More On Oil
From Tom Harvey – author and Cyrus Uible – technical guru.
Stocks took up the volatility wand today, and dropped 206 points. The Dow is approaching the bottom of it’s trading range of about 11,800, and if it drops through that, it will enter a new range, and show all of us we’re in a real bear market.
Bonds, the Dollar and Gold were a little boring today.
Oil, on the other hand, jumped $5.07 today, showing that volatility is “normal” for oil now too. Gasoline followed oil up, leading the way to new pump prices.
In the news today…. It’s all about OIL.
The US Government stated that oil inventories fell in the US. They also stated that people buy oil (drive the price up) because the dollar is weaker and not for speculative reasons.
I take exception to the US Government statement. In addition to my recent declaration on what drives oil prices (the troika of supply/demand, weak dollar, and speculation), and speculation being the recent reason oil has been going up, I would provide the following analysis, printed in yesterday’s front page of the Financial Times (FT).
The FT stated that the big increase in oil prices last Friday was caused a short covering panic. Apparently, traders were selling oil short (expecting the oil price to go down), and when it started going up, they were losing money, and covered their short position. They way you cover a short position is that you “buy” the contract. All the buying caused oil to jump over $10/barrel in one day (in fact oil jumped $16.24 in less than 36 hours to $139.12). AND, it was entirely caused by speculators. These speculators were caught in the wrong position at the wrong time.
How do I back up this allegation? NYMEX, the commodities exchange, revealed that the number of outstanding oil contracts (or open interest, as it’s called) declined by 10.932 July 08 futures contracts last Friday. December 08 futures contracts fell by 7,157 contracts. This is caused by short covering, or buying back their previous money losing positions. The increase in price was not caused by buying new contracts – that would have caused an increase in “open interest.” In addition as a confirmation, the chief oil analyst at Goldman Sachs stated that the price increase “was largely due to a large short-covering.”
Yesterday, Henry Paulson, our beloved Treasury Secretary, said speculators were not behind this year’s rise in oil prices. Henry is hedging his statement by referring to the entire year – not the last few months that WERE entirely speculation. The real question you should be asking is “Why would Henry Paulson not want to talk about speculators driving the oil price?? Is it politics?? Is it because he was Goldman Sachs chairman before he got his Treasury appointment, and he doesn’t want to hurt his buddies??
None of the nonsense that’s coming out from the US Government, or from the TV news, or the radio – all a bunch of amateurs – is true. Remember, you are the heavyweights in the knowledge game.
And, there’s a new game in town. Historically, when a trader wanted to hedge his position in dollars, he would buy a “stronger” currency futures contract. Now he purchases an OIL futures contract. So, the massive currency market is now spilling over into the OIL market, and that’s a lot of money. This helps explain the large amount of speculation going on right now in OIL.
Here are today’s numbers:
Dow Jones 30 Industrial – 12,088 (down 206 points)
10 Year Treasury Bond – 4.07% (down 0.03%)
Euro – $1.5550
Gold – $883 (up $12)
Oil – $136.38 (up $5.07) – here we go again.
Gasoline – $3.47 (up $0.15)
All readers,
Congress is painfully aware of the problems with Speculation and Sen. Levin is one person leading the charge. Here is a recent article more fully explaining the situation. The CFTC is the body that must act. But, the key question is “Who can make them get off their backside and do something?”
Tom Harvey
In Washington, financial speculators have a fat target on their backs.
They are being blamed for high gasoline prices, soaring grocery bills and volatile commodity markets, and lawmakers are lashing out at market regulators for not cracking down on them more vigorously.
“You study it, but you don’t act against this incredible increase in speculation,” Senator Carl Levin complained to a senior official of the Commodity Futures Trading Commission at a recent Senate hearing. “Unless the CFTC is going to act against speculation, we don’t have a cop on the beat.”
Just this week, Senator Joe Lieberman, the Connecticut independent, said he was working on a proposal to ban large institutional investors from the commodity markets entirely. The same day, the administration of President George W. Bush approved another Senate proposal for the creation of a federal interagency task force to investigate commodity speculation. At least four public hearings have explored the topic in just the past two months, and Lieberman has scheduled another session on June 24.
This escalating rhetoric against speculators is starting to worry people with years of knowledge about how commodity markets work. Because without speculators, they note, these markets simply do not work at all.
Speculators, people willing to risk their capital in search of high profits, are so central to healthy commodity markets, they say, that the broad-brush restrictions now being considered could inadvertently damage a market that is already under pressure from rising global demand for food and fuel.
Even in Washington, there is widespread agreement that no single factor is responsible for rising food and energy prices. The hungry, high-growth economies of India and China are fundamentally affecting worldwide demand, while uncooperative weather, and government policies on trade and ethanol, are among the many factors affecting supply.
And commodities, priced in dollars, tend to rise in price as the dollar weakens, making commodities a haven for investors fearful of future inflation.
But beneath all these external factors is the simple see-saw of the marketplace: For every person trying to buy oil at $130 a barrel, there must be another person willing to sell at that price – and, odds are, one of them will be a speculator, taking a risk in hopes of profiting from the next big price move.
But with tempers rising along with food and fuel prices, some market scholars are concerned that speculation, the legal pursuit of market profits, is becoming a synonym for manipulation – secret and collusive trading activity aimed at deliberately moving prices to produce illegal profits.
Certainly, there have been unusual price spikes in commodity markets, like the short, sharp roller-coaster ride that hit the cotton market in early March and the more recent gyrations in the oil markets, that have alarmed some market participants.
While commodity market regulators regularly scan markets for manipulative behavior, they took the unusual step in recent weeks of publicly confirming that they were conducting investigations looking for illegal activity in both the energy and agricultural markets.
“Concern about manipulation is not misplaced,” said Patrick Westhoff, an economist at the Food and Agricultural Policy Research Institute of the University of Missouri. “But speculation doesn’t equal manipulation, and I am concerned that there’s been a confusion between the two concepts.”
The scene of the speculation that is alarming Washington is the commodity futures market, which trades a financial derivative called a futures contract, an agreement for the future delivery of a fixed amount of a commodity at a certain price. The prices at which these futures contracts change hands are the benchmark for pricing commodities around the world.
In essence, speculators are the only voluntary players in the commodity futures markets. They could use their billions to dabble in currency markets or buy distressed real estate or pile up Treasury bonds. But farmers, miners, oil producers and all the other players engaged in commodity production and consumption – the so-called “commercial” players – pretty much have to be there. There just are not many other places they can hedge the price risks that arise in their commodity-based businesses.
So speculators become the ballast in the market, making the contrary trades, taking on the risks the hedgers want to shed, reacting quickly when news jolts the markets and, most importantly, creating liquidity by pouring in enough money to allow everyone to make very large trades quickly without causing wild price swings.
In the past five years, hundreds of billions of dollars have flowed into the commodity futures markets both from traditional institutions – hedge funds, pension funds and investment-bank trading desks, for example – and from the newer commodity-linked index funds and exchange traded funds, which track various commodity market indexes.
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Seems worth while to me