[3aidlillahi]

There is, admittedly, a growing category of inherently bullish investment funds that seek to track commodity-price indices, in which oil is usually the biggest component. Politicians have begun to denounce these “index funds”, since they make money for their investors only if prices rise. According to Mr Lieberman, they have grown in value from $13 billion to $260 billion over the past five years.

Double, Double, Oil and Trouble - The Economist

So it appears to be $260 billion in commodities, not $190 bln, Dantes. But going back to what you're saying, that's still for all commodities and that's only a fraction of oil contracts even if it were 100% oil.

Here's another figure given:

Paul Horsnell of Barclays Capital, an investment bank, puts the total value of index funds and other similar investments at $225 billion. That is less than half the market capitalisation of Exxon Mobil, he points out, and a tiny fraction of the $50 trillion-odd of transactions in the oil markets each year

$225 billion. Still in that range of $190 to $260 (in fact, it's the average).

But what struck me was the $50 trillion number in oil-transactions! Much larger than your figure (and mine!) of $5 trillion. I suppose they are including the sale of all shorts, payments of futures, purchase of oil by consumers, investment, refineries, rigs, etc. Is that likely where it comes from or is it a typo? Some clarity and insight on this would be nice.

He estimates that index funds swelled by $13 billion in the first quarter of this year, for example, of which all but $2 billion derives from the rise in commodity prices.

Hmm... So it's not a rise in investment. It's simply a rise in price caused by rising demand and constant supply. That seems to be what Dante's been saying, no?

How did that $2 billion cause a first quarter rise in the price of oil from $100 to $110/barrel? That's a rise of $10/barrel and we used 7.5 billion barrels during that time ... That's $75 billion dollars in the increase of the end price of oil and it was caused by $2 billion in speculation? That just doesn't seem right. School me if I'm wrong though.

[Judgie]

............But that's not what the article said. The article is hidden behind a subscription wall, so I can't read the entire thing. Here is the teaser:...............

Ah ok. So before you are willing to read the whole article, you automatically infer the above as being the entire point of the article. Rarely does the abstract tell the entire story my friend. If it did that, then there would be no need for the articles themselves......

[bkwillia]

OPEC, China and Russia are likely playing a big part in this oil boom. They have too a surplus of petro dollars, and a falling US dollar, so their lowest risk investment is crude oil futures. This goes for the major independent produces like Shell, Exxon, BP etc.

Oil producers have insider information on production and reserves, while outsiders have to deal with OPEC's questionable numbers. They must have realized that it was more profitable to buy back all their futures contracts and resell them at a higher price, than to invest in more oil production. This strategy boosts both front month and long term prices. Investing in more production lowers near term prices and lowers reserve life.

At this point the flow of money into oil futures is like water flowing down hill. The stream of money is not going to change direction now that we are facing the other side of peak oil.

[AlterEgo]

I see this whole bidness as an initial reaction of people to the friction between a real economy and a paper economy.

Lifted from Russ Winter's website:
http://wallstreetexaminer.com/blogs/winter/?p=1722

"“Should we have an economy that’s based on whether people make good or bad bets? Or should we have an economy where people build companies, create manufacturing, do inventions, advance the American society and make it more productive? We are rewarding people for sitting at their computers and punching in bets.” - Stanley Greenberger in “New American Economy”"

[kublikhan]

How did that $2 billion cause a first quarter rise in the price of oil from $100 to $110/barrel? That's a rise of $10/barrel and we used 7.5 billion barrels during that time ... That's $75 billion dollars in the increase of the end price of oil and it was caused by $2 billion in speculation? That just doesn't seem right. School me if I'm wrong though.

I believe you are only required to put down 7% of the contract's price. Thus that $2 billion of real cash can buy $29 billion worth of oil. Further, my sources don't support a $2 billion increase in first quarter 2008:

You can see from Chart Two that prices have increased the most dramatically in the first quarter of 2008. We calculate that Index Speculators flooded the markets with $55 billion in just the first 52 trading days of this year.

Index Speculators

$55 billion of real cash can buy you $786 billion of oil, assuming you put down the minimum 7%.

[kublikhan]

Here's another figure given:

Paul Horsnell of Barclays Capital, an investment bank, puts the total value of index funds and other similar investments at $225 billion. That is less than half the market capitalisation of Exxon Mobil, he points out, and a tiny fraction of the $50 trillion-odd of transactions in the oil markets each year

Here's another figure for you to chew on:

In 2004, the total value of futures contracts outstanding for all 25 index commodities amounted to only about $180 billion. Compare that with worldwide equity markets which totaled $44 trillion, or over 240 times bigger.

