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is it really worth it?
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is it really worth it?

  #11 (permalink)
Fortitudo et Honor
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Fat Tails View Post
Hi RM99,

I really love your post.

Basically you are saying that small speculators add liquidity without moving price, because they follow random strategies. I think this is true. I have watched the positions of the Small Traders in the COT reports, and although some experts suggest to fade them, as they tend to be on the wrong side of the market, I personally think it is best to ignore them altogether. I just watch the positions of the large speculators, commercials and swap dealers.

You are also commenting the fuel prices. The relationship between crude prices and gas prices at the pump, is highly dependent on refining margins and storage capacity.

If you look at refining margins, you will find that they are depressed. This shows that refiners are currently not able to pass on the price increase in crude oil to consumers. They are suffering from the scissors effect. This can also explains the lack of elasticity. With negative refining margins, even the last refinery is incurring losses, so they need to rise prices instantly, without being able to better their position. Of course, when crude prices are falling, they will try to maintain higher prices for refined products, but this is a prisoner's dilemma type situation. You can be sure that one of them will defect to gain a temporary advantage. You can check current refining margins here:

Refinery

Also you really overestimate the impact of OPEC on oil prices. It is not an OPEC decision that has driven crude prices, but the fear of a disruption in supplies following the recent political upheavals in Middle East. Libya is one of the main suppliers to Europe, and as you can see below, this has had a larger impact on Brent than WTI prices. The WTI/Brent spread is now near record lows, as Brent trades around $ 12/bbl higher than WTI (see chart attached).

Thanks,

I understand that it's fear, anticipation and speculation that drive the prices, but the underlying reality that helps the frenzy is manipulation in the market.

Just as you stated with elevated prices and downward pressure with refiners, OPEC has a significant stranglehold on supplies, which provides the consumer with market uncertainty.

Imagine if there were no OPEC during the fiasco in Lybia. With no OPEC, oil exporters who had additional capacity could/would try to increase output, to take advantage of the better prices. As soon as they did that, obviously it would provide downward pressure on price as there would be an uptick in supply.

If you look at the last 2 times that we've released SOR (under Clinton and Bush) prices fell significantly and almost immediately.

In a truly free world oil market, not only would we not see such drastic swings, but we'd see those swings abbreviated.

As it stands now, OPEC doesn't increase supplies without significant external pressures. It wasn't until there was significant international and diplomatic pressure that they helped to ease prices when we were seeing $4/gallon gas right before the brunt of the recession.

OPEC's response is always the same "We'll respond when there's an actual shortage" however, like I said, that's a fallacy, because all the members collectively do what's in the best interests of OPEC, not themselves. Under a free market, the ones who could take advantage of the higher prices would and that would help self correct the speculation, anticipation and outright gambling that happens.

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  #12 (permalink)
Fortitudo et Honor
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It's also noteworthy and interesting that we export more food than any other nation, but manipulating food prices would seem criminal in the minds of not only a great deal of our own citizens, but the rest of the world.

I wonder how OPEC nations would respond if we had a static link to oil prices (rather than a natural elastic market link). I wonder when they're people began starving and paying crazy prices for grain if they would elect to go back to a more reasonable stance on oil exports.

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  #13 (permalink)
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RM99 View Post
Thanks,

I understand that it's fear, anticipation and speculation that drive the prices, but the underlying reality that helps the frenzy is manipulation in the market.

Just as you stated with elevated prices and downward pressure with refiners, OPEC has a significant stranglehold on supplies, which provides the consumer with market uncertainty.

Imagine if there were no OPEC during the fiasco in Lybia. With no OPEC, oil exporters who had additional capacity could/would try to increase output, to take advantage of the better prices. As soon as they did that, obviously it would provide downward pressure on price as there would be an uptick in supply.

If you look at the last 2 times that we've released SOR (under Clinton and Bush) prices fell significantly and almost immediately.

In a truly free world oil market, not only would we not see such drastic swings, but we'd see those swings abbreviated.

As it stands now, OPEC doesn't increase supplies without significant external pressures. It wasn't until there was significant international and diplomatic pressure that they helped to ease prices when we were seeing $4/gallon gas right before the brunt of the recession.

OPEC's response is always the same "We'll respond when there's an actual shortage" however, like I said, that's a fallacy, because all the members collectively do what's in the best interests of OPEC, not themselves. Under a free market, the ones who could take advantage of the higher prices would and that would help self correct the speculation, anticipation and outright gambling that happens.

