Speculation

[cmmichaels]

Hello,

I have a quick question that does not have a quick answer but I would be interested to know peoples views. Who on here thinks that speculation in the energy markets and the deregulation of OTC derivatives is the cause of unnecessary price fluctuations in the spot market and caused the huge spike in oil prices since the 90s as shown below?

I'm sure this has been discussed before but if anyone has a view on this I would love to hear it.

 

[scose-no-doubt]

Mate you could write a thesis on that.

 

[cmmichaels]

Mate you could write a thesis on that.

haha I know mate, I've been having an on going debate about it with my colleague at work and I was just wondering what people on here thought ... in a nut shell if that is possible.

 

[BeginnerJoe]

The spike in energy prices is caused by the need to fund wars. The real recipient of the money is the government and not the speculators. The speculators take a small chunk but get all the blame.

 

[GoodBread]

No easy answer to that. But it's clear from the chart that OPEC and the oil shocks were game changers. Speculators have played their part since then but there are plenty of arguments that support higher oil prices for fundamental reasons. I personally think fundamentals account for a large majority of the spike in prices although speculators play a part, particularly at extremes in sentiment.

 

[cmmichaels]

The issue is for every fundamental reason there have also been periods that demand has been low but prices have still risen dramatically! The price per barrel would have obviously gone up over the years but there seems to be at times very little correlation between the supply and demand of the product and the huge fluctuations in price.

On the other hand I know in the past there have been periods where futures speculation was banned in certain commodity markets but the price became even more volatile so they had to reintroduce futures trading to bring some stability back to the market.

I'm not sure if speculators could be described as taking a small chunk though. If you look at the total net gains made by some speculators over the years this could not be described as a small chunk of money (Glencore). Obviously in comparison to what the governments make from oil then there would be a huge difference but it will be an extremely substantial figure which in essence could be the catalyst to some of these issues.

 

[scose-no-doubt]

The issue is for every fundamental reason there have also been periods that demand has been low but prices have still risen dramatically!

When?

Also, ignore everthing Beginner Joe says.

 

[BeginnerJoe]

I'm not sure if speculators could be described as taking a small chunk though.

If you work out how much the government is getting out of it, you will see the speculators take home nothing more than a mosel.

 

[cmmichaels]

When?

Also, ignore everthing Beginner Joe says.

World crude oil demand grew an average of 1.76% per year from 1994 to 2006, with a high of 3.46% in 2003-2004

http://www.indexmundi.com/energy.aspx

That shows roughly 23% increase in global demand between 1994 and the 2008 high. The increase in price between August 1994 and August 2008 was 837%. (over 500% adjusted for inflation)

Inflation adjusted the price of an Aug 1994 barrel is approx $23 vs $134 in Aug 2008.

An annual decrease of 0.71% in 2008 consumption caused the price to fall nearly 70% in 3 months. But obviously the market is efficient, especially given that the top officials of the biggest supplier and biggest consumer economies have two completely different interpretations of what is going in with the market at a given time.
http://www.rollingstone.com/politic...s-show-speculators-behind-oil-bubble-20110526

 

[scose-no-doubt]

An annual decrease of 0.71% in 2008 consumption caused the price to fall nearly 70% in 3 months

I done think that it's that linear mate. What about credit, cash flow and risk conditions at the same time?

 

[cmmichaels]

If you work out how much the government is getting out of it, you will see the speculators take home nothing more than a mosel.

look at how much Glencore have made? is that a mosel? it is not, there is huge amounts of money to be made in speculating a trader using 1 lot on cl not huge but that is not the issue. Look at the side of the commodities trading industry! Look at how much the trading arms of banks make in comparison to any other area of the business... its not a mosel

 

[GoodBread]

I wouldn't quote Taibbi to make your point. Plenty has happened beyond the simple increase in demand over the past 15 years. Oil is becoming harder to find and harder to extract, and prices discount future growth in emerging markets as well as the fact that oil is a finite resource. Furthermore, where is it stipulated that oil demand and prices should have a correlation of 1?

 

[libertas]

Don't forget about the considerable fall in the value of the dollar as a major factor.

 

[cmmichaels]

I done think that it's that linear mate. What about credit, cash flow and risk conditions at the same time?

Yep you are completely right mate this is the thing I'm not really trying to prove one argument over the I'm just looking at the facts I've read articles regarding both sides of the story. Some of the figures that you come across are obviously very questionable. The big problem with this debate is the fact that no one knows how much of an effect these issues would have had without speculation in the markets. There is no sure fire way to say no the price would have definitely increased by x% regardless.

 

[cmmichaels]

I wouldn't quote Taibbi to make your point. Plenty has happened beyond the simple increase in demand over the past 15 years. Oil is becoming harder to find and harder to extract, and prices discount future growth in emerging markets as well as the fact that oil is a finite resource. Furthermore, where is it stipulated that oil demand and prices should have a correlation of 1?

I agree with your points completely with regards to the quote I'm just piecing together whatever I can get at the moment.

Obviously no the correlation is not that basic but when supply greatly outweighs demand yet the price is still rising this is when questions need to be asked.

Some more articles:

Testimony to congress from hedge fund manager regarding concerns over commodities index speculation
http://hsgac.senate.gov/public/_files/052008Masters.pdf

Article on the impact of commodity speculation on food prices
http://frederickkaufman.typepad.com/files/the-food-bubble-pdf.pdf

Price pressures of passive index investors on commodity prices. Lots of direct quotes from people involved in setting up the first exchanges and herding big long-only money into them
http://stopgamblingonhunger.com/wp-content/uploads/2010/01/Dangers-of-Passive-Investment.pdf

Price pressures of passive index investors on commodity prices. Lots of direct quotes from people involved in setting up the first exchanges and herding big long-only money into them
http://stopgamblingonhunger.com/wp-content/uploads/2010/01/Dangers-of-Passive-Investment.pdf

 

[cmmichaels]

Don't forget about the considerable fall in the value of the dollar as a major factor.

Yes I agree again this will be a factor but the general decline in value of a currency over a 100 year period like this does not really correlate with the volatile price flucatuations we are seeing in these commodities.

If you look at the graph you posted and overlay a crude oil graph the dollar is remaining around the same level while the value of oil was increasing dramatically. If you look back while the value of the dollar was decreasing dramatically crude oil remained at around the same level... before speculation was introduced.

 

[libertas]

Yes I agree again this will be a factor but the general decline in value of a currency over a 100 year period like this does not really correlate with the volatile price flucatuations we are seeing in these commodities.

If you look at the graph you posted and overlay a crude oil graph the dollar is remaining around the same level while the value of oil was increasing dramatically. If you look back while the value of the dollar was decreasing dramatically crude oil remained at around the same level... before speculation was introduced.

The chart is a little misleading I must admit because near the end where the dollar doesn't appear to be falling that hard it actually is. The further it falls the greater percentage fall it is for each fall in cents. The logarithmic chart below is a much better illustration of the decline.

You are quite right though, the fall in the dollar is not the only reason for commodity price fluctuations.

 

[cmmichaels]

The chart is a little misleading I must admit because near the end where the dollar doesn't appear to be falling that hard it actually is. The further it falls the greater percentage fall it is for each fall in cents. The logarithmic chart below is a much better illustration of the decline.

You are quite right though, the fall in the dollar is not the only reason for commodity price fluctuations.

Yes this graph seems clearer however looking at the figure from earlier it is clear that it is clear that the rate of inflation and the rocketing price of oil do not correlate but as mentioned there are other factors. The issue again is how volatile the prices become after the rise in speculation.