OT: speculation and oil prices

As the investigations grind on and on and on, the facts are begriming to float to the surface like so many dead fish. It now
appears (with every possible spin) that 49% of the traders/trades in crude oil over the last few months indeed were speculators or in the terminology of the report "non-commercial market participants."
========<snip> 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 prices in their business -- rose to 49% of all crude-oil bets outstanding on the New York Mercantile Exchange, up from 38%. <snip> Meanwhile, a debate is erupting within the agency, which is charged with overseeing the $4.78 trillion commodity futures and options markets, about what the agency does and does not know about participants in this market. The CFTC has been accused by some in Congress this year of lax oversight. <snip> [For a point of reference, the US GDP is currently estimated at around 14.2 trillion in CY dollars. see http://www.bea.gov/national/index.htm#gdp ========From that left-wing rag "The Wall Street Journal" at http://online.wsj.com/article/SB121875013286742245.html?mod=hps_us_whats_news
This appears to be true in every commodity that has had serious run-ups (including metals), with cotton being (one of)the latest. http://online.wsj.com/article/SB121857778719434667.html "CFTC data show an eightfold jump in net buying from Feb. 19 to Feb. 26 by classes of investors that include pension funds and hedge funds. They also made many bets that would work only if cotton prices climbed sharply, according to options brokers and data from the operator of the cotton exchange, IntercontinentalExchange Inc., or ICE." <snip> "He frantically called his contacts in the markets. "I couldn't find anything, no news at all, to change the fundamentals of the cotton business," he says. Yet by day's end, prices on the usually staid market had leapt 15%, and the next day 16% more, before falling back. Investors faced two bleak choices: Come up with far more cash to keep the losing bets on, hoping for a turnaround, or unwind them for steep losses." <snip> "Fallout has been significant for farmers, traders and textile mills. Many cotton shippers are no longer bidding for crops months before harvest and thus are rendering futures markets less effective as risk-management tools, Undersecretary of Agriculture Mark Keenum told the CFTC in April. That situation continues.
And the prices of cotton? After touching $1.09 a pound in the tumult of early March, it closed Tuesday at about 67 cents." ===========
Unka' George [George McDuffee] ------------------------------------------- He that will not apply new remedies, must expect new evils: for Time is the greatest innovator: and if Time, of course, alter things to the worse, and wisdom and counsel shall not alter them to the better, what shall be the end?
Francis Bacon (1561-1626), English philosopher, essayist, statesman. Essays, "Of Innovations" (1597-1625).
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F. George McDuffee wrote:

Told ya'.
--

John R. Carroll
www.machiningsolution.com
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People are speculating on oil selling short, too. What effect do they have on the market?
=)
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Jon wrote:

Less. When you short anything your largest gain is realized when whatever you shorted goes to zero. The sky is the limit in the other direction. Short selling is a great hedge but a poor strategy otherwise.
The article George quoted from glosses over the big problem, which is the source of the new money. Futures contracts are gambles in the truest sense of the word unless you have a genuine interest in the underlying commodity. Banks and other mortgage lenders were prevented by law from making such bets until recently and for good reason.
How would you feel if the article had substituted the name of the bank where your demand deposit accounts are or maybe your mortgage is for the term "non-commercial market participants"?
That is what they meant and it's the truth. It's also the reason Banks used to be Banks and Investment Banks weren't allowed to cross over. That's all changed to the point that provate equity firms effectively control Investment Banks that control or operate as Banks. We aren't at the begining of the end at this point. We are about a year beyond the end of the beginning and the middle could be real ugly.
--

John R. Carroll
www.machiningsolution.com
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On Fri, 15 Aug 2008 10:29:19 -0700, "John R. Carroll"

