Saturday, May 24, 2008
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Speculators drive OIL prices not supply and demand
TELL ALL SENATORS - OBMAMA, CLINTON  TO  CLOSE THE LOOP HOLE
in Commodity Futures Trade Commision rules NOW!



Paul Foldes writes:
Documentation of speculations impact on current oil prices from yesterday's wsj

If Senators this week really wanted to know what was responsible for the
sudden jump in prices for gas, it was not recent dramatic increases in
demand for oil, as the oil industry would like us to believe.

Most oil used by refineries is sold on long term contracts. But only the
spot price (for spot delivery) is being reported in the news daily (spot
prices form a convenient 'price signal' to producers, signaling how much
the market is willing to pay in the near future).

What's screwing up things right now is that - as the Wall Street Journal
reported, yesterday on page C1 of the print edition
... " speculators, and <<long term contract sellers>> are unwinding
their positions, driving up prices dramatically. "

Evidence that the short term high futures prices will have major impacts
in the long term oil contract market soon.

This and the reporting in Business Week earlier this week provides much
more substantive and reliable news than the pablum shown on TV this week
where the Senators did their public flogging of Big Oil CEO's just so
the politicians can grandstand for the voters in an election year
without doing anything to help curb the speculation; which is in their
power to do!

As the Wall Street Journal and other papers have also reported recently,
the reason speculators in oil futures are able to swing the market so
much - as they are also doing on the Minneapolis grain exchange - is a
loophole in Commodity Futures Trade Commision rules, which is not being
closed, regulatorily - as the Bush Administration is so against any
regulation; even regulation which affects home heating oil prices, and
food prices so directly.

The relevant news pieces are clipped below:


Bad Oil Bets Come Back To Haunt Speculators
By *ANN DAVIS*
May 23, 2008; Page C1, WSJ

Surging energy prices are wreaking havoc on producers and speculators
who made bets on lower oil prices, forcing some to buy oil to exit their
positions. That, in turn, is helping push up oil prices.

<<<Producers who long ago struck deals to sell oil in future years are
finding they locked in prices at as little as half what oil fetches in
today's red-hot market. Some companies are unwinding these deals by
buying back their oil contracts>>>>>>........

snip....



NYT 4 24 08

" Typically, gasoline sales rise before Memorial Day weekend. But
gasoline sales dropped nearly 7 percent last week compared with the same
week in 2007, according to an estimate by MasterCard

Gasoline prices almost always rise in the summer, as demand increases.
On Friday, gasoline prices reached yet another record, a nationwide
average of nearly $3.88 a gallon. That figure was up 4 cents in one day
and is 65 cents higher than this time last year, according to AAA.
Diesel hit $4.65 a gallon on Friday, up $1.73 a gallon in a year.

"All this has led to a vast transfer of wealth from American drivers to
domestic and foreign oil producers. Every one-cent increase in gasoline
prices means Americans pay $1.42 billion more a year for gas, according
to Stephen P. Brown, an economist at the Federal Reserve Bank of Dallas.
Nearly two-thirds of that goes to foreign producers."

<snip>

WORLDWIDE DEMAND FOR OIL DIDNT INCREASE 40% IN JUST LAST FEW MONTHS
ASHAVE SPOT OIL FUTURES PRICES. D

EMAND FOR OIL FUTURES CONTRACTS INCREASED
DRAMATICALLY AS SPECULATORS PILED INTO THE MARKET TO MAKE A KILLING.

THIS DEMAND IS BEING FUELED BY PENSION FUND, AND OTHER INSITUTIONAL
COMMODITY SPECULATORS, AND PARTIES WANTING TO MAINTAIN THE PURCHASE
POWER OF THE RAPIDLY DECLINING US DOLLAR WHICH THE ADMINISTRATION HAS
ALLOWED TO DECLINE IN VALUE -- AS REPORTED BY BUSINESS WEEK EARLIER THIS
WEEK.


Capitol Hill May 21, 2008, 12:01AM EST
Are Pension Funds Fueling High Oil?
by Moira Herbst, BUSINESS WEEK
A Senate hearing weighs charges that speculation by big investors
and sovereign wealth funds is behind the rise in commodities and
energy prices

If you're wondering why driving to work has gotten so expensive, you
might want to peruse your pension fund's investments. That's because
speculation by institutional investors pouring money into the
commodities market may be largely to blame for spiking oil prices,
according to testimony on May 20 before the Senate Committee on Homeland
Security & Governmental Affairs. Crude oil, a so-called hard asset, is
viewed as a buffer against inflation—a foe of longer-term investment
returns. At the hearing, "Financial Speculation in Commodity Markets:
Are Institutional Investors and Hedge Funds Contributing to Food and
Energy Price Inflation?," senators heard from those defending the role
of speculators in oil and commodities markets as well as those who argue
that excessive speculation is the root of global price surges.

"[Commodities] are experiencing demand shock from a new category of
speculators: institutional investors like corporate and government
pension funds, university endowments, and sovereign wealth funds," said
Michael Masters, managing member of Masters Capital Management,
a Virgin Islands-based hedge fund. "Index speculators are the primary
cause of the recent price spikes in commodities."
<snip>

above provided under the applicable fair use exceptions to copyright
law, for educational for discussion purposes only.



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Saturday, May 24, 2008 11:57:18 AM (Eastern Daylight Time, UTC-04:00)    Disclaimer  |  Comments [1]  |  Related posts:
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Thursday, May 29, 2008 11:11:02 AM (Eastern Daylight Time, UTC-04:00)
First, we don't use 33 million barrels of oil per day; the figure is less
than 21 million. See:
http://www.nationmaster.com/graph/ene_oil_con-energy-oil-consumption

According to the head of the American Oil Institute, worldwide oil demand
is 86 million barrels a day, while production exceeds this by 2 million
barrels. According to Department of Energy estimates, supply and demand
are in rough equilibrium, varying somewhat from quarter to quarter. See:
http://www.eia.doe.gov/emeu/steo/pub/3atab.pdf So, fundamentals don't
explain why oil has shot up again in the past couple of weeks, nor why it
is up so much in the past year or so.

In March, 2008, oil futures fell almost $10 in three days, in part because
of false rumors the Commodity Futures Trading Commission was on the verge
of significantly raising margin requirements for commodity
positions.
http://www.minyanville.com/articles/Bernanke-Fed-commodities-ubs-china-india/index/a/16416/from/yahoo
3/26/08

Business Week has done Pulitzer prize level reporting on the problem,
including how oil fell 35% in 2006-2007 when speculators pulled out for a
while, with no meaningful change in supply and demand fundamentals. .
http://www.businessweek.com/bwdaily/dnflash/content/jan2007/db20070116_499932.htm
and
http://www.businessweek.com/investor/content/oct2006/pi20061004_295294.htm

Michael Masters has long been regarded as one of the most respected hedge
fund managers in the industry. According to him, there is a new breed of
speculators around now, and they have influenced prices beyond supply and
demand fundamentals. His testimony to Congress is described in the
Business Week article quoted by Paul Fodes (below).

As long as the 400 or so commodity hedge funds and the major banks and
brokerages are allowed to trade futures contracts with margin rates at
around 5%, we'll continue to bleed.

Regards,

Marty Burack
Marty Burack
Comments are closed.