Comments on naked capitalism: Is the Commodities Boom Driven by Speculation?

Rootless, sorry about the delay. I haven't checked...

2008-05-12T22:32:00.000-04:00

Rootless, sorry about the delay. I haven't checked in to the site for a few days.

You said: "The market for the asset intermediates the cash flow between households, like a boundary between buckets, but the asset market itself is not the bucket to which or from which the cash flow takes place."

That this isn't always so was the very point I was trying to make, all the while accepting your more general point about money flows.

To take the share market as an example, stock buybacks and cash takeovers on the demand side and IPOs, secondary issues, option exercises and other insider sales on the supply side change the number of shares outstanding. The "bucket', to use your term, becomes either more full or less so. In most established and deep markets, of course, such changes in stock outstanding will be small and incremental. Still, the distinction is worth noting both as a general principle and because such net changes in stock outstanding can at times become very important indeed.

So Rootless: Most markets have intermediaries, wh...

2008-05-11T05:51:00.000-04:00

So Rootless:

Most markets have intermediaries, who take fees; that's a sink any way you count it.

Also in that argument, you treat commodities units as if they are of uniform expression regardless of where they are in 'market space.' For some assets, this is true; for others, their form changes/is changed as they pass through the market in ways that re-paramaterize their value without affecting physically or directly the asset itself. For one example securitization of sub-assets. For another example the entailment of derivatives tied to an asset unit. For a third example, a change in the currency in which they are priced. For a fourth example, a change in the exchange or clearinghouse in which the transaction is settled. Markets are not a zero-dimensional vacuum in the way that your example suggests. I'm not disputing the broad validity of your comments in saying that, only adding a layer of complexity to the picture. : )

ingolf,"(although net flows do occur whenever ther...

2008-05-11T01:08:00.000-04:00

ingolf,

"(although net flows do occur whenever there are changes in the outstanding stock of a commodity or security)"

Yes, there is net cash/capital flow between households (private, corporate, government) in the economy. No one could get rich, if it were otherwise. Here, that would be a net cash flow to the producer of the commodity or the issuer of the security from the unlucky ones who only will be able to re-sell the commodity/security for lower than the purchase price. There is also a net cash flow from those ones to the ones who aren't the producer or issuer, but are able to re-sell higher than the purchase price w/o a change in the size of the stock even necessary. The market for the asset intermediates the cash flow between households, like a boundary between buckets, but the asset market itself is not the bucket to which or from which the cash flow takes place.

In the case of things that are consumed, there is also a permanent net cash flow from the consumers, the sink of the good, to the producer, the source, w/o a change in the size of the stock even necessary, either. The market of the good just intermediates this cash/capital flow also.

What goes into a boundary at one side comes out of the boundary at the other side. Markets are like boundaries. Boundaries don't have sinks or sources. Commodity prices can't increase because cash/capital allegedly flows from other asset markets to the commodity markets. Those capital flow explanations are bogus.

Perhaps the term "asset bubble" used for irrationally increasing prices of assets both results from and re-produces the false perception of what is going on. It supports a false association that price increases are a function of an increased volume of something. But prices are better compared to a variable like the temperature, measuring the "hotness" for the asset. Maybe the term "asset fever" would be more appropriate than "asset bubble". High fever also can lead to delusions which can be observed quite often while watching market participants. :)

M-F F-MMoney transformed to claim FClaim F transfo...

2008-05-10T19:20:00.000-04:00

M-F
F-M

Money transformed to claim F
Claim F transformed to money

is not just MoneyX-MoneyX

but contains transforming mediations which help determine price change of both Claims and from this the underlying. Balanced reciprocity between futures and spot can become imbalanced with the former becoming determinant.

To say a purchase is a sale and a sale is a purchase hence circulation takes place
is a tautology that fails to account for
asymmeteries within a still not instantaneous process infected with not-so-perfect information and irrationalities.

Rootless Cosmopolitan, in a strict sense you're ri...

