"Study: Oil speculators dominate open interest in oil futures" Ruth

"Using data from the Commodity Futures Trading Commission (CFTC), the authors state that the previous claims by the commission that speculation wasn't influencing oil futures markets were based on inappropriate analysis. The authors present new evidence that speculative trading is playing an increasingly important role in the oil market.

They note that while the question of what has produced sharp swings in oil prices since 2005 is a complex one that requires further and deeper study, there are "inescapable facts" that need to be part of the debate about regulating the activities of institutions betting on movements in oil price purely for financial gain. Specifically, speculators, which the CFTC designates as any reportable trader who is not using futures contracts to hedge, have increased their footprint in the marketplace dramatically since the late 1990s.

Hedgers are typically producers and consumers of the physical commodity who use futures markets to offset price risk. By contrast, speculators seek profits by taking market positions to gain from changes in the commodity price, but are not involved in the physical receipt/delivery of the commodity.

"To protect the U.S. economy and American consumers, there needs to be greater market oversight," Medlock said. "The tremendous increase in the market presence of speculators by fifteenfold speaks for itself."" Ruth

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Need I say more?  pl

Comments

[charlottemom]

Sure, but don't forget that swings in oil markets corrolate with swings in the dollar. Witness today with drop in dollar and sudden burst up in oil prices.

Also Reuters piece today on declining production from Mexico Canterell oilfield and from Seeking Alpha earlier this week, "The eighth largest oil field in the world will be dead by the end of next year.

http://seekingalpha.com/article/157824-mexico-s-declining-oil-production-clarion-call-for-cantarell

Truth or "peak oil nonsense"? Don't know, but I do think there is a bit of a resource grab happening in all sorts of commodity classes.

[R Whitman]

The original paper by Medlock and Jaffee was quite explicit when it came to pricing interest by speculators.

What it did not cover was the supply of oil. Old oil fields get depleted and need to be replaced. Over the last 50 years this has been done easily on a wordwide basis. The supply of oil is elastic. It is price dependent. More oil will be available at $100/bbl than $50/bbl. This is because there are fields where the production cost is so high that it would not be economic to develop them at a market price of $50/bbl. Peak oil theory is only valid at a set price.

[JohnH]

"Speculators...have increased their footprint in the marketplace dramatically since the late 1990s." Bill Clinton's gift keeps on giving to the wealthy few.

The clearest indicator of speculation is the increasing gap between prices for oil and for natural gas, which does not seem subject to much speculation.

Though this suggests that peak oil is not the culprit, speculation may lead future shortages. Who would invest in producing something with such dramatic price uncertainty?

The wealthy blockheads in Congress seem content to stand idly by as oil speculators help the nation shoot itself in the foot.

[William R. Cumming]

Evidence exists that many hedge funds and speculators are operating out of middle-east and manipulating market by also releasing inaccurate information concerning Gulf of Hormaz. The US INTEL community knows it but cannot get a clampdown because of ties to Saudi Royal Family and other important middle-eastern connections. This information is from open sources only.

[Fred]

CFTC has been a paper tiger for some time, just look back to Enron.

The Congressional Research Service report gives some good background:
http://digital.library.unt.edu/govdocs/crs/permalink/meta-crs-10584:1

On a parallel note regarding unregulated commodities trading, AIG is up 245% since being bailed out.

[Steve]

All,

If the market is rigged, what should the real price be? Is it the speculators that drove up the price approximately 15 fold in 10 years? Oil was trading at $10 or so in 1997/1998 . Getting rid of speculators will do nothing except create more economic uncertainty. Oil will never be cheap again for the long haul. Oil is finite. All major US oil companies reserves are in decline. We are entering into the second half of the oil age, like it or not. Sorry.

[different clue]

If speculation could be so effectively restrained that oil prices went back to reflecting supply and demand, we would at least be able to very roughly predict supply and price going forward. Bussinesses and the rest of us would be able to make multi-year plans in an environment where the multi-year future might at least be roughly predicted between the bounding bands of improbability. (Sort of like
with hurricane forecasts, where the forecasters draw a
"cone of possible landfall" somewhere within which the hurricane landfalls).

