I think that's exactly what I said. Whether it's an airline trying to lock in at a lower cost (to reduce operating costs) or the speculator who's trying to make a $, both aren't buying based on the current physical reality, both are buying based on sentiment and anticipation and both are "speculating" that the price will increase. Whether it actually does or not, remains to be seen. That's why it's called speculation.
My point was the although both the business owner/consumer and speculator are both buying and selling based on forecasts and analysis and speculation, it's the "speculator" that gets a bad reputation or seen as evil/no honor.
If you alter a purchase/sale decision at all based on anticipation, you are in essence, speculating. The person that buys a home NOW (instead of continuing to shop) because they're speculating that the market has reach bottom (and prices will increase) is speculating. There's no way to know. Very few people who operate a business or make large purchases do so strictly on a current basis.
There's only a certain percentage of currency transactions(vacationers and travelers) who actually exchange currency based on immediate/current needs. Banks, businesses, companies all make currency transactions based upon some sort of analysis....which is called speculation...
nope, you are still placing two completely different things under the same umbrella.... speculating is all about profiting from information... a business hedges to smooth operating costs arising from their raw materials and business processes that might depend on a given variable(currencies, oil, natgas, grains, milk, metals, etc) ... their primary goal is not speculating as to the direction of the raw material, but to ensure stable prices...
and speculators are only getting a bad rap because congress/senate needs a escape goat to point the finger to when it comes to inflation and rising costs... never mind that they flooded the markets with currency and that they esentially subsidized the banking/financial sectors with taxpayers funds...
Buying now because you think prices will increase is not hedging, it's speculating.
Buying an option in both directions (where you can lose a little bit of money on the cancelled option, but save a lot on the purchased option) is hedging. "Hedge your bet" and the term hedge refers to strategies trying to limit your risk if your theory is wrong. In a sense, you could call speculation hedging, but in it's purest form, hedging requires you to take an opposite position in either another market or vehicle, thus locking in your risk, if one loses, the other wins and offsets. Buying roofing materials now because you think prices will increase is only a hedge if you're able to sell "future" roofing contracts immediately to use them, otherwise if the price stays current, you lost the money for tied up capital, storage, etc if you can't use them.
BOTH are speculative. you need to look up the term speculation or speculative in the dictionary (not investopedia). In it's purest sense speculation is supposition about the future or unknown/unverifiable events.
1. a. Contemplation or consideration of a subject; meditation. b. A conclusion, opinion, or theory reached by conjecture. c. Reasoning based on inconclusive evidence; conjecture or supposition.
2. a. Engagement in risky business transactions on the chance of quick or considerable profit. b. A commercial or financial transaction involving speculation.
Anyone who makes a business decision based upon anticipation is "speculating."
It's making a decision or statement without facts.
So when an airline sees what's going on in Lybia/Egypt and some smarty types think that the price of oil is likely to go up, they "speculate" and purchase more oil than they need now....anticipating future costs...which adds upward pressure to the market. It's a different motivation (trying to save a $ instead of make of the resale) but the effects upon the market are the same....more contract orders and upward pressure on price.
We're def talking semantics, but here's why I think we're talking apples/oranges. We both agree on what a "typical" sense of a speculator is.
I agree with you that buying or locking in with a futures contract is hedging, but I'm not talking about that, I'm talking about the airline that decides...."hey, if we buy at $100, NOW (or the nearest future contract), and the price goes up, we'll come out ahead....all we have to do is rent or build storage capacity to keep it till then." Although they're not buying it with the intent on making a $, they're buying it (immediate) with the intent on saving a $ or reducing future anticipated operating costs.
A true "hedge" in oil would involve buying 1 contract of WTI and shorting 1 contract of Brent. That way, if oil goes up, you sell the WTI at a profit, pay the loss on the Brent and you're only out the fees/commissions (and any spread changes between the two). If the price goes down, you flip the scenario. It's very similar to an option hedge strategy.
The real cost/risk to a true hedger is if the price does nothing, cause you're still out the fees (or vig in sports betting).
An example in sports betting is to bet a 2 game parlay where you have a fairly good idea about the first game...if/when you win the first game, you can then "hedge" your bet to your liking by betting in the opposite direction on the second game...that way, if you win, you at least win some money and if you lose, you only end up losing the vig.
In order to be a true "hedge" there needs to be an opposite transaction in a competiting manner which ensures that no matter what outcome, your pain in minimized.
Even buying/locking in futures prices now is speculative, cause if the price goes down, you're out both the loss in value AND tying up the capital(interest/opportunity cost) till the expiration/delivery.
I guess we are looking at different dictionaries, so let's just leave it at that..
as to the Middle East and Airlines..
Lybia's Oil production was down by 75% over over 1MM bbl/d ... before the US "intervened" ... they used to represent about 5% of total OPEC Exporting production... if the unrest spreads to Iran (15% or 4MM bbl/d) the remainder OPEC members wont be able to quickly enough ramp up production to supplement the 5MM+ bbl/d that would be impacted...
The US alone consumes close to 20MM bbl/d... with China and Japan following closely... so you have the worlds largest economies depending on that production to meets the needs of their respective populations and that of the rest of the world that consume their products...
we all know OPEC is only a component of overall world oil production, but OPEC members are the largest exporters of oil; but lets assume that Russia/Norway/Canada/Mexico can maintain demand... there will still be an issue with ramping up...
now, I dont know how much you know about crude but Jet Fuel is not the only resulting product of the combination of one of the petroleum distillates that is used in our economy.. you have so many different things that are interwined on our industries that depend on crude that it is embedded on pretty much everything around us..
as a result any business using crude distillates byproducts will hedge their raw materials... not speculate... and offset the risk to their business operations as soon as there is the possibility of any impact to the fundamentals on the crude oil market... simple supply and demand... fundamental change: decrease in supply, translates to higher prices as the demand has not changed..
USA might intervene and open their reserves, but that is only a short term measure to offer relief to actually prevent speculators from profiting too much from a fundamental change.
anyhow, just my opinion.. I dont track crude.. but I do pay attention to it as it impacts all markets.
Again, I see buying at a price now because you're anticipating a price increase as speculation, regardless of your motives.
I see selling an equal amount of BZ for every CL you buy as a true "hedge" thereby locking in the price and hedging your risk regardless of whether it goes up or down. THAT is a true hedge. The real risk to a true hedge is if it does nothing at all (i.e. you lost money trying to eliminate risk that wasn't there).
you assume there has to be a transaction on both sides... but what if you are hedging against your current inventory...
you have storage for X @ $100 lets say... and you need $105 before your profit margin start suffering and you have to raise prices... crude is at $103.... so you hedge your current costs from going higher locking your price at $105 let say...
pick another example..
Coke, they hedge their raw materials for their cans... it is all based on what inventory they have and what produdction requirements they have, as well as what fundamental changes they are foreseeing within the market.
as to the WTI/BRN... isnt that an inter-exchange spread? I started trading spreads lately, and I am focusing mainly on index spreads while I learn more about them... so take the last comment with a grain of salt..
Last edited by sysot1t; March 22nd, 2011 at 12:14 AM.