2008-05-10T10:05:00.000-04:00

Rootless Cosmopolitan, in a strict sense you're right about the money flow issue (although net flows do occur whenever there are changes in the outstanding stock of a commodity or security) and it's a point worth making. But only, I think, in passing.

I don't see that it helps us much in trying to understand price changes and how well founded they may be. As someone has already noted, prices are made at the margin based on the relative eagerness of buyers and sellers. If a whole new class of relatively uninformed and price insensitive buyers turns up in a market, prices will be pressed much higher than they would otherwise have been. If you like, the ecology of that market will have been profoundly disturbed.

By the way, jj, your assumption about the reactions of sellers doesn't necessarily hold true. It certainly hasn't in stocks. Through much of the last decade, US corporations have been huge net buyers of stock. It's been a bit like a long running short squeeze.

I could believe oil at $90-100 on demand fundament...

2008-05-10T06:36:00.000-04:00

I could believe oil at $90-100 on demand fundamentals---but $125 in a global environment of economic downtrend at the moment? Chickpeas shooting higher: in relation to . . . soaring population, what? Naw, not credible. There are clearly 'speculative' processes in play in commodities, but not all speculation is created equally.

Much of the discussion of potential commoditiy speculation at present is made in regard to 'hedges against inflation.' Surely some of that is in play, but I don't think this is the main story. Consider: the hedgies were many of them major issuers of credit default swaps to the mortgage security market, both internally to the securities themselves in some cases by apparently more actively as counterparties to major _holders_ of CDOs. [Clarification on this issue by knowledgable parties is most welcome.] This means that the hedgies or the hedgie-like i-bank arms must all be miles down on many of their CDSs outstanding. Other CDS issuers are taking a bath in carbon tetrachlorhyde at present; look at AIG's losses in Q1. Why aren't more hedgies stone dead?

Wellll, they all putatively carried counter-hedges of their own. Earlier on, many of these were in gold and shorting the $ for other currencies. Other hedges were clearly in commodities, specifically oil. Well, gold and the $ both came under pressure of intervention or other counter-momentum activities . . . just about the time that commodities of all sorts went vertical in their price lines. Not surprisingly as the Frankfurter says above, commodities futures markets have been 'wired' so that shadow players can get in without being observed, and these markets are significantly susceptible to market manipulation. For hedgies looking to offset their CDO driven CDS losses, it matters not what the intrisinc 'value' of soybeans, oil, or rubber is, to anyone, anywhere; all that matters is that the momentum stays up until they clear their positions for a profit. Or for the CDO market to return to 'normal,' i.e. balloon up again. The mystery to me for most of '08 so far has been, "Where are the losses from the huge paper asset declines?" I think we see the answer: In the wallets of everyone buying ballooning commodities. . . . The world will be a better if noisier place when we line the hedgie boys up against the wall, click off the safties, and close out their positions in our lives, speaking figuratively or otherwise. Or so I'd like to think. They are NOT value-added to our society.

"but at $20 barrel, they were happy to rapidly dep...

2008-05-10T06:19:00.000-04:00

"but at $20 barrel, they were happy to rapidly deplete reserves."
Oil producers were very unhappy about those prices and they don't want a return of that time. So many new actors piled into the oil markets in the 80s that prices were severely depressed. Even OPEC members were forced to break quotas just to cover their own spending and trade deficits. Now prices are high again and the biggest worry of most oil exporters is how to efficiently handle all that surplus income. The OPEC cartel has teeth again and they see little point in cranking the taps to the max.

Micheal--- Why would producers drop out in an asse...

2008-05-10T03:16:00.000-04:00

Micheal--- Why would producers drop out in an asset bubble? If indeed oil prices are inflated, producers have every incentive to maximize profit by selling an extra barrel into the market. They sell the futures at a price at deliver into it with physical supply.

THE WORLD CAN'T PRODUCE MORE OIL, IF IT COULD IT WOULD.

Please don't tell me that every single oil producer woke up this morning with the intent to lengthen the production cycle, but at $20 barrel, they were happy to rapidly deplete reserves.