If we can restrict speculation to its former minor presence; then "the market" will signal us about
developing brute shortages. I hope nobody believes a rising price actually "creates" more oil.
All it does is to incent the finding and extracting of oil more expensive to find and extract. At some point we will be down to the oil which costs a calorie of energy from all-sources-combined for every calorie of energy obtained by the end users from that oil. What do we do then? I believe The Oil Drummers are thinking about these things. Hopefully somebody can offer a relevant link.

[J]

Colonel,

Oil shouldn't be over $25/barrel max. Anything above that I see as greed, and is also hurting people around the globe both in the consuming and producing nations. When oil prices go up, consumers back off usage, and conserve their holdings, thus causing the producers to loose income that they could have had, had the consumers chose to continue spending or up their consumption with prices at a realistic level of $25/barrel.

People have been, and are continuing to be hurt by the greed of those who's goal is to eventually push oil prices over $200/barrel.

[Ken Roberts]

Different Clue's focus on tangible (non-currency) measurement of cost of oil seems helpful for analysis. As he notes, that is being explored eg at www.theoildrum.com under the acronym of EROEI - energy return on energy invested.

Roughly, it would seem that if EROEI were 3:1 (considered the point of no net return), and if society requires X amount of energy for consumption (net of energy production requirements), then 3X of tangible activity must be devoted to energy. In theory, 33 pct of GDP. Not all oil, of course - natgas is an alternative. (And I'm not hearing claims of manipulation re the natgas price, by the way).

If 33 pct goes to energy production, and 20 pct goes to health care, and X percent to overseas wars and footprint, and Y percent to "let no sparrow fall" homeland security overheads, ... there ain't enough percents. One way the stress will show up, given that some entitlements are in dollars not tangibles, is inflation.

I'm making a long term bet on much higher oil prices, combined with a reduction in consumption. If you want to call it peak oil, ok. Another analogy may be "runoff" of insurance biz. Lots of money to be made in an industry which has declining outlook so new entrants don't want to make capital investment in plant, organization etc, yet is still an essential.

In the gloom and doom biz, widespread gloom is easy to obtain but doom doesn't come so easily, and if it arrives does so piecemeal and halfheatedly. There is plenty of time to adapt and groups of people are extraordinarily creative.

Consequently peak oil is overstated in terms of its effects - even if the causes side of the case might happen to be spot on. Which it is not, of course, in an uncertain world.

Speculators, smechulators. Let the games continue!

[Maureen Lang]

Completely OT, but just had to mention it:

Cieran has posted "Prairie Skies Part 2" over at The Athenaeum. This 2nd installment is on astrophotography & it is superb, both visually & textually.

Have a look!

[N. M. Salamon]

ALL:
With due respect, speculators are playing Ponzi Schemes, but the reasons is valid. The deplation rate of old oil fields by 2011 will be greater than the so called [though unproven] "Saudi Holdback/spare capacity". To replace Canterell's peak production the Canadian tar sands would have to be doubled in one year - not feasible, besides almost all new development is on hold courtesy of Wall Street schenigans in the last 10 years or so. While the Tar sands [or Colorado Shale] hold more oil than Saudi Arabia, the best guess is that less then 10% is recoverable under present technology [Tar Saneds]. With war noises re IRan, with continuing occupation of Iraq neither of those two states can expand their oil production, except with Chinese money [Uncle Sam can not pick on a nuclear power, that is different than Panama, Grenade et al].

So the price of oil will go up, as will gas in USA, for there is no attempt by the powers to be [Government, Banks, money pools, etc] to invest in risky business, when the USA's Treasury requirements for this fiscal year are greater than all available spare capital in the world.

So blame oil price increase on reality [depletion vs. new development costs], blame it on shortsightedness of
usa Congress, for over 30 years Presidents have talked about need to reduce oil dependency. Anything else is BLAME GAME.

[isl]

Speculation and peak oil are not unrelated. In a market where demand outstrips supply (i.e., post peak oil), opportunities for speculators abound to profit at others' expense.

The cost of extracting oil was $90 per barrel when the price of oil was $150 because there were not enough boats, equipment, drilling rigs, etc. to meet future drilling plans. Now, with most of those plans on hold or cancelled, costs have fallen substantially.

