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> People thought oil prices were purely demand driven > until we found out they were being bid up traders. Do you mean "bid up by traders"? You're suggesti

by cturner 16y ago

> People thought oil prices were purely demand driven > until we found out they were being bid up traders. Do you mean "bid up by traders"? You're suggesting that oil prices are high because of a conspiracy? If so - no. That's a "turtles all the way down" argument. Prices need to be sustained by demand. Traders may make money via moves on the fluctuation. But buying a lot of oil in order to push the price up is not a business model. You have to store it (expensive), transport it, and then when you come to sell it the price will decline again. Not to mention the risk you incurr by holding it, and the opportunity cost of not using that money to do something else at the time. An idea that does the rounds regularly is that a conspiracy of evil speculators permanently distort markets. I've never seen a situation where that was true. There may be periods where the market does odd things, and market manipulation does exist, but unless it's a locked-up market (like diamonds) or a true conspiracy of all the players (can't think of an example) it will eventually have to revert to the mean because the traders will start calling bluff. Usually when you see people blaming speculators it's someone trying to cover up ineptitude or corruption by picking an easy target. When this kind of talk gets momentum the results can be bad. A common target during collapsing bubbles is short-sellers (people who borrow stock, and sell it, with the promise to re-buy it and give it back to its original owner at another time, possibly tomorrow). Short-sellers contribute to price discovering in markets, and this is a good thing. But during bubbles, people who know about shorting can do well when others are doing badly, so they're an easy target. US regulators stroked this theme during the economic crisis and introduced measures that limited short-selling for a period. In doing so, they contributed to the crisis because short-sellers provide a lot of the liquidity behind money markets. Cuffing short-sellers removed their liquidity pool from money markets, which was already under strain.

