Clearly this is beginning in the US, the question is: when does the hyperinflationary scenario playing out in Asia bring consumption there under control?

My guess is this suumer will see the peak in oil prices, but the Keynes quote about solvency and irrationality is appropriate here.

Excellent point. There are people making arguments across the entire spectrum. I agree with you. That is a poor argument.

I argue differently–see my post above. I argue that flushing all traders ex-commercials from this market will hurt society. It will damage the ability of actual, real world producers to buy undeveloped properties, raise cash to develop them/hedge the purchase of them for the following reason: there will be less capital in the two year forward market to give to those producers. In the last 3 months, there have been a number of oil and natural gas producers who have bought properties, hedged the deal by selling oil and gas forward for 24 months, and then who set about the process of getting those properties into production.

Flushing specs or investors from the market will have the following effect on price: it will make the price more volatile, and eventually will make price even higher. It will hurt no speculators. They will simply take their money at expirations and go home, passing off the contracts to real world users.

The crude oil and natural gas futures curves are real world mechanisms by which producers are enabled to bring undeveloped oil and natural gas into production. The capital is provided to them by airlines, cities with huge fuel needs, and yes, investors.

Anyone who wants to mess with one of the most ingenious inventions in history, the futures market, simply doesn’t know their stuff.

If the presence of the speculators hasn’t affected the price, then why would the restriction affect the liquidation value of their positions? At least in absolute form, these statements cannot both be true.

Start making futures more expensive, and you could just drive even the honest hedgers into the OTC market.

Re: physical delivery for futures
Futures hardly ever result in physical deliveries. The physical delivery clause is only there to bind paper prices to reality (so if prices diverge, somebody will buy a future, refuse to sell it and get a delivery of cheap oil).

Normal hedging process it 1) somebody buys Gulf oil, loads it on tanker and carries to USA 2) he buys offsetting futures to hedge 3) when tanker arrives, he sells oil and closes futures.

The open interest on light sweet crude (futures only) alone = 1.3 billion barrels … that is 15 times the amount of all crudes consumed daily worldwide. Light sweet crudes represent about 20-25% of total American consumption which by itself = about 5-8% of world consumption.

If I understand correctly, 80-90% of oil actually delivered is contracted for via private long term (1 year) contracts. These contracts usually are tied to some spot market price, plus or minus some differential, and often have a ceiling and floor, which means that a percentage of the wet barrels delivered are being paid for at a price largely divorced from the various boards.

That would mean that an 1.3 billion barrel open interest for light sweet crude over 8.6 m/bd actually contracted for delivery over the boards.

It’s a price discovery mechanism, but as one of the other–rather rude–commentators pointed out, taking so much of the volume out of the market would likely make it that much more volatile. I suspect forcing so many currency hedgers, etc., out would precipitate a sharp drop in the price of oil for a short time because they would be desperate to sell. But I suspect that it would rebound quickly.

Thanks for bringing up the delivery percentage.

What I take to be the current NYMEX “Energy Complex” brochure does not break crude out but does state that, for its core energy futures, deliveries represent less than 1% of trading volume.

In 2005, the IMF claimed that: “Given that only about 5 percent of futures contracts are ever delivered as a physical product…” (Structure of the Oil Market and Causes of High Prices, September 21, 2005)

I’m not sure anyone can really know but 60% seems high.

So you’re sticking a gun to people’s head and forcing them to lose money, even if their honest participants.

If there were ever an American version of Soviet communism on the stock market, I think that would be it. You cannot call yourself a capitalist if you believe that is the way to do it. And if you also think that is the way to do things, I wouldn’t participate in the stock markets at all. What’s to say in the future the government takes this new-found power and applies to other stocks or commodities where they want prices at certain levels? Isn’t that price fixing?

Yes but innovation does little good unless brought to scale production and used, i.e. unless it becomes generalized. Production and generalized use of new tech is not divorced from conditions in the overall real economy. $200 oil, by exacerbating weaknesses, would not likely bring about desired results but delay the shift from innovation to generalization.