J: 25 dollar oil is not doing anyone a favor, a gradual transition to other energy sources is critical (if nothing else, China will outbid the US) and if oil is too cheap, that wont happen. Rapid rise as happened was very destructive.

[Duncan Kinder]

Oil, schmoil.

The next big racket is going to be farmland:

Farmland Investment - Next Bubble or Undervalued Asset?

Following the bull run in metals and oil, agricultural land prices are rocketing as big money pours into the sector.

"You can't make it. And, as the world gets bigger and bigger over a period of time, the pressure on land and land use is going to increase," said Clive Hopkins, partner at Knight Frank.

Soaring agricultural prices, growing demand for biofuels and the growth of the Chinese and Indian economies are leading top global investment banks to buy farmland in a bid to embrace the physical commodities market.

Investment banks and hedge funds are mopping up vast tracts of agricultural land around the world, hoping to ride the so-called "commodities supercycle" that has lifted prices of everyday agricultural commodities such as wheat, rice, soybeans and corn to record highs.

U.S. investment bank Morgan Stanley has bought several thousand hectares of land in Ukraine, Europe's grain basin.

Morgan Stanley declined to comment, but industry executives say many other big banks are looking at land.

Barclays Capital, the investment bank arm of Barclays, is actively searching.

"We are looking at a lot of opportunities in those sort of things. We are looking across the board. We certainly wouldn't rule it out," said Roger Jones, co-head of commodities at Barclays Capital.

Banks are not the only ones going back to the land.

Fund manager BlackRock has a hedge fund that invests in agricultural land. International estate agents Knight Frank is setting up one to buy agricultural land in the UK.

Industry experts say hedge funds have bought thousands of hectares of corn and sugarcane plantations in the United States and Brazil, illustrating how even purely financial players are moving beyond paper markets into real assets.

"Farming is going to be one of the best places to make money in the next 10 years if you know what you are doing," investor and commodities guru Jim Rogers told Reuters in an interview earlier this month.

Investors say the possibility of commodities demand outstripping supply is driving the trend that could intensify given the pace of growth in China and India.

With nearly 2.5 billion people, the two countries are home to nearly a third of the world's population.

As their economies grow, pulling millions out of poverty, this will drive up consumption. China and India could trigger a wave of demand that existing supplies will struggle to meet.

"Over the next five years, you will have 2 billion more people eating bread, eating noodles, drinking coffee ... There is no way in this world that the supply side can catch up with the demand side," says Badung Tariono, an Amsterdam-based fund manager for ABN AMRO.

That is not all. Pressure on arable land will also come from rising demand for biofuels and for grains for cattle to provide meat to emerging markets.

"The use of foodstuffs to make energy substitutes -- corn and sugar for ethanol and palm oil and soy oil for biodiesel -- has created a fresh layer of demand," says Edward Hands, a portfolio manager at Commerzbank Corporates & Markets.

"Supply is inelastic. It's not easy to increase the acreage to produce crops. Effectively your supply curve is fixed and your demand curve is moving to the right," he added.

Financial players also realise that agricultural land is a limited resource, and who controls it now could well reap windfall gains later.

Analysts say having a stake in the agricultural process is an extension of a trend among financial players to embrace physical assets to gain greater insights into paper trading.

Banks, hedge funds and private equity funds have over the past several years built sizeable interests in physical infrastructure in the energy sector, with assets ranging from ships to pipelines to power stations.

"There is this craving for real assets. Banks have become more and more physical in their investments," says Francisco Blanch, head of global commodity research at Merrill Lynch.

"In any resource sector, if you want to get involved, you always want to be in the upstream. It doesn't matter whether it's mining, whether its oil and gas or agriculture," says ABN AMRO's Tariono.

"The highest return you get is always in the upstream. The upstream side of the business has higher risk. So you need to be compensated with higher return."

[rjj]

The word that comes to mind when I read that (DK@11:32 AM) is obscene.

[Duncan Kinder]

To follow the topic of the current corporate and foreign governmental purchase of farmland, goto Food crisis and the global land grab

It's part of my daily reading.