When prices get crazy, as you say, producers respond by selling more crude. Its that simple.

Just like when stocks get expensive, insiders sell out en masse.

Anonymous...you're nuts. 7% collateral is obscene...

2008-05-10T00:53:00.000-04:00

Anonymous...you're nuts. 7% collateral is obscene leverage. And that's not even using REAL leverage. Imagine borrowing 2x (or 30x in BSC's case). This game gets outta hand really quick. That's the whole point of the post. Futures markets aren't designed to handle this type of trading. They were designed for producers and consumers to hedge...speculators were merely liquidity providers.

Producers and consumers are dropping out b/c the asset prices do not reflect their information sets.

And Apparently,the market belives Goldman Sachs has better information than do the people that actually produce the products. Amazing how that works.

But please, continue listening to "$100 trillion of infrastructure still needs to be built" Matt Simmons...he's not batt-*hit insane, i promise.

anonymous,"Look out the window. If what you said w...

2008-05-10T00:24:00.000-04:00

anonymous,

"Look out the window. If what you said was valid, there would be no such thing asset bubbles."

Define "asset bubble". Of course, there can be price increases of assets, anyway. It just doesn't have anything to do with cash "flowing" into the markets. As I said, markets are no cash containers. Every buyer meets sellers who sell the same asset for exactly the same cash amount for which the buyer is buying. The net cash flow summed over both buyer and seller is Zero. The same money amount which is put into the market by the buyer is taken out by the seller. Buyers are just more eager to buy than sellers to sell, therefore higher prices.

"1. Trading prices set at the margin, but every asset holder revalues based on marginal prices. If everyone tried to realize those prices at the margin, they'd swiftly find they were unattainable."

True, in their mind, asset holders will put new price tags at the assets which they are holding, when prices increase (or decrease). It's a change in the book value of the asset. But this doesn't have to do anything with my argument that there isn't any net money flow in or out of the asset market due to buying/selling of the asset.

"2. High use of leverage. Futures are intrinsically highly geared"

In what way is high leverage supposed to invalidate my argument that each buyer meets sellers who sell the asset for exactly the same money amount? Whether the money is borrowed or not which is used for buying the asset doesn't matter for the argument.

I still say there is a common mis-perception. In up markets, markets seem to be seen from the buyer's perspective, who invests money to buy the asset, in down markets from the seller's perspective, who realizes cash by selling the asset, as if the counterpart of the trade didn't exist who exactly does the opposite.

Think about it.

Rootless,Look out the window. If what you said was...

2008-05-09T23:37:00.000-04:00

Rootless,

Look out the window. If what you said was valid, there would be no such thing asset bubbles.

What you are missing:

1. Trading prices set at the margin, but every asset holder revalues based on marginal prices. If everyone tried to realize those prices at the margin, they'd swiftly find they were unattainable.

2. High use of leverage. Futures are intrinsically highly geared

Critical point in this article is the psychologica...

2008-05-09T23:21:00.000-04:00

Critical point in this article is the psychological sign that gold price sends. In looking at the gold oil ratio, it is screaming reversion (7x vs. 12x historically). That reversion whether oil goes up or down means gold goes up longer term. Note that gold started to break 10 days or so before the G7 meeting. It shrugged off the Treasury Dept. reversal on IMF gold sales earlier on, but when the market basically decided that intervention on the dollar was coming, they sold the metal off. Just this week we got the FT confirm article but several weeks ago we got the Canadian Finance minister musing about how the market wasn't listening to the G7 on $. Oil may or may not be speculation, but like copper it has a relativily believable supply demand proposition. Thus it has the appearance of underlying fundamental support, plus it bolsters the longed after thesis of the global growth story. On the other hand gold is either Jewelry or inflation. Since there is really no "fundamental" story, aside from those believing a sound currency matters (hard one at that), it is far more subject to coordinated attack. It is also a threat, albiet a weak one now, to fiat. It is unimaginable that at this stage GCBs keep buying garbage treasury paper instead of gold.