Index Speculators
Thus the dollar value of the entire futures market is barely a rounding error compared to the equities market.

[3aidlillahi]

Chart One shows Assets
allocated to commodity index trading strategies have risen from $13 billion at the end of
2003 to $260 billion as of March 2008

From the Congressional testimony of Masters, pg. 3.

Same number as I quoted.

But then he comes out and does say $55 bln in the first 50+ days of '08. Can someone clarify the discrepancy between those two numbers?

According to the DOE, annual Chinese demand
for petroleum has increased over the last five years from 1.88 billion barrels to 2.8 billion
barrels, an increase of 920 million barrels.8 Over the same five-year period, Index
Speculatorsʼ demand for petroleum futures has increased by 848 million barrels.9 The
increase in demand from Index Speculators is almost equal to the increase in demand
from China!

This guy apparently doesn't know what "annual" means. According to the DOE, Chinese demand has increased from 1.88 gigabarrels/year to 2.8 gigabarrels per year for a net increase of 920 mby. But Index Specs have increased demand by 848 million barrels TOTAL, not per year. So that's really less than 20% of China's growth.

Yeah, that's not exactly putting a dagger in your argument. I'm just saying that he's wrong (slightly) on this point about IS vs. China.

That table that he provides is interesting. It gives us some hard stats on % of money going into which commodity. I don't feel like going through and calculating the value of each net increase. But:

Oil - 850 million barrels = $115 bln
Gold - 8.7 million oz = $7.8 bln
Silver - 150 million oz = $2.6 bln
Wheat - 1 bln bushels = $15 bln
Live Cattle - 5 bln lbs = $500 bln!
Lean Hogs - 3.8 bln lbs = $285 bln!
Cattle feed - 365 million lbs = $37 bln

So between those commodities which they've acquired, it has a total value of nearly a trillion USD! Oil is about 10% of the commodities net worth, from the net increase in futures.

So then we can approximate that 10% of the $55 bln in the first 50 days was for oil. Or $5.5 bln USD which is enough for ≈$78 bln USD. Which is what I projected the net increase for the price tag of crude oil in the first quarter.

How did that $2 billion cause a first quarter rise in the price of oil from $100 to $110/barrel? That's a rise of $10/barrel and we used 7.5 billion barrels during that time ... That's $75 billion dollars in the increase of the end price of oil and it was caused by $2 billion in speculation? That just doesn't seem right. School me if I'm wrong though.

Hmm...

------
Edit: Joewp reminds me that just because that money is going into oil and others, it doesn't mean that it's pushing the price up. So maybe those $75 bln and $78 bln figures are just a coincidence. Ayuda, por favor? Where is everyone on a Monday night when you need'em. Football hasn't started yet...

Thus the dollar value of the entire futures market is barely a rounding error compared to the equities market.

Huh? Care to elaborate on the point of this? (I'm not knocking what you're saying; I'm just an idiot)

I see this whole bidness as an initial reaction of people to the friction between a real economy and a paper economy.

Exactly. If we had a sane dollar or government, then we wouldn't have this problem (not to this extent). But we're stuck with it, I guess.

[joewp]

Somebody fix that link up there!


All you guys are assuming all these hedge fund dollars are going long on oil, whereas Dante and others have shown evidence that there's a large bearish sentiment in the traditional Wall Street speculator types that is shorting oil in all venues, from the futures to the ETFs. It doesn't matter the amount of money flowing into the markets, the important point is the direction of the trades, and a substantial amount of this money is shorting oil, actually keeping a lid on the price.

At this point it seems that without the speculators shorting the market, oil would be well over $150.

[threadbear]

Good to know its just a bubble. Hopefully $2 gasoline is right around the corner. Its all economics, oil production has nothing to do with the price of oil.

I don't think that's the point, Frank. If I can speak for JD and Kublikhan, (who both seem to agree that supply IS constrained) they would simply like fellow posters to understand that the fact of constrained supply touches off bidding wars. And btw, I frequent a forum where many trade for a living and short sell frequently.Short sellers are sensitive to actual supply/demand dynamics-much more so than the average investor. Why would they short sell into a bull market that actually does reflect some supply problems?

[kublikhan]

All you guys are assuming all these hedge fund dollars are going long on oil, whereas Dante and others have shown evidence that there's a large bearish sentiment in the traditional Wall Street speculator types that is shorting oil in all venues, from the futures to the ETFs. It doesn't matter the amount of money flowing into the markets, the important point is the direction of the trades, and a substantial amount of this money is shorting oil, actually keeping a lid on the price.At this point it seems that without the speculators shorting the market, oil would be well over $150.