OPEC only controls a minor portion of the world's oil. In my opinion SPECULATION is the problem here and you have to limit speculators. No more Goldman Sachs and other Huge Megafirm's having the ability to "HEDGE" in the oil and equities markets.

We need to remove the waiver these firms were granted and our politicians need to stop being so darn corrupt in letting these scum bags get these waivers. The futures markets were intended for HEDGING and speculation limits are here for a reason and they should be the same for all players including market manipulators like Goldman etc...

SPECULATION is good as it adds volume to the markets, but only lots of LITTLE ONE's. If we continue to allow waivers to the BIG firms who can buy/sell unlimited amounts of futures then we will have created a normal market but disabling the 'common' investors with limits. Until we roll back those waivers, we will continue to see this problem.

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  #14 (permalink)
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RM99 View Post
Imagine if there were no OPEC during the fiasco in Lybia. With no OPEC, oil exporters who had additional capacity could/would try to increase output, to take advantage of the better prices. As soon as they did that, obviously it would provide downward pressure on price as there would be an uptick in supply.

Absolutely.

Influential members of Opec, the oil cartel, are joining Saudi Arabia in raising output to cool soaring prices and allay fears of a supply crunch in the west, writes the FT. The behind-the-scenes move by Kuwait, the United Arab Emirates and Nigeria reflects growing unease among Opec members over the threat to the global economic recovery from crude’s runaway rise amid the worsening crisis in Libya. US oil prices increased to their highest levels since September 2008 on Monday, trading at an intraday high of $106.95 a barrel, as Brent, the European benchmark, hit a session high of $118.50. Gold jumped to a fresh record of $1,444 an ounce. Industry officials said the production increase, expected by early April, would – together with an earlier rise by Saudi Arabia – almost make up the shortfall in supply from falling Libyan crude exports.

Source: Financial Times March 8, 05:45 GMT

Oil prices are not driven by OPEC for several reasons.

-> OPEC controls only about 44% of the current crude production
-> There is a mutual dependency between oil producers and importers

It is also not true that oil prices are driven by physical supply and demand. Prices are driven by expectations. Further crude is used as a hedge against a weakening dollar. If I look at the COT report published last Tuesday, the main driver behind long positions is Managed Money - my humble opinion reflecting trend following approaches. The commercials, which are assumed to have offsetting positions in the physical market (oil producers and airlines), have a significant short position, so I doubt that the physical markets or OPEC are driving up prices.

What about Quantitative Easing 2 and the dollar devaluation, doesn't this raise fears of inflation? What about the Japanese earth quake, don't you expect the Japanese to sell some of their US treasury holdings to finance the reconstruction of industry and housing in affected areas? With US debt rising - debt levels in the EU as a percentage of GDP are far below US debt levels - and a weak dollar more money will flow into commodities. Add to this the current political instability in Nigeria, the Emirates and Libya and you have an explanation why crude prices have risen.

To blame the OPEC for Quantitative Easing 2 and political unrest in the Arab World has nothing to do with reality.

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  #15 (permalink)
Fortitudo et Honor
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OPEC controls 44% which IS significant and you're missing the point. SPECULATION is based upon anticipated supply/demand. Furthermore, even though a nation like the US is the 3rd largest producer, we consume much more than we produce.

China and the US, the 2 largest economies and consumers, depend heavily on external supplies, that is where OPEC comes in.

There's speculation in virtually any market, but free systems help stave off huge swings.

Here's an easier way to think about it.

Debeers was able to manipulate diamond prices for years through restricted supply. When a competitor entered the market and tried to undercut them, they flooded the market with diamonds and drove the price so low, it ran their competitors out of business, then, they simply pulled back the supply again until prices reached a level of their choosing. Debeers had WAREHOUSES of diamonds and the prices were way higher than a free system would allow.

Oil obviously is a little different in that we don't have oil shortages, but harvesting shortages.....like subscribers on a water distribution system, if everyone increases consumption all at once, there's a shortage (even though there's plenty of water, just not plenty of delivery).

Again, one only need look at how the last 2 Presidents have released Strategic Oil Reserves and how that had an immediate downward effect on crude prices. IF, OPEC was to be busted up, then individual members would/could take advantage of higher prices through any excess capacity they had.