entangld 16y ago
>Usually when you see people blaming speculators it's someone trying to cover up ineptitude or corruption by picking an easy target.< I lived through the California energy crisis and there was no crisis. It was a gigantic manipulation. Videos of energy traders laughing their butts off at grandmothers dying of heatstroke. Oil doesn't need to jump into the hundreds every time someone screams in the Middle East. Analysts in every profession know the whims of their markets. Some of the movements are reality based, some are based on perceptions. Commodity trading (specifically oil) is highly profitable. It can be hacked by the people who know the ins and outs. They'll never tell you, but it can. Most everything can be hacked in some way. I highly doubt the few who are able to profit from the ignorance of millions will confess that some troubles in the Middle East don't significantly impact the supply chain. Or that the price of oil shouldn't jump as wildly as it does. Or even that the oil price seems to reflect the greed of traders chasing historical highs. Not buying it.
- cturner 16y ago
  I don't know about the Californian energy crisis, but maybe this is an example of a situation where the players are in alignment. Spikes in oil prices can be caused by panic in an industry. For example, if I ran an airliner maybe I'd seek to lock in fuel prices via forward trades. There's a risk I'd pay a high premium for the period, but I'd judge that as being bettter than the risk that I'd go out of business. And spikes can be caused by speculators. But my point was that in liquid markets things will revert to a mean that is backed by whatever the real demand is. Pushing prices up by buying and holding oil is not in itself a business model.
  - danssig 16y ago
    >For example, if I ran an airliner maybe I'd seek to lock in fuel prices via forward trades. I was under the impression that airlines are already always buying fuel via futures regardless for planning purposes.
- dantheman 16y ago
  In california you had traders turning off power plants so that energy had to be purchased from other places at higher price. That is not speculating, that is blatant abuse and lack of properly written contracts. They exploited a loophole in a newly created market, this would eventually be fixed as the contracts would have provisions so that what they were doing would be prohobited.
praptak 16y ago
> You're suggesting that oil prices are high because of a conspiracy? Why a conspiracy? Traders do not have to collude for a bubble to occur - there's a positive feedback loop at work. Even if you're convinced that the prices are already far above the sustainable level, it may still be rational to buy - as long as you're convinced that you will sell at the right moment. It's a chicken race. If you sell too early, other traders will beat you by profiting from the last period of growth.
- cturner 16y ago
  If there was lots of oil sitting around in warehouses from people speculating on the price of it (or for another reason), I'd expect we'd hear about that in the news. We've been hearing this about copper being stockpiled in China recently. In this case it seems to be not for speculation but due to a loophole in bank lending rules.
  - cabalamat 16y ago
    > If there was lots of oil sitting around in warehouses from people speculating on the price of it Maybe the oil was sitting in underground reservoirs? (i.e. people were extracting it more slowly)
    - dhruval 16y ago
      Haha. Yes, OPEC is basically a 40 year old global oil price fixing conspiracy.
      - deleted 16y ago
        [deleted]
  - praptak 16y ago
    > If there was lots of oil sitting around in warehouses from people speculating on the price of it People who speculate on commodities do not actually have to physically keep them. The commodities just change ownership, but not location. Only the final buyer actually picks them up.
dantheman 16y ago
Another thing, is that speculators add stability to the market. They predict future demand, so they buy today - driving up the price, reducing use, and then sell tomorrow. If it weren't for speculators you'd see drastic rises in prices as increases in future demand would not be offset by previous savings.
- entangld 16y ago
  I'm not against speculators. They are a useful part of the market. But let's not pretend they can't have a negative effect on society. People are anticipating water moving onto the commodities market. If water somehow surges, that's not good for the people at the bottom. Super high oil prices are bad for the world economy. It's advantageous for oil market traders but bad for everyone else.
  - dantheman 16y ago
    Of course if the price surges someone is hurt, but there are 2 outcomes: 1. If the price surges and it's due to improper speculation, then speculators will lose a lot of money - sure, people will be temporarily harmed, but it will be short term. 2. If the price surges and it's due to a good guess, then the surge is actually less than it would be in near future since people were able to increase the available supply, by reducing consumption due to higher price. -- unless I'm missing your point, which I very well may be.
    - entangld 16y ago
      What I'm saying is, on top, the speculator is playing with numbers. He wins some and loses some. But at the bottom, very high prices could squeeze workers into homelessness and poverty. Living check to check (business or person) leaves little room for large price swings in necessities.
      - cturner 16y ago
        The initial investors are motivated to invest by the possibility of higher prices later on. If there was no possibility of upside, they would not invest in the first place, meaning that it would be a given that nobody would have access to the resource. If government was to make a decision to intervene and strip away investors' upside just when they get one, investors will remember this, and be less motivated to invest in that market in the future. The uncertainty about it affects other parts of the system - someone who gets burnt on one product is likely to be jaded about investing in unrelated products in the same jurisdiction. It's important to look at the system as a whole. Speculators and short-sellers are net-positive on markets. If you take away their upside you'll remove them from the system entirely and everybody loses. It's important that we set rules for the game, and then honour them, except in situations where individuals do something outside of the principle of the rules, such as market manipulation. Further up, you're repeating a meme seen elsewhere in this thread about oil prices being determined by speculators. I'm not sure how you believe this, because I don't think the evidence leads to that conclusion. The price meanders about but the curve is supported by underlying demand. It's advantageous for oil market traders but bad for everyone else. How is it advantageous for oil market traders for the price to go up? Some will be short just as others are long, and there's no reason to believe there's more long guys than short guys. Higher oil prices are likely to be goood for oil producers, but I don't understand how come to the conclusions you come to about about speculators.
danssig 16y ago
>You have to store it Store what? Commodities are typically traded in futures.
- cturner 16y ago
  In order for a speculator to lift the price and sustain it, they'd need to actually take delivery of oil and remove it from the system. If they're exiting before the delivery date then they're not generating underlying demand, which means they can't sustain an impact on the price of the underlying. This thread was about speculators pushing prices higher, and I was outlining the only viable way where I saw that they could push prices higher, and then explaining why it didn't make sense as a business model.
  - danssig 16y ago
    >In order for a speculator to lift the price and sustain it, they'd need to actually take delivery of oil and remove it from the system. No, when they buy a commodity on futures they own that product. It is out of the market at that point. Further trading can't go on on oil that was bought on futures, it's been sold before it was produced. >This thread was about speculators pushing prices higher, and I was outlining the only viable way where I saw that they could push prices higher But this can be done via futures as it has been with Gold. There is more than 10 time more gold "owned" by people than actually exists.
    - cturner 16y ago
      It is out of the market at that point. I see one of two things will happen. Our fictional speculator either accepts delivery of the thing, in which case they have to warehouse it and take the stuff away from market. Or, they form a new contract and sell in order to get it off their books. Which will have the effect of increasing supply and depressing the price. But this can be done via futures as it has been with Gold. There is more than 10 time more gold "owned" by people than actually exists. Do you have a reference for this? With equities, when there's extra fractional-reserve style liquidity in the system due to shorting, you can tell because that info is available in Bloomberg. So if you see that there's more outstanding than exists, you could call bluff on the people with the outstanding positions. I'm not sure if the same is true with commodity contracts.