We are not talking about the traditional speculator pushing up prices here, we are talking about index speculators:

Index Speculator demand is distinctly different from Traditional Speculator demand; it arises purely from portfolio allocation decisions. When an Institutional Investor decides to allocate 2% to commodities futures, for example, they come to the market with a set amount of money. They are not concerned with the price per unit; they will buy as many futures contracts as they need, at whatever price is necessary, until all of their money has been “put to work.” Their insensitivity to price multiplies their impact on commodity markets. One particularly troubling aspect of Index Speculator demand is that it actually increases the more prices increase. This explains the accelerating rate at which commodity futures prices (and actual commodity prices) are increasing. Rising prices attract more Index Speculators, whose tendency is to increase their allocation as prices rise. So their profit-motivated demand for futures is the inverse of what you would expect from price-sensitive consumer behavior. There is a crucial distinction between Traditional Speculators and Index Speculators: Traditional Speculators provide liquidity by both buying and selling futures. Index Speculators buy futures and then roll their positions by buying calendar spreads. They never sell. Therefore, they consume liquidity and provide zero benefit to the futures markets.

Also, using the figures that Dante provided, the average short interest among U.S.-listed ETFs is 10%, according to Morgan Stanley. That would mean that the average long position is 90%.

[kublikhan]

This guy apparently doesn't know what "annual" means. According to the DOE, Chinese demand has increased from 1.88 gigabarrels/year to 2.8 gigabarrels per year for a net increase of 920 mby. But Index Specs have increased demand by 848 million barrels TOTAL, not per year. So that's really less than 20% of China's growth.
Yeah, that's not exactly putting a dagger in your argument. I'm just saying that he's wrong (slightly) on this point about IS vs. China.

Not sure I follow you. China's demand did not jump from 1.88 giga barrels/year to 2.8 giga barrels per year in a single year. That increase was spread out over 5 years. China's oil demand has been growing about 7% a year.

Thus the dollar value of the entire futures market is barely a rounding error compared to the equities market.

Huh? Care to elaborate on the point of this? (I'm not knocking what you're saying; I'm just an idiot)

I'm saying there is a very large amount of investment money in the equity markets. So far, only a tiny fraction of that money has entered the futures market, and just look what that tiny fraction of money has done to prices. Any sizeable chunk of that investment money slogging around the equity markets could easily overwhelm the futures market.

[joewp]

Also, using the figures that Dante provided, the average short interest among U.S.-listed ETFs is 10%, according to Morgan Stanley. That would mean that the average long position is 90%.

Obviously, we're talking about reading comprehension here.
You completely misunderstood what Dante posted.

Energy, the best-performing commodity sector, has been the focus of heavy short-selling. United States Oil Fund, the biggest ETF tracking the price of crude oil, is among the most-shorted funds. During the first five months, while oil prices rose 33%, the fund's short interest, or the number of total outstanding shares sold short, soared 140% to 16.26 million shares, about two times the fund's total shares, according to Nasdaq OMX Group Inc. The average short interest among U.S.-listed ETFs is 10%, according to Morgan Stanley.

The average short interest among Us listed ETFs (of all kinds) is 10%. The oil ETF has a 140% short interest. It must be tough to take when the facts interrupt your fantasies that there's plenty of oil and the only reason the price is going up is those damn speculators. It must be really jarring to realize that without specs selling the market, the price would be even higher.

I don't know where you got that big quote about "Index Speculators", but it makes little sense. Especially that part about "explaining" the commodity markets prices increases, which completely ignores supply and demand.

You must be an economist or something, am I right kublikhan?

[kublikhan]

It must be tough to take when the facts interrupt your fantasies that there's plenty of oil and the only reason the price is going up is those damn speculators. It must be really jarring to realize that without specs selling the market, the price would be even higher.
I don't know where you got that big quote about "Index Speculators", but it makes little sense. Especially that part about "explaining" the commodity markets prices increases, which completely ignores supply and demand.
You must be an economist or something, am I right kublikhan?

Lets try and remain civil shall we? I have no interest in seeing this discussion drop down to the level of a schoolyard fight. But if you must know, no I am not an economist. And further, no, I am not "jarred" from my "fantasy" position that speculators are having an effect on the movement of prices in oil. About the "Index Speculators" quote, I have linked to it several times in different sources, as have other posters. Most of it is from Mike Masters testimony before congress. Here it is again in case you missed it:
Mike Masters Testimony

I recommend you read it. Even if you don't agree with it it will hopefully familiarize yourself with some of the things I have been talking about, like why I think index speculators are taking long positions.

