, and many others leading the bubble charge never thought prices would rise this high and can't see PO if it jumped up and bit them in the nose.

The commodity bubble is not just about oil. It's about all commodities: base metals (copper, nickel, zinc, lead, tin), precious metals, oil and other energy resources, and agricultural products.

I agree with Veneroso that oil is the commodity whose price is most justified by fundamentals. However, there are a few reasons why your points aren't that convincing:

1. The fact that prices remain high does not prove that oil is not in a speculative bubble. The dotcom bubble surged upward for quite some time after numerous people recognized it as a bubble. Lynch may be right, just off in terms of timing.

2. It's not just Lynch. Boone Pickens was recently shorting oil. He's a peak oil stalwart, and still thinks it's a bubble.

3. There's a big disconnect between concerns about the coming economic collapse in the U.S. (consumer of 25% of the world's oil) and crude prices simultaneously rising by 20% in the last month, and 10% in the last week.

[JohnDenver]

I'd guess you're the kind of Marxist who doesn't like anybody making money off of any investments.

On the contrary. I'm one of the staunchest pro-business free marketeers on this forum, as everyone knows. I do, however, question the wisdom of allowing speculators to run amok in the markets for key necessities such as oil and food.

[JohnDenver]

More info on the ongoing speculative dogpile into commodities:

"You're seeing record prices right now because of non-traditional players all coming into the market at the same time," said Larry Goldstein, director of the Energy Policy Research Foundation. "It would be hard to believe that (sovereign funds) are on the sidelines."

The average daily trading volume in crude-oil contracts on the New York Mercantile Exchange jumped to more than 480,000 in 2007, compared with roughly 280,000 the year before.

Non-commercial trading — buying and selling by investors that neither produce nor consume oil — has also risen sharply. The proportion of contracts held by non-commercial traders increased from approximately one-sixth in 2002 to one-third in 2008, according to Robert Weiner, a professor at George Washington University.

[mkwin]

This is the usual explanation of the utility of speculators, but IMO it doesn't really say much. Yes, speculators make the market more liquid, but why is liquidity a good thing?

As I explained, a more liquid market makes it easier for oil producers and refiners, who are the majority users of the futures market, to get the contracts they want at the time they want as there are more potential counter parties to the contracts.

Consider the classic tulip mania for example. Attracting ever larger numbers of "greater fools" into the tulip craze certainly increases the liquidity of the tulip market, in exactly the way you define.

You are mixing up speculation with a bubble. Speculation has happened on a large scale for decades for almost every commodity. It normally has little impact on the price and provides the liquidity benefit I defined.

When I go to the store to buy food, there's no liquidity at all.

When you go to the store you have 100% liquidity. There is a willinging buyor (you) and a willing seller( the shop keeper) and you can transact straight away. I think you need to look at the definition of liquidity. I tried to explain it in my last post, if you read it fully you should get a better idea of what people mean when they speak of liquidity in a financial sense.

[JohnDenver]

Speculation has happened on a large scale for decades for almost every commodity. It normally has little impact on the price and provides the liquidity benefit I defined.

I'm not concerned with the times when it has little impact on the price. I'm concerned with bubbles, where speculation constitutes most of the price.

In particular, what should be done if a speculative bubble/mania/craze occurs in the markets for critical commodities like food or oil?

"Speculation normally works quite well, and is convenient for the brokers" is not an adequate defense if the speculation is highly abnormal and causing severe problems in the real world.

[mkwin]

I'm not concerned with the times when it has little impact on the price. I'm concerned with bubbles, where speculation constitutes most of the price.

In particular, what should be done if a speculative bubble/mania/craze occurs in the markets for critical commodities like food or oil?

"Speculation normally works quite well, and is convenient for the brokers" is not an adequate defense if the speculation is highly abnormal and causing severe problems in the real world.