Just mentioning that they would increase supply eased speculation....and for OPEC that's rare. Speculation only works as long as the physical reality allows it to......and again, the more free and competitive the market, the more able it is to accomodate/dampen speculation (demand) through increases and decreases in supply.

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  #16 (permalink)
Fortitudo et Honor
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Fat Tails View Post
Absolutely.

Influential members of Opec, the oil cartel, are joining Saudi Arabia in raising output to cool soaring prices and allay fears of a supply crunch in the west, writes the FT. The behind-the-scenes move by Kuwait, the United Arab Emirates and Nigeria reflects growing unease among Opec members over the threat to the global economic recovery from crude’s runaway rise amid the worsening crisis in Libya. US oil prices increased to their highest levels since September 2008 on Monday, trading at an intraday high of $106.95 a barrel, as Brent, the European benchmark, hit a session high of $118.50. Gold jumped to a fresh record of $1,444 an ounce. Industry officials said the production increase, expected by early April, would – together with an earlier rise by Saudi Arabia – almost make up the shortfall in supply from falling Libyan crude exports.

Source: Financial Times March 8, 05:45 GMT

Oil prices are not driven by OPEC for several reasons.

-> OPEC controls only about 44% of the current crude production
-> There is a mutual dependency between oil producers and importers

It is also not true that oil prices are driven by physical supply and demand. Prices are driven by expectations. Further crude is used as a hedge against a weakening dollar. If I look at the COT report published last Tuesday, the main driver behind long positions is Managed Money - my humble opinion reflecting trend following approaches. The commercials, which are assumed to have offsetting positions in the physical market (oil producers and airlines), have a significant short position, so I doubt that the physical markets or OPEC are driving up prices.

What about Quantitative Easing 2 and the dollar devaluation, doesn't this raise fears of inflation? What about the Japanese earth quake, don't you expect the Japanese to sell some of their US treasury holdings to finance the reconstruction of industry and housing in affected areas? With US debt rising - debt levels in the EU as a percentage of GDP are far below US debt levels - and a weak dollar more money will flow into commodities. Add to this the current political instability in Nigeria, the Emirates and Libya and you have an explanation why crude prices have risen.

To blame the OPEC for Quantitative Easing 2 and political unrest in the Arab World has nothing to do with reality.

I'm not blaming OPEC for all the price increases, you are correct...QE is definitely to blame for anticipated inflation, I'm simply talking about the recent events in Egypt and Lybia...where we saw oil skyrocket.

Go further back to last year when the BP Gulf disaster was ongoing, we saw a huge increase in price on worry/speculation.

Under a free market, individual firms that have an ability to take advantage of increased profit margins through increasing output....do. And as soon as the collective of firms do that, it adds excess supply (to an already properly supplied market) and then price trends downward.

in a manipulated market, when price goes up, individual firms that COULD take advantage...do not...they band arms with the others and collectively, they all enjoy higher margins at the same/similar outputs.

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  #17 (permalink)
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RM99 View Post
I'm not blaming OPEC for all the price increases, you are correct...QE is definitely to blame for anticipated inflation, I'm simply talking about the recent events in Egypt and Lybia...where we saw oil skyrocket.

Go further back to last year when the BP Gulf disaster was ongoing, we saw a huge increase in price on worry/speculation.

Under a free market, individual firms that have an ability to take advantage of increased profit margins through increasing output....do. And as soon as the collective of firms do that, it adds excess supply (to an already properly supplied market) and then price trends downward.

in a manipulated market, when price goes up, individual firms that COULD take advantage...do not...they band arms with the others and collectively, they all enjoy higher margins at the same/similar outputs.

The crude oil market is difficult to manipulate, there are too many actors. Also it is not always the interest of these actors to maximize their revenues in the short term. Some producing countries such as Saudi Arabia and the Emirates counterbalance price increases as they are more interested in a longer term relationship with their allies. This includes fears on security.

Crude prices are driven by the futures market and not by physical demand and supply. The crude oil spike in 2008 was not a result of any action taken by OPEC, but rather a cyclical occurrence. Commodities tend to spike about 6 to 8 months after the stock market peaked. This cyclical relationship is well explained by John Murphy in his classic on Intermarket Analysis. The main driver for commodities is money that left the stock market and cannot move into bond as interest rates are gradually moving up this creating an unfavorable environment for bond holders. What we saw was a buying frenzy driven by speculators, not the wicked manipulation of OPEC. This is a fairy tale.

