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

  #1 (permalink)
Market Wizard
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is it really worth it?

this is for CL traders. sorry for the bad (google) translation. just hope everybody trading CL understands the consequences that are involved.



gamers are to blame for the oil crisis!




The fuel prices blow from high to high, and everywhere is a guilty looking. Currently, it is easy to blame North Africa as a price driver identify the. But is it really that easy?


Definitely not. Libya, with just 2 percent to world oil production. Even if oil supplies from Libya would fail completely, it would be easy for other oil-producing countries - especially Saudi Arabia - to fill this gap. To date, nowhere is an oil tanker had not been supplied and there is no refinery was shut down for lack of oil supplies.


From an oil shortage can therefore be no question at all. Why then the price rises to new highs every day?


The explanation is already - as in the exploding food prices - for the speculators. The price of oil, the oil producers are selling a black gold to a refinery, is based on the price of the futures exchanges. Here transactions are concluded on the future.


It may well be useful today to negotiate a set price for a lot of oil in a few months. So both sides calculate their businesses better. But this legitimate interest today makes less than 10 percent of the revenue from in these futures markets.


Over 90 percent of businesses are pure bets by speculators.


You bet that oil will be more expensive tomorrow than today and therefore buy oil contracts on the futures exchanges without an interest to ever get oil delivered. Thus, naturally rises through the purchases of speculators, the price of oil right after the top.


In recent months, especially a lot of speculative money flowing into commodities. The investors do not trust the government bond no more and invest their money in "real values". That is the reason for the skyrocketing prices of food, copper, iron, and just as oil.




Each argument is then legally to justify further price rises. Here come the turmoil in North Africa just right and attract additional stakes in the oil market.


What excesses can still accept it is still completely open. The oil and thus the price of petrol can in a whole new level vanish, but it can also break down completely within a few weeks in itself.


Exactly what has happened once before in 2008. The barrel of oil climbed speculation driven in a short time to over U.S. $ 140. The arguments then were much like today. Sometimes there are hurricanes, sometimes attacks on Nigerian pipelines, other times the huge demand from China.


But then oil prices collapsed in a very short time to as little as $ 40. What had happened?


The speculators had resolved their bets. The global economy is threatened by these massive price escapades and negligence. A few years ago, when oil prices averaged U.S. $ 32 was, said the economists ". The price of oil should ever rise above U.S. $ 60 per barrel, would be the collapse of the global economy," We now are well over $ 100, and the consequences are not yet clear.


There are starving children because gamers drive up food prices, the global economy will once again slipping into recession because the same gamers play on the oil market. When the politicians finally realize that it is high time to curb the excessive speculation.


Not speculation per se is bad, but the magnitude that it has adopted. Real offer from producers, and real demand from consumers should determine prices. Not bets. If the football betting the gambler determine the result, is the prosecutor. If betting on the stock market determine the development of the real economy, obviously no one cares.

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  #2 (permalink)
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Hi Silvester17,

first of all, thank you for your contribution. It is highly relevant to this trading site, and it is good that you have the courage to post your opinion.

Basically you blame speculators for price peaks, which is not entirely false. I am willing to participate in this discussion with an open outcome, as your position is well-founded, but the opposite position can be justified as well. So let us first gather some arguments in favor and against speculators.


Speculators are needed for the following reasons:

(1) They provide liquidity to liquidity seekers they are willing to take a risk as the counterpart of commercial participants in the markets, who need to hedge physical positions, as they are willing to take the opposite side of the bet. Speculators thus contribute to liquid markets.

(2) Speculators identify instruments in the market, which are underpriced or overpriced, so they bring up to the surface what is brewing underneath. You may also qualify them as vultures, they clean up the markets from the wrong doings of governments, institutions and bank as their greed makes them identify future imbalances. This assumes that speculators can contribute to defuse bubbles buy making them burst early.


However, speculators are not contributing to common wealth:

(3) Speculators often lack means and the financial power to engage in arbitrage trades that would stabilize the markets, so their rational behavior is to participate in Keynes' beauty contest, selecting the girl who they think will get the highest number of votes instead of selecting the prettiest girl. This is rational behavior: You go long an instrument - for example crude oil - because you anticipate that others will buy, not because you think that it is fundamentally undervalued. Under the known label of trend following this contributes to inflating bubbles, which will necessarily burst in the end. Your position is that speculators actually exacerbate the bubble inflating game. To deal with this we have to look into history and take some specific examples.