We are clearly engaged in a massive game of chicken. The i-banks and their assets with the Fed. The commerical banks with the Fed/Treasury. The Treasury and Fed are trying to hold it together long enough for banks to recover. If for some outlier reason, depositers begin to withdraw their deposits, it would mark the end of the Fed. The perverse game of cramdown. Perhaps it is just wishful thinking to hope that the American people are educated before the full fleecing occurs.

Reload that short dollar long gold trade - and look for a nice spike when the Fed comes back to the confessional

I actually don't understand the argument mentioned...

2008-05-09T23:12:00.000-04:00

I actually don't understand the argument mentioned in Yves's post and used in some of the comments that commodity prices were driven upward, since newly created cash/capital flows into the commodity (future) markets or because traders/investors move cash/capital from other asset classes into the commodity markets. Like the different markets were containers in which money can be poured or from which it can be taken out or between which it can be shuffled. While an individual trader/investor certainly can sell assets of one class to buy assets of another class, therefore, moving his/her cash, every buyer meets sellers who sell the same asset for exactly the same cash amount for which the buyer is buying. Summed over the cash flow of both buyers and sellers in the market of this asset there isn't any net moving of cash/capital in or out of this asset market at any point of time. There are only traders/investors willing to buy the asset at increasing prices. This hasn't anything to do with moving of cash/capital into the market. I think there is a quite common false perception about what is happening when assets are traded, about an alleged "money flow" in and out of assets.

Therefore any explanation which uses the cash flows into the commodity markets argument, whatever the specific cause for the alleged cash flow is given, which treats markets as containers of cash in the economy, is based on a logical fallacy and can't be true.

Or what am I missing here?

Yves,Excellent.Moe,As Simmons has long argued, pro...

2008-05-09T17:52:00.000-04:00

Yves,

Excellent.

Moe,

As Simmons has long argued, production data has been of questionable quality. I would note that accurate data requires a very unlikely access to proprietary information, equally, access to strategic planning. Simply, there is no way to avoid selection bias and its relation to, lets say, induced and historic social psychologies.

Neoclassical economics contains particular axioms to do with methodological individualism and equilibrium. Efficient market theory is a derivative of the neoclassical and, as such, is inherently biased against artificial price.

Nevertheless, there is a long history of price movements deviating from such wonders as supply/demand curves and, when price discovery for a physical commodity is determined not through arms length trade in that commodity but, instead, by financial markets, it is worth considering that price and fundamentals might differ, even over longer periods.

Herding behaviour is not a new phenomenon nor is it manipulation and can, at the individual level, be perfectly rational even as, at the macro level, it is not. But this leads into a critique of neoclassical economics and its offshoots, so out of place here.

OK, in re. "the thing that has everyone bitching is that prices are always going UP" did not apply to the same Matt Simmons who, in a January 1998 paper, argued against what he took to be a too low price, stating:

Our intention in this report is to highlight that in the NYMEX crude oil market, price is not the beacon for fundamentals. Rather, it reflects the psychology of a small group of financial players.
(Is Another “MG” At Work? (Or, What is Driving Down the Price of Oil?, 27 January 1998))

Admittedly, Simmons is not 'everyone' but has been an important 'peak oil' opinion creator.

One last comment: It's actually extremely importan...

2008-05-09T17:26:00.000-04:00

One last comment: It's actually extremely important that blame not be incorrectly assigned to speculators for the energy price increases. If we hurt the markets, we increase the control of the few over energy prices and supply, and more important, we distort price signals. This is exactly what we saw going into the 2006 elections, when Hank Paulson arranged for Goldman to reweight gasoline futures out of the Goldman Sachs Commodity Index.

With one mark of the pen, Goldman was able to crash the price of gasoline and oil roughly 50%. Consumers were happy, and it probably boosted the economy for a while. But we're paying the price for that manipulation of the price signal now. Consumers bought an entire extra year of Hummers they shouldn't have bought, etc., and the price rise now is unnaturally fast and sharp.

