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04 August 2008


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Now that we have seen $4.00 per gallon gasoline our politicians are falling over themselves to come up with a new Energy Policy.

We the Public should hold their feet to the fire until a bill is signed into law that aims to make the USA self sufficient utilizing a mix of energy sources, new and old.

It may take twenty to thirty years but a least our energy needs will be met without meddling into other areas of this world.

Jonathan House


If the price averages below $110 for any three month period between now and August 2009 I will say - on this list - that you were right and further will contribute $100 to any charity you name.

However, even if that happens, barring a coherent answer to Shephard's question, I will conclude that the cause of the large variations in price during this period was, in your words, that "markets are exercises in mass psychology" (namely the spot market) and not that speculation in the futures market was what moved the spot market.


Patrick Lang

Jonathan House

Are you really a photographer from Portland Oregon whos is working as a staffer? That's what Google says?

You are being tedious and sophistic. Investor=speculator=capitalist. Get it now? There is nothing sinful about speculation.

Short term trading in oil futures and the spot markets ran up the price. How hard is that to understand?

Someone here posed the same question and then answered it. I am not going to search for the answer. pl


PL, the slightly surprising thing (for me at least) is the sheer enthusiasm you're displaying for this whole business. A bit of schadenfreude when market lunacies are at last unveiled is understandable (indeed, pretty much unavoidable for those of us who watched the absurdities of recent years with amazement), but this almost feels personal. In any case, it's not as if there's a shortage of equally good examples of cretinous market activity in recent years. Like, for example, the lemming like behaviour of much of the financial sector.

As it happens, I'm pretty much in your camp on this one, both when it comes to the influence of speculative (or, I think perhaps more accurately, institutional money) in the recent runup and the chances of a real washout over the next 6-12 months. Still, I don't know that it's a lay down misere. Sentiment on crude has dropped back to levels not seen since late last year/early this year (when prices were around $90-100) and large speculators (as per the CFTC COTs report) are no longer net long (something not seen since early 2007 when crude was around $60-70). I appreciate the exchange traded business tracked by the CFTC is only a fraction of the OTC activity in crude (or anything else for that matter) but it's nevertheless an interesting (and visible) indicator. Oil may just plummet but it might also be a pretty wild ride.

Jonathan, you pose an interesting question. As far as I can tell the various contract prices for physical crude have for some time keyed off futures based benchmarks (see the link below for quite a lengthy discussion of this issue). If this is right, it seems to provide the transmission mechanism you're looking for. My own view, FWIW, is that a good deal of the move in commodity prices of all kinds has been driven by the entry in the last few years of sizeable mainstream institutional money for the first time ever (the estimates I've seen suggest about US $250 billion has poured into direct commodity related investment vehicles and that's just in the US). However that exposure is attained, whether through futures based funds (like many of the commodity ETFs), or through custom derivatives put together for the institutions by houses like GS, I can't see how this sizeable (and entirely new) net buying interest wouldn't have significantly effected the markets it was entering. Equally, of course (and this is where I think PL is spot on) when a decent chunk of this money wants to leave, I doubt it'll be a smooth exit. In fact, it wouldn't surprise me if it got very messy indeed.

Here's that link to a discussion of crude pricing:


Patrick Lang


Thanks for explaining it to him. Do you have a charity you would like him to send the money to?

Yes. It is true. I am enjoying the failure of group think in this matter.

My bad. pl

Leila Abu-Saba

Colonel, with all the respect of a niece or daughter, I must say that I am enjoying your high dudgeon in this exchange. This is probably my bad. I am not really following the actual issue. Just appreciating your attitude and glad I'm not the one incurring your ire.

My fondest regards to you, sir. If I were your daughter I'd give you a big ole' hug and a kiss right now. (OK I miss my dad).

Sorry to go so sappily off-topic on such a serious blog.

Leila Abu-Saba

Colonel, sir, did you try using the quote marks to narrow your search? "Jonathan House" returns the author of _Combined Arms Warfare in the Twentieth Century_ published by University Press of Kansas. Cannot be the same as that 27 year old blogger, the Scorpio with the three-day beard. Also see _The Battle of Kursk_ co-authored with David Glantz from U Kansas Press as well.


About Kudlow's argument: Martin Feldstein, a real economist, made a similar prediction about futures markets, but the prediction is at best speculation and the recent behavior of the futures markets suggest that if offshore drilling is approved, the prediction will be refuted.

The price of crude seems to be falling because demand is falling.


All contracts that I am aware for purchase and sale of physical crude over a period of time is indexed to the futures price.

It is quite similar to the ag complex in that regard. If you want to buy rail tank car loads of soy oil or canola oil from ADM or Bungee over a period of a year the monthly price on the purchase contract will be indexed to the average monthly price of the near CBOT futures contract.