==========As usual, John appears to be exactly on target.
While the run-up in petroleum prices caused considerable economic dislocation because of increase fuel and feed stock costs, the real danger was behind the scenes in the [mis]allocation of capital into nonproductive activity, with much of it borrowed.
Indeed, the steep fall in oil prices is likely to be far more damaging than the steep rise in total economic terms. Several very large oil futures traders went bankrupt within hours of the announcement of CFTC clamp-down, even before it was enforced, and these companies have considerable commercial bank loans in addition to other debts.
The failure just one of these firms because of the central position it had in the US midwest in domestic oil storage and transportation, in addition to speculation in oil futures, is causing considerable dislocation in the oil trade in Oklahoma and Texas, in addition to flushing several billion dollars down the tubes.
As the "dead fish" continue to float to the surface, additional companies will be placed under overt stress because of shrinking credit availability thus making there actual financial status visible, and forcing other agencies to take mandated actions. One example: ========(Reuters) - The U.S. government has asked bankrupt auto parts maker Delphi Corp (DPHIQ.PK) to transfer more than $1.5 billion of unfunded pension obligations to former parent General Motors Corp (GM.N) by September 30, the New York Times said.
The paper, which did not specify how it obtained the information, said failing that Delphi will have to contribute more than $2 billion to the fund. It said if a deal was not reached, Delphi may have to terminate its pension fund.
In a letter to GM and Delphi, the federal Pension Benefit Guaranty Corp (PBGC) warned it would lay claim to $8 billion if the auto maker does not keep its pension plans intact, the paper said. This would dilute the claims of Delphi's other unsecured creditors, who are owed about $3.5 billion. <snip> ==========[total 11.5 billion $] To put this in perspective, the market cap [total value of all outstanding stock] of the entire General Motors corporation is about 6.3 billion. http://finance.yahoo.com/q?s=gm
To see the complete article click on http://news.yahoo.com/s/nm/20080815/bs_nm/delphi_pensionobligations_dc ;_ylt=AuEk7IT2c09RgPXuLqNWvLmyBhIF
Be reminded that GM and Chrysler [Cerberus] are joined at the hip by their joint ownership of GMAC, and the tax payers are liable for much of GMAC obligations through the FDIC. Didn't know that GMAC had a FDIC insured bank? Click on http://www.gmacbank.com/index.html?engine=google&keyword=gm+bank
Unka' George [George McDuffee] ------------------------------------------- He that will not apply new remedies, must expect new evils: for Time is the greatest innovator: and if Time, of course, alter things to the worse, and wisdom and counsel shall not alter them to the better, what shall be the end?
Francis Bacon (1561-1626), English philosopher, essayist, statesman. Essays, "Of Innovations" (1597-1625).
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F. George McDuffee wrote:

In all fairness it isn't me. It's my Peeps. They are the ones that really know wa'zzup wid'dis stuff. LOL The important thing isn't who you know, it's the only thing and why the game really is rigged but without actual colusion. Not usually anyway and because it just isn't necessary. 'Course, you knew that.
--

John R. Carroll
www.machiningsolution.com
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Not just the last few months. I used to buy natural gas at the well head, pay to transport and then store it. The number of non-energy, as in producer and users, in the market back then was a bit too high for my liking. I think I liked things a lot more back when we had not refined to an art, manipulating finances, law, truth, ect. You are old enough, I think you know what I mean. Andy of Maybery is a time I'd like to go back to.
Wes -- "Additionally as a security officer, I carry a gun to protect government officials but my life isn't worth protecting at home in their eyes." Dick Anthony Heller
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TO ALL THE KIDS WHO SURVIVED THE 1930's, 40's, 50's, 60's and 70's!!
First, we survived being born to mothers who smoked and/or drank while they were pregnant. They took aspirin, ate blue cheese dressing, tuna from a can and didn't get tested for diabetes.
Then after that trauma, we were put to sleep on our tummies in baby cribs covered with bright colored lead-base paints.
We had no childproof lids on medicine bottles, locks on doors or cabinets and when we rode our bikes, we had baseball caps not helmets on our heads.
As infants & children, we would ride in cars with no car seats, booster seats, seat belts or air bags.
Riding in the back of a pick up truck on a warm day was always a special treat. We drank water from the garden hose and not from a bottle.
We shared one soft drink with four friends, from one bottle and no one actually died from this.
We ate cupcakes, white bread, real butter and bacon. We drank Kool- aid made with real white sugar. And, we weren't overweight. WHY? Because we were always outside, playing...that's why! We would leave home in the morning and play all day, as long as we were back when the streetlights came on.
No one was able to reach us all day. And, we were O.K.
We would spend hours building our go-carts out of scraps and then ride down the hill, only to find out we forgot the brakes. After running into the bushes a few times,we learned to solve the problem.
We did not have Playstations, Nintendo's and X-boxes. There were no video games, no 150 channels on cable, no video movies or DVD's, no surround-sound or CD's, no cell phones, no personal computers, no Internet and no chat rooms. WE HAD FRIENDS and we went outside and found them!
We fell out of trees, got cut, broke bones and teeth and there were no lawsuits from these accidents.
We ate worms and mud pies made from dirt, and the worms did not live in us forever.
We were given BB guns for our 10th birthdays, made up games with sticks and tennis balls and, although we were told it would happen, we did not put out very many eyes.
We rode bikes or walked to a friend's house and knocked on the door or rang the bell, or just walked in and talked to them.
Little League had tryouts and not everyone made the team. Those who didn't had to learn to deal with disappointment. Imagine that!!
The idea of a parent bailing us out if we broke the law was unheard of. They actually sided with the law!
These generations have produced some of the best risk-takers problem solvers and inventors pr oblem solvers and inventors ever.
The past 50 years have been an explosion of innovation and new ideas.
We had freedom, failure, success and responsibility, and we learned how to deal with it all. If YOU are one of them? CONGRATULATIONS!
You might want to share this with others who have had the luck to grow up as ki ds, before the lawyers and the government regulated so much of our lives for our own good.
While you are at it, forward it to your kids so they will know how brave and lucky their parents were.
Kind of makes you want to run through the house with scissors, doesn't it ? ~
The quote of the month is by Jay Leno: "With hurricanes, tornados, fires out of control, mud slides, flooding, severe thunderstorms tearing up the country from one end to another, and with the threat of bird flu and terrorist attacks, are we sure this is a good time to take God out of the Pledge of Allegiance?"
For those that prefer to think that God is not watching over us...go ahead and delete this. For the rest of us...pass this on.
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F. George McDuffee wrote:

The CFTC, which learned about the nature of Vitol's activities only after making an unusual request for data from the firm, now reports that financial firms speculating for their clients or for themselves account for about 81 percent of the oil contracts on NYMEX, a far bigger share than had previously been stated by the agency. That figure may rise in coming weeks as the CFTC checks the status of other big traders.
Some lawmakers have blamed these firms for the volatility of oil prices, including the tremendous run-up that peaked earlier in the summer.
"It is now evident that speculators in the energy futures markets play a much larger role than previously thought, and it is now even harder to accept the agency's laughable assertion that excessive speculation has not contributed to rising energy prices," said Rep. John D. Dingell (D-Mich.). He added that it was "difficult to comprehend how the CFTC would allow a trader" to acquire such a large oil inventory "and not scrutinize this position any sooner."
The CFTC, which refrains from naming specific traders in its reports, did not publicly identify Vitol.
The agency's report showed only the size of the holdings of an unnamed trader. Vitol's identity as that trader was confirmed by two industry sources with direct knowledge of the matter.
CFTC documents show Vitol was one of the most active traders of oil on NYMEX as prices reached record levels. By June 6, for instance, Vitol had acquired a huge holding in oil contracts, betting prices would rise. The contracts were equal to 57.7 million barrels of oil -- about three times the amount the United States consumes daily. That day, the price of oil spiked $11 to settle at $138.54. Oil prices eventually peaked at $147.27 a barrel on July 11 before falling back to settle at $114.98 yesterday.
The documents do not say how much Vitol put down to acquire this position, but under NYMEX rules, the down payment could have been as little as $1 billion, with the company borrowing the rest.
The biggest players on the commodity exchanges often operate as "swap dealers" who primarily invest on behalf of hedge funds, wealthy individuals and pension funds, allowing these investors to enjoy returns without having to buy an actual contract for oil or other goods. Some dealers also manage commodity trading for commercial firms.
To build up the vast holdings this practice entails, some swap dealers have maneuvered behind the scenes, exploiting their political influence and gaps in oversight to gain exemptions from regulatory limits and permission to set up new, unregulated markets. Many big traders are active not only on NYMEX but also on private and overseas markets beyond the CFTC's purview. These openings have given the firms nearly unfettered access to the trading of vital goods, including oil, cotton and corn.
Using swap dealers as middlemen, investment funds have poured into the commodity markets, raising their holdings to $260 billion this year from $13 billion in 2003. During that same period, the price of crude oil rose unabated every year.
CFTC data show that at the end of July, just four swap dealers held one-third of all NYMEX oil contracts that bet prices would increase. Dealers make trades that forecast prices will either rise or fall. Energy analysts say these data are evidence of the concentration of power in the markets.
http://www.washingtonpost.com/wp-dyn/content/article/2008/08/20/AR2008082003898.html?hpid=topnews
Meanwhile, commodities have been good business for big Wall Street brokerages. Its commodity trades helped keep Goldman Sachs profitable during the credit crisis, said Richard Bove, a banking analyst at Ladenburg Thalmann.
"Business is lousy right now," Bowie said of Goldman Sachs. "Commodities and currencies are clearly the strongest business they have right now."
In the coming months, swap dealers expect to have yet another venue for oil speculation. The CFTC has stated it would not stand in the way of trading in U.S. oil contracts overseas in Dubai. Goldman Sachs and Vitol are among the major investors in this new exchange.
--

John R. Carroll
www.machiningsolution.com
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On Thu, 21 Aug 2008 10:32:18 -0700, "John R. Carroll"

<snip> ===========Thanks for the insight and good information.
Somehow the fact that the price spike was due to market manipulation and profiteering will make it more acceptable to public that if the government had imposed some sort of emergency fuel tax to help reduce the current accounts trade deficit.
Any idea how many people got caught short when the oil bubble popped? I have the feeling that the tax payers are about to take it in the shorts again when the cry goes out to stabilize the market by subsidizing the speculators' losses [pension and major financial institutions as creditors/lenders if not direct players] . Highly ironic when you consider that these financial masters of the universe were the ones that caused the problem in the first place, while raping the consumers world wide.
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