Call me naive, but when I've been watching CNBC th...

2008-05-09T17:20:00.000-04:00

Call me naive, but when I've been watching CNBC the most seemingly most common hedge they talk about has been the short dollar/long oil and/or commodities. Of course, this trade is based on the believe that the dollar will continue with its fall and commodities will continue with their increases, and the net position will be protected due to the offsetting positions. (note to claim that the dollars climb vs. the euro debunks oil prices are not speculative, see the recent Brad Sester article on the possibiliity of China dumping their Euro positions, http://www.rgemonitor.com/blog/setser/252577/ )

This trade in itself is speculative in its nature and while those who make the trade may state that it is based on market fundamentals the end result is speculation. Just think blackjack and imagine everyone at the table taking an insurance bet based on the dealer showing an ace. This movement will result in a lot more money being thrown on the table.

Please note, that I am still bullish on oil, and I believe that it will likely continue due to negative real interest rates and the lack of other notable investments. But don't fool yourself to believe that oil prices are solely based on demand/supply variables. Money is cheap and oil/commodities is the largest publicized growth sector in the economy.
For a recent case study on how everything will end, please go back and read all the garbage being written in 2003-2005 about the housing market and also note the lack of investment options and the negative real rates at that time.
However, I believe this cycle may differ a bit from the last, I believe inflation and not growth will force the fed to increase rates and thusly deflating the oil/commodity bubble.

that should say "as buy a contract for which you h...

2008-05-09T16:51:00.000-04:00

that should say "as buy a contract for which you have no intention of taking delivery of the commidity"

Moe Gamble

Regarding michael's comment: "But when too much mo...

2008-05-09T16:49:00.000-04:00

Regarding michael's comment:

"But when too much money chases too few paper assets...your market breaks down and ceases to provide accurate pricing. Producers are dropping out of futures markets because they don't want to get leveled by margin calls (selling futures)...that doesn't mean they let their products rot...it just means they don't hedge themselves anymore..."

Oh, puh-leeze. Con-Agra can't afford to hedge anymore??? You really think it was small family farmers hedging their crops all these years?

Besides, the thing that has everyone bitching is that prices are always going UP. If prices can be expected to go up, there is no need for Farmer Joe to hedge.

And how can there possibly be too much money chasing too few paper assets, when you can always create more paper assets? You can just as easily sell a contract for which you have no intention of delivering the commodity as buy a contract for which you have no intention of delivering the commodity, and producers speculators both routinely do exactly that to make trading profits.

As for michael's comment "the OTC/ICE allow trading of "sythetic" futures contracts that are hedged by real contracts...so the synthetic contracts expire and the real contracts are rolled. No oil really ever makes delivery. You will never see this trading show up in inventory reports...cushing every now and again, but not often", it shows a complete lack of understanding of the markets. Both contracts MUST BE CLOSED. If I have a contract to buy 1000 barrels of oil, I can close it out by taking delivery or I can close it out by taking out a contract to sell 1000 barrels of oil, but either way it must be closed. "Rolling it over" requires you to first close out one contract. The party who agrees to buy when I close out this contract has to be someone who either needs the commodity or needs to close out his own contract.

Regarding jj's comment, "On the flip side, fuel subsidies in China, India, Iran, and Venenzula continue unabated", it should be noted that the U.S. subsidizes gasoline prices as well, only the U.S. does it through the subsidization of ethanol. Since we get little to no energy gain from ethanol beyond the fossil fuel inputs, this amounts to little beyond subsidizing consumption of fossil fuels.

lune asks if demand in China can really account for current prices. The answer is that, in addition to growth in demand from China, we have an oil production decline rate--in other words, even if worldwide demand was constant (which it's not), prices would have to go up because supply is going down. Even the recent supply plateau was not really a plateau, because it has taken so many extra rigs (and so much extra energy) to extract the oil we've been extracting.