(4) If a small number of speculators can be considered useful and even stabilize the market, a large number of speculators can contribute to destabilizing markets, and their marginal contribution to common wealth is at least doubtful. To deal with this argument, we need to gather some figures, particularly from the CFTC, who publishes the weekly COT reports.

(5) Speculating can be considered as modern form of educated gambling. If everybody was a gambler, nobody would be left to do the real work. So this argument takes us into game theory. Essentially gaming is non-cooperative behavior. The gamer defects to generate an individual advantage ta the expense of the commons. This is very much like the car driver who uses his large pick-up truck to drive to work instead of using public transport. He gains in individual comfort, but the overall contribution of his doings is negative. +1000 points for him and -1 point for each of the 5,000 inhabitants of his town. This is called moral hazard: I win, you lose. To deal with this argument, game theory is needed.


Three Central Questions

To make things simple, things can be boiled down to three central questions

- Are speculators needed to facilitate liquid markets?
- Do speculators rather stabilize or destabilize markets?
- Does the purpose justify the number of speculators that participate in today's markets?

Let us slowly continue with this, the questions are not new, and nobody will care about our opinion, so we can take our time.


Last edited by Fat Tails; March 11th, 2011 at 06:15 PM.
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  #3 (permalink)
Market Wizard
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Hi Fat Tails,


Didn't think anybody would reply. But then you show up with just another brilliant post. Thank you.


I do believe speculators are needed in today's markets. But not in all markets. Definitively yes in financial markets. Maybe less in commodities like corn, soybeans, sugar etc. and of course crude oil.


There's just too much risk involved of causing harm to many people already in need. Of course I understand there's no ethic in trading.


You have to wonder when you read: ES is going up, maybe I should short CL. Unfortunately in certain market conditions it makes perfect sense. But think about it, shorting oil because of stock index futures? The other way around would be a different story.


What I would like to see are some more regulations in day trading for some instruments.

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  #4 (permalink)
Big game hunter
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I saw first hand what soaring comm prices do to the less fortunate . In mexico there was a shortage of tortillas and the police were outside every store and market because people were going wild. Corn is a staple item there and a critical part of these peoples diet .The thirst for ethanol as an alternative fuel drove corn prices and supplies out of reach for these people . Where I am everyone has multiple cars and the highways are a mess every day so the demand for gas is obvious but how many of us think of the repercussions of us fulfilling our wants .

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  #5 (permalink)
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Eric j View Post
I saw first hand what soaring comm prices do to the less fortunate . In mexico there was a shortage of tortillas and the police were outside every store and market because people were going wild. Corn is a staple item there and a critical part of these peoples diet .The thirst for ethanol as an alternative fuel drove corn prices and supplies out of reach for these people . Where I am everyone has multiple cars and the highways are a mess every day so the demand for gas is obvious but how many of us think of the repercussions of us fulfilling our wants .


I agree with this to some extent....I also recognize the demand for ethanol is spurned by the corn lobby trying to the world governments and particular the US to force ethanol into cars....when every one knows it takes more energy to produce the ethanol in the first place than to just put gasoline in the cars......once again, government, special interest and corruption triumph over the good of the people......just my two cents worth.

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  #6 (permalink)
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Biofuels


aztrader9 View Post
I agree with this to some extent....I also recognize the demand for ethanol is spurned by the corn lobby trying to the world governments and particular the US to force ethanol into cars....when every one knows it takes more energy to produce the ethanol in the first place than to just put gasoline in the cars......once again, government, special interest and corruption triumph over the good of the people......just my two cents worth.

This is not directly related to the subject of the thread, but to be honest, I cannot refrain myself from posting a comment on this.

I have done some research on land-grown biofuels (as opposed to biofuels from algae), and without going into details here are some results:

(1) Germany: If you use 10% of the arable land for growing crops for fuels, which is about the maximum percentage that can be allotted, this will allow to replace about 10-15% of the German consumption of crude oil products. Moreover, the production of biofuels consumes a large part of the energy that can be retrieved by burning them and uses natural resources such as ground water.

