The so called speculators are mainly long only index fonds, as your own contribution clearly showed. Please notice that behind those funds are individual investors. For these it makes absolutely sense to invest in such funds:
-> irresponsible policies have led to an exponential increase in government debt, which for sure will first lead to inflation, then to higher interest rates, which are required to control inflation
-> given this perspective and the supply of liquidity a careful investor can neither invest into government bonds nor stocks, which will be negatively affected by higher interest rates
-> my home is heated with heating oil, my car uses gasoline, so I understand that many individual investors select to invest into commodities, because tomorrow they will have to buy their heating oil and gasoline at higher prices
Of course they do not want to take delivery. But they may want to hedge their own exposure to inflation via investment into a long only index fund. The high rolling cost induced by the Cushing Contango penalizes those individual investors. Just compare the return of the USO fund with the evolution of real prices of WTI.
Last edited by Fat Tails; April 8th, 2011 at 12:07 PM.
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yes I do agree that the rollover issues are mainly caused by those funds. and I do understand the urge for some people to hedge the higher heating bill or the higher cost at the gas pump. but does it serve the purpose? not really, because you're trying to compensate your higher energy costs by buying (which will put more pressure on the underlying ) the exact same thing that is causing the problem in the first place.
and of course I understand that people want to invest in something resistant to inflation. but there are other ways to do that. you could always buy funds or stocks that are involved in the oil or gas industry. might be more work involved, but on the other hand you could eliminate some rather high management fees.
either way, I do believe the biggest part of the daily volume is created by "pure speculators" and not by funds.
Maybe, but those intraday speculators close out their long and short positions every day, so unlike long only index funds they are not causing any trouble, as they do not hold large positions, which they need to roll.
If you want to discuss the issue seriously you need to have a look at the COT figures as well. The
The last COT report from March 22 shows the following positions for Light Sweet Crude
Commercials: Long 193,560 - Short 429,057
Swap Dealers: Long 219,886 - Short 288,349 - Spreading 242,571
Managed Money: Long 281,134 - Short 28,916 - Spreading 167,819
Other Reportables: Long 101,606 - Short 100,096 - 190,251
Non-Reportables: Long 106,807 - Short 56,555
Let us have a look, who is net long and who is net short:
The commercials are net short 235,497 contracts.
The swap dealers are net short 68,463 contracts.
Managed money is net long 252,218 contracts.
Small traders are net long 50,252 contracts.
This is a typical situation. Producers are structurally short, as they need speculators to take the opposite side of their trade. I do not know, why the swap dealers are short, this would require further analysis.
Oil prices are quite high now, so the producers are happy to sell forward, which explains their short position. Producers behave anticyclical, they dampen price swings. Managed money traditional uses trend following strategies. So their are currently long. Prices will only drop, when they rush to the extis. So far this is nothing unusual. To further interpret the figures, we need to know, whether the current positions of the four groups are currently different from their relative average.
The COT reports were recently changed, they now include figures for swap dealers and managed money. which makes it difficult to compare the current COT reports to the old format.
Speculators like myself are to blame. When the news of the Libyan civil war broke I immediately bought oil. Many others did the same. The 2.2% figure is really not that high and not really worth the $15 premium. But with so many traders out there blindly trading the contracts what's one to do?
so here's my proposal to the U.S. Government. but should add, it wouldn't be the first time they don't listen to me.
start shorting crude oil. a good price target would be around $70.00 a barrel. since crude has little or nothing to do with fundamentals, that should be doable without any major issues. and then below $70.00 you start covering your shorts and above $70.00 you sell again.
not only would we see lower prices for everything that needs oil, it would also take off a lot of pressure on inflation in general. and not to forget a significant reduce of the U.S. debts.
If the US government starts shorting crude this will increase the exposure of the US to crude price fluctuation. When crude prices rise this will have a negative impact on the US trade balance and - taking into account the short position - the federal budget as well. So it increases dependency from crude prices.
It also means the end of free markets, if governments try to manipulate them.
There is also a risk that speculators will drive prices up, until the US government finally abandons their short position. If their is one big trader trying to corner the market, the vultures are watching and waiting until that big traders has to liquidate. This is what killed LTCM and Amaranth, as the exits were already crowded when they had to liquidate.
Inflation is not a result of rising oil prices, but of
- recklessness and selfishness
- failed monetary policies that have flooded the whole world with US dollars
The government just needs to stop printing money, and the oil price will decline.
- rising oil prices have a big impact on inflation. simple example is the higher cost of bread and milk.
- the U.S. Government should be able to hold the breath longer than a LTCM. and the more speculators try to drive prices up with no success, the faster it will come down because at one point they'll have to close their long positions (they can't print money like others).