The second part of the answer to lune's question is that China and the Gulf states are consuming an awful lot: Emerging Market Oil Use Exceeds U.S. as Prices Rise (http://www.bloomberg.com/apps/news?pid=20601109&sid=a_YCEx7do3LQ&refer=home)

lune also says "you've mentioned how the spot price for many commodities on the contract closing day is often significantly lower"... First of all, it was never significantly lower. It was a little lower. Second, it turns out that this was essentially a small premium charged by middlemen (grain silo people) to producers (Farmer Joe, who can't afford to hedge) for taking on price risk in slightly more volatile markets.

lune points out, correctly, that problems in the pipeline can't account for the price rise in oil because there are always problems in the pipeline. But that's a problem with reporting on commodity prices, not the market for commodities. Essentially, reports never have a clue why prices are going up or down, and so they assign the event of the day to explain things.

Last week we had a significant increase in oil inventory, yet the price of oil went up. This was due to significant commercial buying in anticipation of a lack of supply coming this month from Nigeria. What had happened was that commercial buyers put off buying in April as prices rose, because they expected a better price in May due to some production coming online. And at the end of April, producers jumped on prices, likewise expecting this production, and drove down the price about $9. The price should have then settled down into roughly 2-3 months of trading range between $110ish and $120ish. Unfortunately, we then saw strikes in the UK and Nigeria that wiped out such a large amount of May supply that the price had to go up. Commercial buyers who had held off buying in April were suddenly aware that the price wouldn't be coming down any further in May, and jumped to buy.

Moe Gamble

I used to think oil prices were driven by demand b...

2008-05-09T16:12:00.000-04:00

I used to think oil prices were driven by demand but as oil crossed $100 and passed $120 in record time even as U.S. demand declined, I'm thinking much of the current price increases are driven by speculation. For people who argue it's all demand driven, oil has now doubled in about a year: have India and China really grown that fast to justify such a stunning rise? Especially in the absence of significant supply disruptions?

2 other points:

1) It's funny that every time oil reaches a new record, someone points to some supply disruption somewhere in the world as proof that it's legitimate. The fact is, with a commodity produced, transported, and consumed worldwide like oil, there will be problems in the supply chain all the time. Were there no hurricanes or civil wars or exploding pipelines 10 years ago? Such explanations reek of finding evidence for a pre-conceived conclusion rather than a real analysis of supply and demand fluctuations.

2) In previous posts, Yves, you've mentioned how the spot price for many commodities on the contract closing day is often significantly lower than what the contract settles for. In other words, actual buyers/suppliers on the spot market, are valuing the same commodity at significantly less than the price set by investors in the exchanges. This is happening because the enormous volume of contracts traded has overwhelmed the physical delivery systems that are supposed to tie contract prices to actual prices. That to me is almost prima facie evidence for speculators overwhelming the system.

While I agree that we'll never go back to gas being $1/gal, I highly doubt that demand has risen so fast in the past year to justify the incredibly rapid increase in prices we've seen.

Perhaps in a few years, when peak oil hits and India and China have significantly higher demands, then perhaps oil will legitimately be priced at $120 (or $150 or whatever). But today? I doubt it.

Nobody has a frickin clue. Go read Matt Simmons. H...

2008-05-09T15:52:00.000-04:00

Nobody has a frickin clue. Go read Matt Simmons. He has been warning of peak oil for years.

Why are we focusing on high U.S gas inventories or high U.S crude oil inventories?

The reality is that global crude oil production is stuck at 85 million barrels/day, while global consumption is 87 millions barrels/day.

So please stop with talks of a bubble, it is not a bubble.

Its peak oil, accept it. The longer we make faulty excuses for high oil prices the longer it will take to transition to alternative energy sources. The population will think oil is rigged and that prices will come down shortly, when in fact they should be told they are never coming down into we move to alternatives and consume less fossil fuel.

Russia, Mexico, Norway and others have likely seen peak oil production

On the flip side, fuel subsidies in China, India, Iran, and Venenzula continue unabated.

So with the majority of developing world subidizing oil demand, it will fall on the developed world to use less oil, which means lower economic growth.