Most of the high price increases in commodities are due to China's explosive demand growth and collapse in the dollar. Speculation is a secondary factor. If speculation were to overtake the commercial users of futures markets it would of course be a cause for concern but they are currently 30% or less and of that 30% some push the price down as well as up. The ratio of long to short in oil is currently 60/40 and it proberbly closer to unity in many markets.

The bottom line is we are entering a period of inflation in commodites and energy because the industrialisation of 3 billion people is pushing the entire global system to it's limits. Not because of some evil Grekko wall street types trying to make a quick buck.

[Bas]

almost all commodities were down quite a bit earlier today on margin calls among other things but they seem to be back up by a bit...

[mkwin]

In particular, what should be done if a speculative bubble/mania/craze occurs in the markets for critical commodities like food or oil?

P.S. Who is to say food and oil prices are in a mania? We have had stock draws all winter in the oil market, shortages in many parts of the world and very little supply growth despite robust demand growth.

Same with food, stock levels are at there lowest for many years, biofuels are now competing for farm land and Asians want a better diet all of which has pointed to a tighter market and higher prices.

You could only say there is a bubble where there is a disconnect with the underlying market. I would say buying oil for $110 in 2012 is perfectly rational considering it could be $150 or $200 by then.

[BillPeakOil]

Its tough though, I see both sides of the coin:-) Where else can someone put their money and have it be safe besides commodities? I surely don't see the dollar as an attractive store of value. Any other ideas anyone??

[BigTex]

JD, go take a look at the "Will Food Prices Collapse" thread.

I would like your take.

I agree that there can be doom bubbles, just like there can be happy bubbles.

[billg]

The bottom line is we are entering a period of inflation in commodites and energy because the industrialisation of 3 billion people is pushing the entire global system to it's limits. Not because of some evil Grekko wall street types trying to make a quick buck.

The Grekko wall streets types in cahoots with corrupt government have helped foster an unsustainable system of growing food and securing energy which has pushed us into the current predicament. The Grekkos are not interested in low yielding investments that provide long-term sustainability, instead they want it all and they want it now.

I'm sure there are still some profits to be made off the rape of mother Gaia, but at some point the speculators will wake up to realize that mother will no longer bear children since all her life force has been drained away.

[Revi]

I'd say that a gallon of gas is still an incredible bargain. For around the same price of a gallon of fancy water you can propel yourself, 5 other human beings and a couple of hundred pounds of stuff about 20 miles in about 20 minutes.

I'd say that it's still pretty cheap.

Speculators will find out if the price is too high. They will bet that oil is going up a little too much and it will crash.

I'm not worried about the speculators. I'm worried albout the regulators.

When they institute price controls, the shortages begin.

[FreddyH]

Contract price attained a new USA high of $95 on March 1st. A speculation component of $18 & windfall profits of $25/barrel reflect that the bubble factor is $43 at the moment.

Extraordinary Supply gains since September have shocked many in the sector as they have preceded scheduled new capacity flows. This phenom disrupts the foundation for high estimates of underlying decline and will encourage upward revisions in many of the production profile models.

The fly in the ointment continues to be the lack of faith in the commitment by producers to maintain their current pace of 4.8-mbd/yr of new capacity. There have been virtually no announced projects for the 2014 to 2019 time frame.

Amending the underlying decline rate downwards assures a postponement of Peak Rate to 2013 based on announced MegaProjects. Using the 4.8-mbd industry avg as a trend indicator would push out Peak Rate to 2019 at which time the ever rising underying decline rate should overtake new capacity.

Awareness among non professional speculative traders of the non-immanency of Peak Oil will gradually wear down the Depletion spec component in current prices. Factoring in of the immanency of a new USA prez within 300 days will similarly beat down the Geo-political spec component:

[dohboi]

Quote:

"Extraordinary Supply gains since September have shocked many in the sector as they have preceded scheduled new capacity flows. This phenom disrupts the foundation for high estimates of underlying decline and will encourage upward revisions in many of the production profile models."