(2) If you compare biofuels to solar energy and wind energy, the energy produced per square mile is less than 10%.

(3) As stated above the production of biofuels has a negative impact on food prices and will further contribute to put rare resources such as arable land and ground water under pressure.

(4) Biofuels are not competitive, unless there are special tax incentives.


Conclusions:

For most applications biofuels have a limited potential. There are some exceptions, however:

-> if biofuels are manufactured as co-products from crops
-> if crops for biofuels are grown on land that cannot be used for conventional crops (dry regions) in areas that do not have an industrial infrastructure to produce conventional fuels (for example, if you grow Iatropha Curca on the island of Flores, both conditions might be fulfilled)

For the US major effects can be obtained

-> by increasing fuel efficiency (a 100% gain is not unrealistic)
-> by substituting crude oil imports with US produced natural gas

So the impact of speculators on crude prices will be limited.

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Fat Tails View Post
- Do speculators rather stabilize or destabilize markets?

This is a very interesting philosophical discussion for traders.
The problem is speculators get the blame for volatility because thankfully we do not have to bother with a world without speculators.
This should be clear with CL of all things after Japan. Speculators have kept the price stable, shorting the "obvious" blast off after the Japan disaster in CL. Without speculators we would have a highly inefficient market that can not price things at all and we would get a huge jump in both short term volatility and boom/busts cyles.
The tax paid to good speculators is "worth it" because it is far far less than the flat out wrong pricing off goods/commodities/economic growth without.
Even if the financial crisis was caused by speculators it will be just a blip in global economic growth on a century time span that would not happen without speculators.
I do think you can go as far as that no one helps humans out more than financial speculators because they practically price the commodities all humans use but I don't feel like getting in that deep.

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  #8 (permalink)
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nothing new, but could get interesting

this is all old news. nevertheless worth knowing. especially after that panic selling, some of those high flyers might get pummeled and actually getting worse putting on your watch list.

of course penny stocks are very speculative, but with some great opportunities.

Penny Stock Specialist

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  #9 (permalink)
Fortitudo et Honor
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This is a great thread.

One thing that's not being addressed is the ratio of institutional or block trade speculators and individuals.

I agree that consolidation of speculation is harmful (in the short run) to the average outsider, but as pointed out, it's self correcting in the long run. The problem with that whole concept is that the more meager your means are, the less capable you are of weathering speculative price swings.

Secondly, the tiny speculator actually adds liquidity to the market, whereas the big houses are the ones that actually move the markets. Small speculators actually dampen the large swings (and provide price action) that the larger institutions create.

I agree with the administrations stance that it isn't time to release strategic reserves...why? Because no physical shortage exists, which is exactly why prices began to recoil and retrace.

In summary, the best way to explain it is that speculation adds volitility and range to a market, but in the long run, the outcome is smoothed out, resulting in unreasonable highs followed by just as big bursts.

The real problem is that the oil companies win. Used to be, when the price of oil went up, you didn't see an increase at the pump for several days/weeks. Now, it happens nearly instantly. The gasoline markets are much less elastic now. Problem is, when the price goes down, you don't see an decrease as timely as the increases.

The only way to combat this whole ordeal would be for us to pressure OPEC away from it's stranglehold on the market and have a SIGNIFICANT amount of oil in reserve to flood the market and drive price down during speculation.

Just like Debeers manipulates the diamond market, OPEC has an anti-competitive stranglehold on the world's oil market, which enables this speculationa and huge swings.

If there were no OPEC, the market would correct itself MUCH more quickly and speculation effects would be muted. Essentially, when the price went high, Nations like Saud would put their foot on the pedal of production to take profits, increasing supply which would drive prices down.

Between the lags in supply/demand, OPEC's monopolistic effects and modern speculation, we now have an oil market that's not only going to continue swinging from extreme to extreme, but tied directly to the growth and retraction of the world's economies.

As I said before, unfortunately for the poor/average person, they don't have the resources availalbe (storage tanks) to smooth out the highs and lows and it only takes a few months of ridiculous prices for them to hit bottom.

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  #10 (permalink)
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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).

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is it really worth it?-cl-weekly-_-bc-weekly-13_2006-11_2011.jpg  

Last edited by Fat Tails; March 19th, 2011 at 09:14 PM.
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