So yes we can get lower oil prices, but it will happen at the expense of a steep US recession.

The days of goldilocks are over, we have the inverse. A little bit of growth produces horrible commodity inflation and horrible growth produces low inflation.

I almost forgot. Weren't we blaming the weak U.S dollar for high oil prices. That proved to be BS as well. THe dollar has firmed and crude has taken off to a new high.

Nice try guys. Stop trying to make excuses. ACCEPT PEAK OIL AND ADJUST ACCORDINGLY. I WISH OUR POLITICIANS WOULD STOP BLAMING OPEC AND PRICE GOUGING AND INSTEAD LOOK AMERICANS STRAIGHT IN THE EYES AND TELL THEM THE TRUTH.

Look...a few of the anonymouses are missing the po...

2008-05-09T15:39:00.000-04:00

Look...a few of the anonymouses are missing the point of the post.

The point was that there is a structural problem with our futures markets and the regulation that is in place for those markets. Futures markets were designed for hedging. There is an economic benefit for producers and consumers because they can plan and make the proper capital investments in order to produce and consume.

Speculators are present solely to provide liquidity...with arb players keeping them in check.

But when too much money chases too few paper assets...your market breaks down and ceases to provide accurate pricing. Producers are dropping out of futures markets because they don't want to get leveled by margin calls (selling futures)...that doesn't mean they let their products rot...it just means they don't hedge themselves anymore...so what's the point of the hedging market if the participants it was initially designed for are dropping out?

Peak oil, demand, supply, saudi arabia aside -- there is a problem with the capacity and regulation ...like a 300lb person riding a big wheels instead of a harley problem.

and RE: "I can see manipulation in a very small market, like silver. But no way in a market as big as oil, which is traded in many markets all over the world. If the price of WTI gets out of line on NYMEX or ICE, we would have a flood of oil coming to the U.S. from all over the world. The inventory reports would soon take care of matters." - that's just it, thre is no oil moving...the OTC/ICE allow trading of "sythetic" futures contracts that are hedged by real contracts...so the synthetic contracts expire and the real contracts are rolled. No oil really ever makes delivery. You will never see this trading show up in inventory reports...cushing every now and again, but not often.

I published some articles in NYT and the Baltimore...

2008-05-09T14:54:00.000-04:00

I published some articles in NYT and the Baltimore Sun on energy in 1979 and have followed that market on and off since then. I liked the following piece in The Daily Telegraph even if it is a couple of months old http://www.telegraph.co.uk/opinion/main.jhtml?xml=/opinion/2008/05/03/do0311.xml

Far be it from me to argue with NYMEX floor traders but with some trepidation and humility I second the comment about people fighting the Battle of 1981-- expecting oil prices to collapse because they did so in previous cycles. We have had oil prices trend steadily up for six years while supply flattened out two years ago. That would point to a supply constraint in my opinion. Note there has been no embargo or politically driven supply disruption in all this time as in the Seventies -- even though supply has been hurt at the margin by above ground problems in places like Iraq and Nigeria. Could financialization be a part of the price rise? Who am I to say? But given the realities on the ground, who wouldn't want to get interested in oil as an investment? Full disclosure -- I have positions in Suncor (the leading player in the Canadian tar sands) and Encana (the Canadian natural gas producer) both of which have long lived reserves. I would go with players like this (at the right price, judge for yourselves please) or with the oil services group -- the international oil majors simply can't replace their production with new reserves, as the Daily Telegraph correctly states. That problem would also point to emerging physical scarcity in my opinion.

As for gold: as you have pointed out, we are not close to closing either our trade deficit or fiscal deficit, so we are debasing the dollar. Investor interest in gold is fed by justified distrust (in my opinion, anyway) of dollar denominated assets. So yes, the interest of ETFs has added a dimension to a market that was once dominated by commercial hedgers. But I have difficulty seeing a reversal of gold's longterm uptrend, unless you can make a case for renewed soundness in the dollar.

I too am a naked capitalism addict and thanks so much Yves for all the effort.

