Data Raise Questions On Role of Speculators (are a larger piece of the oil market)

[sabra]

Source: WSJ

Data emerging on players in the commodities markets show that speculators are a larger piece of the oil market than previously known, a development enlivening an already tense election-year debate about traders' influence.

Last month, the main U.S. regulator of commodities trading, the Commodity Futures Trading Commission, reclassified a large unidentified oil trader as a "noncommercial" speculator.

The move changed many analysts' perceptions of the oil market from a more diversified marketplace to one with a heavier-than-thought concentration of financial players who punt on big bets.

As a result, the number of futures and options contracts held by traders counted as speculators -- those who don't have a commercial need to mitigate the risks of energy price in their business -- rose to 49% of all crude-oil bets outstanding on the New York Mercantile Exchange, up from 38%.

The scale of the recent revision and questions about the reliability and transparency of data in this market are feeding into efforts by Congress to impose restrictions on energy trading. Four Democratic senators on Thursday called for an internal CFTC inspector-general investigation into the timing of a July 22 release of a report led by the agency. That report concluded speculators weren't "systematically" driving oil prices. Oil prices soared until mid-July before beginning a decline.

Read more: http://online.wsj.com/article/SB121875013286742245.html?mod=hps_us_whats_news

[Platypus]

1. Well, duh

This whole "speculators aren't the problem" line has been a lie all along, promulgated by the champions of the anything-but-free "free market" we have here in the US. There was no sudden change in either supply or demand, or even in expectation on either side. Absent sudden change in supply or demand, there should be no sudden change in prices either, except for (a) collusion or (b) speculation. Given how closely everyone was already watching the producers (including refiners), and that some producers such as Venezuela are more than happy to spoil the party if given a chance, collusion by producers is an unlikely explanation. Far more likely is that the middlemen either went into a collective panic and started outbidding each other out of fear, or recognized an opportunity and started raising end-user prices out of greed. Either way, the prices paid by actual consumers went way up. This is why a market dominated by middlemen is such a bad idea. Matching buyers and sellers is a valuable service and some middlemen are necessary, but it's insane to let non-producers - banks, insurance companies, various kinds of brokers - run the whole show. That they're allowed to proves only that the necessary link between value creation and wealth has become too weak. It's not class warfare to say that we should tax speculation and other financial finagling more so that we can tax labor and innovation less. That's just basic economics - a rejection of the undeclared class war that the already-rich and their willing toadies have been waging against the rest of us for decades. You get more of what you tax lightly, and less of what you tax heavily. Taxing capital gains less than earned income is just a way to ensure bubble after bubble after bubble, with the guilty parties each time retiring on their millions while the rest of us foot the bill through tax-funded bailouts.

[Ghost Dog]

14. Welcome to DU, Platypus. You may be aware

of this information quoted in today's SMW thread here:

http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=102x3440019#3440035

Ryssdal: Why is it so hard to figure out what's going on in commodities markets -- oil specifically?

Greenberger: Well, the reason it's hard to figure out is about 30 percent of our crude oil energy futures are traded in what is called a dark market -- that is a market that was deregulated in December of 2000 at the behest of Enron. Prior to that legislation..., all energy futures traded in the United States or affecting the United States in a significant fashion were regulated ... under a very careful regime that had been perfected over about 78 years and many observers believe that because those markets are not being policed, malpractices are being committed and traders are able to boost the price virtually at their will.

Ryssdal: You're not really telling me that seven years on, we're still paying the price for Enron, are you?

Greenberger: Well, this has been called the "Enron Loophole" and there are many legislators working very hard to close that loophole ... bring the speculation under the kind of time-tested controls that were used until Enron had its way and amended the law...

[clixtox]

15. 4.5+ years on DU and 15 posts...

I sure wish you were posting much more often! Seldom have I seen a more recondite post by anyone on DU...

Thank you, and please share your knowledge and writing skills again and again here on DU.

Pretty please!

Thank you, sincerely.

[Turbineguy]

2. This speculators stuff is a red herring.

No matter what your political afilliation people don't want speculators driving up the price of something.

Analysts come in after the event.

[Hannah Bell]

3. oh, c'mon. where are the peak oilers?

it's all supply & demand. prices are never going down, i tellya!

[Javaman]

5. Oil is still running out. remember it's still finite.

so the price ran up due to speculators. big deal, is it back down to 50 bucks like it was 2 years ago?

more mouth breathers delighted at the fact that oil is now ONLY 115 bucks a barrel.