[3aidlillahi]

Not sure I follow you. China's demand did not jump from 1.88 giga barrels/year to 2.8 giga barrels per year in a single year. That increase was spread out over 5 years. China's oil demand has been growing about 7% a year.

So far, only a tiny fraction of that money has entered the futures market, and just look what that tiny fraction of money has done to prices.

Ok, gotchya. But you are still assuming, without proving, that this money has had a major effect on the price of oil.

Lets try and remain civil shall we?

I had no idea that calling someone an economist were fighting words.

[roccman]

Well beyond moral hazard...

The market will roar tomorrow. Now here's my advice - sell any and all financial stocks - anything that may have written CDS in the market - into the spike tomorrow. Do it at the opening bell, and do not look back. Here's why: By getting warrants that massively dilute existing shareholders what Paulson has done is paint a target on the back of every financial firm in America. All of them.

Let's say I'm a Hedge Fund. I want to make a billion dollars. I pick on, oh, Goldman Sachs. I know they wrote a bunch of CDS I, and a bunch of my hedge fund buddies, short the firm's stock into the ground. Eventually, this will force a ratings downgrade. As soon as it does, Goldman can't make the capital calls on the CDS, and is forced to ask for help. They get help and the common stockholders are wiped out. I, Mr. Hedgie, say "thank you very much" and cover my short at a huge profit. Then I repeat this with the next firm. I get rich and buy me a new yacht, while the common stockholders in the firms are destroyed.

This will happen to every firm in America as soon as this is figured out by the Hedge Fund community, which, incidentally, will take less time than it took me to write this and record the attached video. Sell your financial stocks into the spike tomorrow folks. No firm that is "seriously interconnected" in our financial system is safe from this, and this "risk" was wholly manufactured by the actions of our government this evening. You've been warned!

[Cashmere]

I pick on, oh, Goldman Sachs. I know they wrote a bunch of CDS. I, and a bunch of my hedge fund buddies, short the firm's stock into the ground.

Great plan until they ban shorting of financials. They banned naked SS - no reason to believe they won't ban SS in general.
I assume this came from HEDGEFUNDMANIPULATOR over at the TF. Pretty level headed guy. This is strained advice from him, at best.

[seldom_seen]

I wouldn't worry about Goldman Sachs. They've got their man Hank at the head of the Treasury Department. They were shorting the CDO market way back, and going long on the other side of the house. If things get tight they call Hank, and Hank looks after them.

[Ferretlover]

Hypothetical scenario: Bush activates the Executive Order (can't remember the number at the moment) where the government takes over the financials.
Would what is happening now be what would happen, or would things occur differently?

[cube]

I pick on, oh, Goldman Sachs. I know they wrote a bunch of CDS. I, and a bunch of my hedge fund buddies, short the firm's stock into the ground.

Great plan until they ban shorting of financials. They banned naked SS - no reason to believe they won't ban SS in general.
I assume this came from HEDGEFUNDMANIPULATOR over at the TF. Pretty level headed guy. This is strained advice from him, at best.

The entire financial system would collapse even faster if short selling is banned.

why? It's very simple. The value of any asset is based on consumer confidence. There is absolutely no better way to make people lose complete confidence then for the government to step in and lock your money inside and say you can NOT take it out. This is what separates a 1st world nation from a 2nd or 3rd world nation.

I don't think the US gov. will outright "ban" short sellers. Instead I think the gov. will try to "defeat" the short sellers by pumping massive amounts of $$$ into the system. We're seeing that right now.

[Cashmere]

I pick on, oh, Goldman Sachs. I know they wrote a bunch of CDS. I, and a bunch of my hedge fund buddies, short the firm's stock into the ground.

Great plan until they ban shorting of financials. They banned naked SS - no reason to believe they won't ban SS in general. I assume this came from HEDGEFUNDMANIPULATOR over at the TF. Pretty level headed guy. This is strained advice from him, at best.

There is absolutely no better way to make people lose complete confidence then for the government to step in and lock your money inside and say you can NOT take it out. This is what separates a 1st world nation from a 2nd or 3rd world nation.
I don't think the US gov. will outright "ban" short sellers. Instead I think the gov. will try to "defeat" the short sellers by pumping massive amounts of $$$ into the system. We're seeing that right now.

We disagree on at least 2 things.
1. Banning short selling has nothing to do with "locking in" somebody's money. Nobody's money gets locked in. Short selling is not the same as selling because the stock is going down.

2. You wrote, "This is what separates a 1st world nation from a 2nd or 3rd world nation." I disagree. What separates them is that 1st world nations have successfully constructed the illusion of order.