[David Habakkuk]

In oil, and commodities generally -- certainly including agricultural commodities -- there are certainly plausible reasons to anticipate upward pressure on prices in the medium term. But both the bonfire of regulations discussed in the Rice University study, and also the floods of liquidity which have been unleashed by central bankers over the past decade in the course of their attempts to prevent collapsing asset bubbles having a devastating effect on the real economy, have turned the commodities markets into a speculative casino.

The former IMF chief economist Simon Johnson, writing on the invaluable The Baseline Scenario blog, remarked on how the intensification of the 'easy money' approach under Bernanke is liable to perpetuate, and even intensify, these processes:

'The very cheap money policies of leading central banks, including the Fed, the Bank of England and arguably also the European Central Bank, lower the funding costs for big players who want to take large positions in commodities markets. Essentially, we are providing the credit that makes big speculative positions possible. Add to this mix a ''too big to fail'' attitude and a ''yes we can, recapitalize through trading profits'' deal with policymakers, and you see why major financial firms are likely to place huge commodity bets in the months ahead.

'The G8, separately and jointly, destabilizes energy prices and refuses to even talk about this reality -- taking the view that being more candid would just upset consumer, business, and investor confidence. They gamble, on energy and more broadly, that the road to recovery runs parallel with pretending there are no problems.'

(See http://baselinescenario.com/2009/07/10/speculators-r-us-the-g8-and-energy-prices/.)

A corollary of this is that we may see a continuation of the recent pattern in oil prices -- with very dramatic shifts, both ways.

[charlottemom]

@DK

Very interesting snippet on land as next asset investment bubble.

Of course you know that Goldman Sachs recently incorporated as a bank holding company in Utah and purchased tens of thousands of acres of property out West in Utah, Nev -- areas that apparently rigged for irrigation, avoiding the water rights issues prevelant in parts of CAL and CO. Additionally, Hank Paulson, on behalf of Goldman, purchased hundreds of acres of land in south america. This was before he became head of Treasury and was quitt controversial at the time.

I love that the Goldman land is purchased as conservancy/eco-projects so bet they're even getting a break on the land taxes.

[Duncan Kinder]

Here's another aspect of the global land grab:

Struggling to keep their land
Drug traffickers are building secret airstrips and landowners are acquiring large plantations, pushing out small farmers in Guatemala.

Populated largely by poor farmers and controlled by few authorities, the Peten sits between the Caribbean coast and the Mexican border like a giant piece of real estate waiting with its "for sale" sign hanging out front. Assembling land there is a key part of the drug trade.

Mexican drug cartels pushed south into Guatemala in recent years. Once drugs arrive in Guatemala from producing countries in South America, they are taken by land over the porous Mexican border to the United States.

The drug traffickers don’t advertise themselves as such when they set up shop. Like other large landowners, they use the land as pasture for raising cattle, but they build airstrips in the middle. Guatemalan authorities say some 40 clandestine airstrips are in operation, but an anti-narcotics analyst estimated to a U.S. Congress committee that hundreds of such airstrips exist.

[Anna Coulling]

Moves by the CFTC to try and regulate the oil trading market and prevent the kind of speculation which has seen crude oil prices rise from $30 per barrel back towards $70+ this year took an interesting twist yesterday when it was announced that the weekly COT data would now include new details on the aggregate holdings of the big Wall Street dealers, hedge funds and other financial participants. COT data is a useful market sentiment tool but as many of the market participants both hedge and speculate it has become increasingly difficult to analyse. According to the CFTC the new format will be making its debut next Friday.

[Patricia]

I recently came across your blog and have been reading along. I thought I would leave my first comment. I don't know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.

Patricia

http://forextradin-g.net

[MattMcC]

Here's a little 'at-home' test one can try. Observe the price of gas a week or so before a major holiday. Then, observe the price a day or two prior. Last week where I live in Oklahoma gas was 2.30 something, the next week, that of Turkeyday (no not Khamal Ateturk's birthday), gas shot up to nigh on 2.50. Now, who here did a bunch of driving over the holiday? You know what the say about an increase in demand! Speculation is costin' me money, Col.