The crude oil market is basically too large to be manipulated single-handedly. The OPEC cartel never worked effectively, as most of the member breached their quota whenever possible - which is what game theory predicts, as it is a situation where you can gain from defection.

If you look for manipulation of physical markets you may look to refined products in those areas of the world, where one company has a significant regional market share, allowing them to artificially inflate prices. But even there the situation will only last fro a few days, which is exactly as long as it takes to ship the stuff from another continent.

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  #18 (permalink)
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RM99 View Post
It's also noteworthy and interesting that we export more food than any other nation, but manipulating food prices would seem criminal in the minds of not only a great deal of our own citizens, but the rest of the world.

I wonder how OPEC nations would respond if we had a static link to oil prices (rather than a natural elastic market link). I wonder when they're people began starving and paying crazy prices for grain if they would elect to go back to a more reasonable stance on oil exports.

Food prices are more heavily manipulated than prices of any other commodities. Just try to figure out which part of the US and European (!) budgets are dedicated to subsidizing farmers.

48% of the budget of the European Union - these 48% amounting to about € 50 billion - is spent on agricultural subsidies and programs. This money is basically used to distort the free markets and creates significant oversupply. The consequences are felt in the whole world, as local producers in Africa and Latin America cannot compete with the prices of food imported from the EU (have a look at milk and sugar prices).

I am aware that the situation is much worse in the European Union compared to the US, as least if we are talking about food. But don't tell me that food prices are not manipulated.

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  #19 (permalink)
Fortitudo et Honor
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All I'm saying is that for speculation to have significant effects, it's a sign of a manipulated market.

Imagine if we established an Organization for Food Exporting Countries (OFEC) and what it would do to food prices.

You say that OPEC members defect and act independently, which is may be true PART of the time. In a free market, that would be true 100% of the time.

Physical supply and reserve quantities does have an effect on futures and again, it's exactly how the last 2 times the SOR was released, we saw a significant drop in price. (even if the SOR was symbolic, it's semantics, a free market would allow much more fluid counter sentiment to the market and stave off speculative swings).

OPEC gets a free ticket, because people don't consider it criminal to manipulate oil. If we did the same thing with food exports, the world would go bonkers.

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  #20 (permalink)
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Do Speculators Drive Crude Oil Futures Prices? The Role of Speculators in the Crude


Abstract:
The coincident rise in crude oil prices and increased number of financial participants in the crude oil futures market from 2000-2008 has led to allegations that “speculators” drive crude oil prices. As crude oil futures peaked at $147/bbl in July 2008, the role of speculators came under heated debate. In this paper, we employ unique data from the U.S. Commodity Futures Trading Commission (CFTC) to test the relation between crude oil prices and the trading positions of various types of traders in the crude oil futures market. We employ Granger Causality tests to analyze lead and lag relations between price and position data at daily and multiple day intervals. We find little evidence that hedge funds and other non-commercial (speculator) position changes Granger-cause price changes; the results instead suggest that price changes precede their position changes.

Is Speculation Destabilizing?
Abstract:
The possibility that speculative trading destabilizes or creates a volatile market is frequently debated. To test the hypothesis that speculative trading is destabilizing we employ a unique dataset from the U.S. Commodity Futures Trading Commission (CFTC) on individual positions of speculators. While others have used a more aggregated version of our data, here we test, for the first known time, whether speculators cause, in a forecasting sense, price movements and volatility in futures markets and, therefore, destabilize markets. Our findings provide evidence that speculative trading in futures markets is not destabilizing. In particular, speculative trading activity reduces volatility levels.

Fundamentals, Trader Activity and Derivative Pricing
Abstract:
We identify and explain a structural change in the relation between crude oil futures prices across contract maturities. As recently as 2001, near- and long-dated futures were priced as though traded in segmented markets. In 2002, however, the prices of one-year futures started to move more in sync with the price of the nearby contract. Since mid-2004, the prices of both the one-year-out and the two-year-out futures have been cointegrated with the nearby price. We link this transformation to changes in fundamentals, as well as to sea changes in the maturity structure and trader composition of futures market activity. In particular, we utilize a unique dataset of individual trader positions in exchange-traded crude oil options and futures to show that increased market activity by commodity swap dealers, and by hedge funds and other financial traders, has helped link crude oil futures prices at different maturities.





Here is the website I read from time to time. Bahattin Buyuksahin's Website

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