by cturner 16y ago

entangld 16y ago

>Usually when you see people blaming speculators it's someone trying to cover up ineptitude or corruption by picking an easy target.< I lived through the California energy crisis and there was no crisis. It was a gigantic manipulation. Videos of energy traders laughing their butts off at grandmothers dying of heatstroke. Oil doesn't need to jump into the hundreds every time someone screams in the Middle East. Analysts in every profession know the whims of their markets. Some of the movements are reality based, some are based on perceptions. Commodity trading (specifically oil) is highly profitable. It can be hacked by the people who know the ins and outs. They'll never tell you, but it can. Most everything can be hacked in some way. I highly doubt the few who are able to profit from the ignorance of millions will confess that some troubles in the Middle East don't significantly impact the supply chain. Or that the price of oil shouldn't jump as wildly as it does. Or even that the oil price seems to reflect the greed of traders chasing historical highs. Not buying it.

cturner 16y ago
I don't know about the Californian energy crisis, but maybe this is an example of a situation where the players are in alignment. Spikes in oil prices can be caused by panic in an industry. For example, if I ran an airliner maybe I'd seek to lock in fuel prices via forward trades. There's a risk I'd pay a high premium for the period, but I'd judge that as being bettter than the risk that I'd go out of business. And spikes can be caused by speculators. But my point was that in liquid markets things will revert to a mean that is backed by whatever the real demand is. Pushing prices up by buying and holding oil is not in itself a business model.
- danssig 16y ago
  >For example, if I ran an airliner maybe I'd seek to lock in fuel prices via forward trades. I was under the impression that airlines are already always buying fuel via futures regardless for planning purposes.
dantheman 16y ago
In california you had traders turning off power plants so that energy had to be purchased from other places at higher price. That is not speculating, that is blatant abuse and lack of properly written contracts. They exploited a loophole in a newly created market, this would eventually be fixed as the contracts would have provisions so that what they were doing would be prohobited.

praptak 16y ago

> You're suggesting that oil prices are high because of a conspiracy? Why a conspiracy? Traders do not have to collude for a bubble to occur - there's a positive feedback loop at work. Even if you're convinced that the prices are already far above the sustainable level, it may still be rational to buy - as long as you're convinced that you will sell at the right moment. It's a chicken race. If you sell too early, other traders will beat you by profiting from the last period of growth.

cturner 16y ago
If there was lots of oil sitting around in warehouses from people speculating on the price of it (or for another reason), I'd expect we'd hear about that in the news. We've been hearing this about copper being stockpiled in China recently. In this case it seems to be not for speculation but due to a loophole in bank lending rules.
- cabalamat 16y ago
  > If there was lots of oil sitting around in warehouses from people speculating on the price of it Maybe the oil was sitting in underground reservoirs? (i.e. people were extracting it more slowly)
  - dhruval 16y ago
    Haha. Yes, OPEC is basically a 40 year old global oil price fixing conspiracy.
    - deleted 16y ago
      [deleted]
- praptak 16y ago
  > If there was lots of oil sitting around in warehouses from people speculating on the price of it People who speculate on commodities do not actually have to physically keep them. The commodities just change ownership, but not location. Only the final buyer actually picks them up.