In recent months more and more money entered the commodity markets through ETFs and other vehicles for example PIMCO's Commodity Real Return Fund which is a mutual fund. Many of these index funds purchased futures contracts and or swaps.

In addition many hedge funds in recent months had a leveraged pair trade which was long oil/short financials. They made a killing in the month of June. But that same trade is now underwater. In July non-commercial investors were net short oil. Like Pat, I had made an observation when the discussions on oil prices came up here on SST that the oil market was in contango and that was historically well correlated with subsequent changes to the downside that we have now seen.

I believe Pat has absolutely nailed the definition that "markets are exercises in mass psychology" with pendulum swings between greed and fear. Many of the quant funds which trade on momentum and relative strength pile on to rising or declining markets accentuating the rides.

Having said this a point will come when the short oil trade will become crowded and the better risk trade will be to take the bet on the long side. However, since the momentum crowd is on the other side getting the timing right is absolutely imperative unless you want the margin clerk ringing your bell.

Now in defense of speculators and shorts in particular these are the folks that risk their own or other peoples capital and enhance market liquidity. Now Chairman Cox wants to blame shorts for the debacle in Bear Stearns and Lehman and Fannie Mae. He however fails to inform the public that the shorts never played a role in the decision making by these banks to pile on the CDO and leverage loan asset binge. The Chinese stock market bans all short selling yet it is down 50% year-to-date as bids have disappeared. It would be more useful for JoePublic investor if Chairman Cox would investigate for example John Thain and if he has committed investor fraud by his statements and withholding of material information during his many public pronouncements on Merrill Lynch's balance sheet and capital position. Isn't it ironic that as oil prices were rising federal regulators were on the case of speculators for market manipulation but now as it declines there is no such outcry? The flip is true in financials - as their stocks were rising regulators were cheerleading their leveraged investments in illiquid securities and now when there is no bid for these OTC trades the regulators focus on shorts who had nothing to do with management of these firms shareholder capital. Of course such cognitive dissonance is part of a normal days work when uber-capitalist and ex-CEO of Goldman Sachs - Hank Paulson becomes Comrade Paulson and showers his generosity with our hard earned money on those like him that screwed up big time with bad investment decisions but made a ton while the going was good. I understand it must suck as the market price gets close to your option strike price. But I am sure Chairman Cox will look the other way as the options are way backdated and earnings are manipulated with accounting shenanigans to goose the stock price.


Yes, it is hard not to take at least a little enjoyment out of watching reality (finally) intrude upon some of the more vaporous schemes . . . . so perhaps my bad too.

I appreciate the offer but given how bumpy I suspect the ride to the promised land may turn out to be, leaving the choice of charity to you (whenever the time comes) seems best.

By the way, how do you prefer to be addressed? Colonel feels a bit unnatural to me and Pat (at least uninvited) seems too familiar.

SAC Brat

I didn't get a chance to add earlier that the airlines have been accusing speculators of running up oil prices. While I am always on the look-out for prestidigitation, I think the airlines are upset that the financial carnival showed up in their neighborhood and shot their business in the chutes. Since the airlines had leaned their operations this was supposed to have been good year for them, but high oil prices screwed that up.


All avenues of energy self sufficiency must be invested in and explored by American entrepreneurs. Americans engaging in "free" enterprise, taking chances, have always brought us prosperity, with God's blessing, in the past. Why not let us use this formula for success today regarding energy?

In 1763, King George III decreed an artificial "Demarcation Line" across which he said Americans could not go west beyond the Appalachian Mountains. Today Congress has set a "Demarcation Line" across which Americans can not drill for oil. We have to stop Congress from holding us back like King George III did.

We must plant "seed" into every EVERY form of oil, wind power, liquified natural gas, solar, and alternative energy enterprise that we can find.
We know enough today about how to do this while taking care not to pollute.

We must vote out and/or impeach every politician in Congress who blocks oil drilling in the oceans next to American, on Federal Lands, or in Alaska.

Lets do it all today.



The biggest bang for your buck in the short term is conservation and improved efficiency.

More fuel efficient automobiles, better home insulation, lower thermostats in the winter, less aircon in summer, telecommuting, rideshares, mass transit and re-urbanization around public transport will get better returns in the short term than any other strategy.

There's no reason why we need to eat grapes in winter! Become a "locavore" instead.



had it not been for the stone-walling by standard oil, we as a nation today would be well on our way towards the beginning stages of oil independence. remember the fully electric cars that general motors in the 90s produced and were fixing to release/sell to the public, then all of a sudden the totally electric car by gm was no more. standard oil had the patent on the battery that gm used to develop/produce their totally electric car, standard oil refused to release patent rights and forbid gm from using 'their' battery in the gm produced total electric car. gm was then stuck in a real pickle. the full production line that gm had produced all went to the crusher.