Regarding analysts, and how much cred you should g...

2008-05-09T14:17:00.000-04:00

Regarding analysts, and how much cred you should give to their analysis, from Bloomberg:

"This is the 18th straight week that analysts have forecast a drop in [oil] prices."

In only four of those weeks, however, did we actually see a drop in prices.

"The oil survey has correctly predicted the direction of futures 50 percent of the time since its introduction in April 2004."

Oil analysts, as a group, have the record of a monkey throwing darts.

http://www.bloomberg.com/apps/news?pid=20601072&sid=agIPErPeNurM&refer=energy

Saudi has excess supply, but it's in oil nobody wa...

2008-05-09T13:35:00.000-04:00

Saudi has excess supply, but it's in oil nobody wants because it's less efficient for making diesel. Again, see this important article: http://www.bi-me.com/main.php?id=19968&t=1&c=33&cg=4

But Saudi Arabia has also made clear that future production will do nothing but make up for their own decline rate. They really cannot increase worldwide oil supply beyond what they've done.

I agree with anonymous 1:01 that demand destruction in the U.S. will not be enough to bring down prices, and that the U.S. and its Anglo allies need to wake up to the fact of other people in the world who will be competing for resources. Demand destruction will not bring prices down because the decline in production will be faster.

Regarding a bubble in energy prices, I don't think so, and believe me, I'd be glad to short a bubble. But I just don't see anything like the speculator interest we'd have to be seeing to have a bubble, or anything close to the inventory build-up we'd have to have.

Prices are maybe a couple of bucks over the "correct" price right now, and that couple of bucks is due to fear of shorting in the face of supply declines due to the UK and Nigeria strikes. Still, you can see commercials holding back any major buying for June, and you can see speculators taking profits. Saudi's Khursaniyah production should bring those shorts back in soon, and we should see a price stabilization for a bit. But only a bit.

I think people should get hedged against rising energy prices, and you don't have to do it by speculating in oil. Your next car should be chosen for fuel efficiency. You should be checking out your state's incentives for adding solar panels, and adding them now.

You should not expect the prices of things like solar panels to come down, because even though we can expect a price decline due to volume and manufacturing efficiency, it's unlikely from this point on to overcome the increased energy costs of manufacture. (I do not own any solar stocks, by the way, so I'm not trying to pump my own book.)

And people should be careful about investing in oil-related stocks. The oil companies are producing less each year, and costs for new production are skyrocketing due to high energy costs and difficult geology. If you invest in an oil or natural gas producer's stock, understand that what you are really buying is their "good" reserves--the reserves that can be produced cheaply.

Moe Gamble

"It's a form of denial."--Moe GambleI think the bi...

2008-05-09T13:01:00.000-04:00

"It's a form of denial."--Moe Gamble

I think the biggest thing Americans--and especially major oil company executives--are in denail about is the diminishing importance of the United States in world affairs.

One can only laugh when Ed Wallace talks about the fall in gasoline consumption in the U.S.--as if that had some great importance in the grand scheme of things. There WILL be demand destruction in the United States, but not because Americans want it. What an incredibly arrogant and parochial attitude that man has! The U.S. has 4% of the world's population, but uses 25% of its petroleum. As time goes on we will undoubtedly see that figure drop to 20%, then 15%, then 10%.

And the executives of publicly traded major oil companies? They're little more than spectators. They control a piddling 10% of the world's reserves.

No, the real power resides in OPEC, home to 40% of world oil production and almost 3/4 of reserves. OPEC claims to have 3 million barrels per day of excess capacity, so I suppose if it wanted it could drive down world oil prices.

So here's a simple thought that flies in the face of all those incredibly complex models and theories the quants are so enamored of: If Saudi Arabia wants the price of oil to go down, it will. If Saudi Arabia wants the price of oil to go up, it will.

But some even doubt that. They believe OPEC's claim of excess capacity is a lie. If that is so, then OPEC too has been relegated to spectator status, and can do nothing but stand back and watch as this things plays itself out on the world stage.