dantheman 16y ago

Another thing, is that speculators add stability to the market. They predict future demand, so they buy today - driving up the price, reducing use, and then sell tomorrow. If it weren't for speculators you'd see drastic rises in prices as increases in future demand would not be offset by previous savings.

entangld 16y ago
I'm not against speculators. They are a useful part of the market. But let's not pretend they can't have a negative effect on society. People are anticipating water moving onto the commodities market. If water somehow surges, that's not good for the people at the bottom. Super high oil prices are bad for the world economy. It's advantageous for oil market traders but bad for everyone else.
- dantheman 16y ago
  Of course if the price surges someone is hurt, but there are 2 outcomes: 1. If the price surges and it's due to improper speculation, then speculators will lose a lot of money - sure, people will be temporarily harmed, but it will be short term. 2. If the price surges and it's due to a good guess, then the surge is actually less than it would be in near future since people were able to increase the available supply, by reducing consumption due to higher price. -- unless I'm missing your point, which I very well may be.
  - entangld 16y ago
    What I'm saying is, on top, the speculator is playing with numbers. He wins some and loses some. But at the bottom, very high prices could squeeze workers into homelessness and poverty. Living check to check (business or person) leaves little room for large price swings in necessities.
    - cturner 16y ago
      The initial investors are motivated to invest by the possibility of higher prices later on. If there was no possibility of upside, they would not invest in the first place, meaning that it would be a given that nobody would have access to the resource. If government was to make a decision to intervene and strip away investors' upside just when they get one, investors will remember this, and be less motivated to invest in that market in the future. The uncertainty about it affects other parts of the system - someone who gets burnt on one product is likely to be jaded about investing in unrelated products in the same jurisdiction. It's important to look at the system as a whole. Speculators and short-sellers are net-positive on markets. If you take away their upside you'll remove them from the system entirely and everybody loses. It's important that we set rules for the game, and then honour them, except in situations where individuals do something outside of the principle of the rules, such as market manipulation. Further up, you're repeating a meme seen elsewhere in this thread about oil prices being determined by speculators. I'm not sure how you believe this, because I don't think the evidence leads to that conclusion. The price meanders about but the curve is supported by underlying demand. It's advantageous for oil market traders but bad for everyone else. How is it advantageous for oil market traders for the price to go up? Some will be short just as others are long, and there's no reason to believe there's more long guys than short guys. Higher oil prices are likely to be goood for oil producers, but I don't understand how come to the conclusions you come to about about speculators.

danssig 16y ago

>You have to store it Store what? Commodities are typically traded in futures.

cturner 16y ago
In order for a speculator to lift the price and sustain it, they'd need to actually take delivery of oil and remove it from the system. If they're exiting before the delivery date then they're not generating underlying demand, which means they can't sustain an impact on the price of the underlying. This thread was about speculators pushing prices higher, and I was outlining the only viable way where I saw that they could push prices higher, and then explaining why it didn't make sense as a business model.
- danssig 16y ago
  >In order for a speculator to lift the price and sustain it, they'd need to actually take delivery of oil and remove it from the system. No, when they buy a commodity on futures they own that product. It is out of the market at that point. Further trading can't go on on oil that was bought on futures, it's been sold before it was produced. >This thread was about speculators pushing prices higher, and I was outlining the only viable way where I saw that they could push prices higher But this can be done via futures as it has been with Gold. There is more than 10 time more gold "owned" by people than actually exists.
  - cturner 16y ago
    It is out of the market at that point. I see one of two things will happen. Our fictional speculator either accepts delivery of the thing, in which case they have to warehouse it and take the stuff away from market. Or, they form a new contract and sell in order to get it off their books. Which will have the effect of increasing supply and depressing the price. But this can be done via futures as it has been with Gold. There is more than 10 time more gold "owned" by people than actually exists. Do you have a reference for this? With equities, when there's extra fractional-reserve style liquidity in the system due to shorting, you can tell because that info is available in Bloomberg. So if you see that there's more outstanding than exists, you could call bluff on the people with the outstanding positions. I'm not sure if the same is true with commodity contracts.