:eyes:

[Hannah Bell]

6. it's at $111 as we speak. oil may or may not be "running out" (funny way of

describing what's said to be at least a 40 year supply using current tech & production capacity), but i can't count the # of folks who told me prices "would never come down," that the run-up was all supply & demand, & name-called when one introduced data that called their scenario into question.

...name-called. kinda like you just did.

i guess if logic's not on your side, cheap shots are all you got.

[Javaman]

8. ahhh yes, the old 40 year supply canard. LOL

So you are aware that the "40 year" supply is based on current rates of consumption right? LOL

The demand for oil has only increase over the last 5 years, yet daily output has remained at or around 85 million barrels a day.

Now the price of oil goes down, but funny, the output hasn't increased. speculation yes, but I bet you, it won't go under 100 bucks.

due to the weak dollar, the price to keep the tar sands and shale profitable, the price has to remain over 100 bucks.

Now since it was just announced that the investment in to the sands and shale just had increased due to insufficient funds (now costing 9.3 billion dollars) do you honestly think oil will drop below 100 bucks?

100 bucks is the break even, if it falls below that, prepare to watch shell, exxon and canada to go apeshit. Because they won't be having the record profits anymore. And since they have to answer to stock holders, it will be very interesting to watch.

Personally, I believe the price is coming down do to the coming elections.

The northern parts of this nation still heat in oil. The price of heating oil for this coming winter will break the bank and budgets for many of those people using it.

However, if the price comes down, the bitching will be down. Much like after the 2006 elections, after the vote, the price shot up in January.

believe in peak oil or not, it's a fools belief if you want to continue to believe that oil will last at current levels for 40 more years. Considering that the major oil fields are now failing year upon year and no new oil fields have been found to fulfill the worlds demand. The numbers are, out of the 45 major oil fields 27 are failing. Russia, the current largest oil producer hasn't increased output on their main fields for over two years. And the small amount that the Saudi's put out (200,000 barrels) is a drop in the bucket and was sour crude.

Sure we have plenty of oil left, but the easy stuff, the good stuff is just about gone. The stuff you are talking about, is the crappy smelly hard to refine, massive byproduct, heavy sour crude.

That will last a long time, but as far as fueling our heroin addict need for oil? nope, not going to do it.

I suggest you start reading www.energybulliten.net and my weekly cross posting to Peak Oil Review on Tuesdays.

don't bring a knife to a gun fight.

[Gman]

4. Obama should be calling this a threat to national security

because oil is the lifeblood of this country and this country's economy. No one should be allowed to speculate and falsely inflate the price of something so important to national security and the economy.

[paparush]

7. Excellent Suggestion! nt

[nichomachus]

9. Please don't call them "speculators"

The correct word is "profiteers." We all speculate. We buy a house, hoping that the value will go up. We stock up on certain items thinking the price may increase. That's speculation.

Profiteer: : one who makes what is considered an unreasonable profit especially on the sale of essential goods during times of emergency

Profiteers should be arrested.

[depakid]

11. Yet instead of seizing the issue- and advancing the bill to ameliorate the problem

The Dem "leadership" chose complicity- and allowed themselves to get rolled by the drill, drill drill crowd.

Heck of a job, Pelosi!

[unblock]

10. the distinction between "speculator" and others is farcical.

so who's a speculator? i need a lot of heating oil to heat my house. but i have no business in oil, so i'd be classified as a "speculator" even if i buy an oil contract to lock in a price for my home heating oil.

conversely, some of the biggest speculators are those IN the business, who therefore would be classified as non-speculators. they have a business need to hedge, but they consider themselves so in-the-know that they often take bets on the price of oil. so while a PORTION of their traders might be hedges, the rest are speculative. but the classification of "speculators" is all-or-nothing.


all this is very silly anyway. in every other market, "speculators" are the price setters, and this helps to keep prices accurate. the problem isn't the existence of speculators, it's the existence of too much capital with not enough useful investments.

in a properly functioning economy, people wouldn't go from fad to fad, they'd have their money invested in legitimate production. far less risky.

[depakid]

13. The trouble is that margins are set too low

which inefficiently (and ineffectively) allocates the risk in these transactions.

[Trillo]

12. This issue has got to be related to polarization of incomes

and the ability to pool money into large corporate funds for purposes of speculation. The bigger the participants' wallets, the more their ability to move a market.

The Big Fish eat the Little Fish.