Wow, FH, where did you learn to talk such gibberish. Very impressive

[dohboi]

Quote:
"There have been virtually no announced projects for the 2014 to 2019 time frame."

OK, on a less snarky note, to what do you attribute this lack of announced projects for this time frame?

[NeoLotus]

When I go to the store to buy food, there's no liquidity at all.

When you go to the store you have 100% liquidity. There is a willinging buyor (you) and a willing seller( the shop keeper) and you can transact straight away. I think you need to look at the definition of liquidity. I tried to explain it in my last post, if you read it fully you should get a better idea of what people mean when they speak of liquidity in a financial sense.

You completely missed the point about buying groceries. Liquidity is having the money to make the purchase. No money, no groceries.

Also, the issue is not so much about liquidity as it solvency. Most folks, along with most financial institutions and even our own government, are IN-solvent--see http://www.theoildrum.com/node/3740 . Margin calls are being made and those who need to cough up the cash aren't able to do it in too many cases.

This doesn't mean there aren't individual investors capable of moving their money out of stocks or other securities to put them into commodities (particularly gold or oil), but that ignores the situation on the ground for the average person who has no money to invest in anything let alone buy the same amount of groceries or gasoline they used to buy even 6 months ago.

[FreddyH]

Quote:
"There have been virtually no announced projects for the 2014 to 2019 time frame."

OK, on a less snarky note, to what do you attribute this lack of announced projects for this time frame?

1) IOCs are blocked from traditional domains access by the NOCs.
2) NOCs lack sufficient labour pool & capital to proceed on their own at pace required to thwart decline
3) Some NOCs are more sensitive to environmental and cultural issues than IOCs practice.
4) As i warned in my NPC Global Study submission, fear of Peak Oil can become self-fulfilling. Raising Supply flows requires a tandem incr in refining. But, why build more refining capacity if there could be global over saturation of Refining Capacity as Production Decline sets in within the next five or ten years? New refinery projects have some degree of uncertainty of coming to market at a time when there is up to 5-mbd of surplus capacity due to shortage of crude. This is not a scenario that i envision, but it is a "what if" that will surround the decision making of fringe players. On both the short and medium term, i can foresee Supply growth threatened by the environment where we have adaquate extraction projects proceed but resulting in surplus capacity due to lack of refining capacity to process same...

[JohnDenver]

Speculators will find out if the price is too high. They will bet that oil is going up a little too much and it will crash.

Maybe. Maybe not. Here's the nightmare scenario: Mass exodus from the dollar into commodities. To the point of a mad rush to horde oil and wheat as de facto money. The price isn't going to crash in that case. It's going to spiral out of control in a convulsion of hyperinflation. Will you still side with the speculators if that happens?

I'm not worried about the speculators. I'm worried albout the regulators.
When they institute price controls, the shortages begin.

That's true. But nobody here is suggesting price controls. I personally am suggesting controls on speculation, not prices.
Here's an interesting factoid: Trading in onion futures was illegalized in 1958. Noticed any onion shortages since then? I haven't. Apparently futures markets are an unnecessary appendage.

[emersonbiggins]

Noticed any onion shortages since then? I haven't. Apparently futures markets are an unnecessary appendage.

Onion shortages? Indeed, who would notice such a thing?

Aren't futures markets for peripheral commodities rather superfluous anyways? That would explain why my lavender soap and Frisbee bourses have been utter failures.

[cube]

....
That's true. But nobody here is suggesting price controls. I personally am suggesting controls on speculation, not prices.
Here's an interesting factoid: Trading in onion futures was illegalized in 1958. Noticed any onion shortages since then? I haven't. Apparently futures markets are an unnecessary appendage.

Get to the point, Johndenver. Exactly what are you suggesting?....you want Uncle Sam to shut down:

http://www.nymex.com
and
http://www.cme.com/