As a long term investor, I am willing to suffer the volatilityin order to capture the trend. Pat Lang's comments are all about volatility. Personally, I am holding and will add when I have more money. Oil and fossil fuels are going to be the favorite commodity investment for the next generation. That alone will guarantee good returns for the long term investor.

Jonathan House

Dear All,

I do not want to sully anyone's reputation. I am neither the photographer nor the historian.

I am not sure what the significance of demographics are in this context but to distinguish me from those others, I am a 61 year old psychiatrist who practices in NYC.

On reflection, what I thought of as tenacious insistence on an important distinction was tedious.

Sorry about that.

Jonathan House MD

Jonathan House

I have now read the source posted by Ingolf and the source's source. I was wrong. I now understand how money in the futures market can affect the spot market price.

Thanks for the education.

The link Ingolf provided was:



zansibar: One of the main problems is the freighting of luxurygoods through air. As earlier mentioned, a investment in blimp-technology for the slow movement of cargo seems like a interesting national investment, as opposed to, say, a missile shield wich will be obsolete by the time it gets constructed.

J. House: Barring all out war in the ME, I can see very small odds on you not having to fork out those monies. At least Norwegian oilexperts of all ilks are getting ready for 80-90 per barrel. Wich is still ridicolously much higher than the estimates 2 years ago, so in a sense you can say that the speculators have managed to raise the plataeu of the oilprices. New spikes will go from there, not 23 and spare change as just a few years ago.

William R. Cumming

If my memory is correct PL asked his blog readers to give their best estimate of oil prices the end of 2008! Time will tell. Speaking of facts not sources, any speculation on impact of markets, oil or others, depending on outcome of US elections? My guess is that international interest in the outcome is at a all-time high and inflow of FDI (Foreign Direct Investment) although illegal in the Presidential election is also at an all time high. Question for both candidates in debate, have you made any foreign policy committments to foreign governments that are not public? If so what are they? The same question but as to their large donors?


On a related energy note:

Daimler sues battery maker
Detroit Free Press 08/05/08

"Daimler AG, maker of Mercedes-Benz luxury cars, sued Cobasys LLC, saying the company won't provide battery packs as agreed for a planned Mercedes-Benz gasoline-electric SUV.

The Orion Township -based company is jointly owned by Energy Conversion Devices Inc. and a division of Chevron Corp."

(Think there might be any conflict of interest between the battery supplier owners and the auto maker?)

R.W. Bloomer

Last fall The Chicago Mercantile Exchange and the Chicago Board of Trade discontinued floor trading of PORK BELLIES. Here in my little corner of Colorado, the retail price of BACON fell by half within two weeks

Bill D

Its all Cheney's fault. As long as it looked like he was driving the Iran policy. The Shorts had to stay out of the game. As soon as a slight sign of sanity appeared, they jumped in and started screwing over the Longs. The market can now look for the price that balances everything out.

$147 kills a lot of demand. $75 did not look to be a problem for the overall world economy. The balance price may not be to far South of where we are now. My guess is $105.

Jon T.

Interesting that so many people comment on Larry Kudlow. I went to undergrad school with him. It's illuminating to see who evolves where.
Yes he's smart. So is Vandana Shiva and she has a very different take on markets, having been a founder of Navdanya.

Clifford Kiracofe

Drill, drill of course. Exploration and production contribute to supply.

But...haven't the radical enviros blocked US exploration and production here at home??? And didn't the Zionist Lobby block a major US deal for Iranian hydrocarbons during the Clinton Administration and continues same and more???

Logically to find data about drilling here at home one turns to API.
This is their Exploration and Production page. Note in particular the map. http://www.api.org/policy/exploration/index.cfm

Context? API says:
"Federal lands hold an estimated 650.9 trillion cubic feet of recoverable natural gas, enough to meet the natural gas heating needs of 60 million households for 160 years (approximately 60 million households in the United States are heated by natural gas).

Federal lands also hold an estimated 116.4 billion barrels of recoverable oil, enough to produce gasoline for 65 million cars and fuel oil for 3.2 million households for 60 years."



Just a guess on my part, but anecdotal evidence here in the oil/gas patch would suggest that rigs are in tight supply. Halliburton and other oil & gas service providers are crawling around the southwest like an army of hungry ants--you literally can't drive a highway or byway without seeing several of them. Lots of drilling, lots of exploration going on. More telling, I think, is the capacity or lack thereof of big oil and gas in the U.S. to refine more product. How much elasticity is there in the existing refineries? Off the top of my head, I'd guess not much, given the lack of expansion of refining facilities over the last few decades. So even if exploration/production ramps up, how is that going to push prices down? For McCain's drilling panacea to take hold it seems to me that not only would more rigs be needed, but oil & gas interests would have to invest massive funds to expand refining capacity--something I don't see happening anytime soon.

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