Moon of Alabama Brecht quote
August 21, 2008

No Speculation?

JIDDAH, Saudi Arabia (AP) — The U.S. energy secretary said Saturday that insufficient oil production, not financial speculation, was driving soaring crude prices.
[...]
"Market fundamentals show us that production has not kept pace with growing demand for oil, resulting in increasing prices and increasingly volatile prices," Bodman told reporters. "There is no evidence that we can find that speculators are driving futures prices" for oil.
Bodman: Insufficient oil production behind prices, USA Today, June 21, 2008

Of course there was no evidence available to prove speculation in the commodity markets. That was because the regulators simply never looked for evidence until pressure from some folks in Congress finally made them do something 'unusual':

The [Commodity Futures Trading Commission], which learned about the nature of Vitol's activities only after making an unusual request for data from the firm, now reports that financial firms speculating for their clients or for themselves account for about 81 percent of the oil contracts on NYMEX, a far bigger share than had previously been stated by the agency. That figure may rise in coming weeks as the CFTC checks the status of other big traders.
[...]
Using swap dealers as middlemen, investment funds have poured into the commodity markets, raising their holdings to $260 billion this year from $13 billion in 2003. During that same period, the price of crude oil rose unabated every year.
[...]
"Business is lousy right now," Bowie said of Goldman Sachs. "Commodities and currencies are clearly the strongest business they have right now."

Originally only people connected to commodities, producers and consumers like farms and airlines plus a few middlemen, were allowed big  trades at the commodity exchanges. In 1991 a loophole was created for a Goldman Sachs subsidiary. A second loophole was opened in 2000 with the Commodity Futures Modernization Act of 2000. A main sponsor for that law was Enron. Since then private, unregulated commodity trading platforms have opened in London and in Dubai.

Unless all these markets get regulated down to the original task of commodity exchanges by an entity that really does its job, the daily global cost of oil and food will depend on the morning mood of a few Wall Street traders.

Posted by b on August 21, 2008 at 16:19 UTC | Permalink

Comments

Laura Rozen has a bit more.

Posted by: D. Mathews | Aug 21 2008 16:58 utc | 1

The Free Market is a fine mechanism for balancing supply and demand and for helping direct the flow of capital to where it will do the most good.

But it is a lousy mechanism for distributing natural resources, espcecially those with inelastic demand and a strategic significance, i.e., oil and food.

Posted by: ralphieboy | Aug 21 2008 18:23 utc | 2

If the bastards could, and maybe in fact they will end up being able to, they'd reduce access to air to a commodity, payable, so to speak, online.

Lobbyists, of course, will supply politicians with ample amounts of hot air.

Posted by: Chuck Cliff | Aug 21 2008 19:40 utc | 3

But it is a lousy mechanism for distributing natural resources, espcecially those with inelastic demand and a strategic significance, i.e., oil and food.

energy demand , especially for petrol, is VERY elastic.

http://online.wsj.com/article/SB121868080892739561.html?mod=googlenews_wsj


Originally only people connected to commodities, producers and consumers like farms and airlines plus a few middlemen, were allowed big trades at the commodity exchanges.

Totally false. Pit locals are all 'middlemen' and most of them have never touched a drop of crude oil. Same with investment houses like J. Aron, Glencore, Phibro etc etc etc.

Speculation in crude oil is already measured by the cftc here:
http://www.cftc.gov/dea/options/deanymesof.htm

just add the 'long and short' side of the non commercial column. non commercial 'longs' total 50,000 contracts which is on the low side of long term averages.

Posted by: rbv | Aug 21 2008 20:30 utc | 4

The stuff in Laura Rozen's piece fits.
Just as an aside about Arkan and his group "Arkan's Tigers". They became notorious and feared throughout the Balkans in the time when gangsters held sway. He exclusively used Nissan Patrol SUVs as his means of transporting his marauding murderers, eventually the sight of a Nissan SUV would have any law abiding Balkan resident running for cover. Towards the end of Arkan's life, a tele journalist aquaintance who was working for one of the big trans-national tabloid news and current affairs shows, got sent to cover the war of the "unspellables versus the unprounceables" as it became known. Some local directed him to a torture house full of blood and body pieces. The journo decided to interview the neighbours as if this were suburban wherever back in the world. Finally he found an old lady with a little english prepared to talk. She said little other than a very fearful "Arkan's Tigers, it was Arkan's Tigers". Of course the journo couldn't let a claim such as that go untested so he said. "How do you know it was Arkan's Tigers?" She looked at him as though he came from another planet which I suppose he did, from another world anyway, and said "they were driving Nissans, of course it was Arkan's Tigers". The most compelling piece of the story never went to air. Nissan was the show's major sponsor that year. Ahh journalism...

Speaking of our wonderful capitalist system, Rozen's article also explains why Vitol has been picked out. Thrown to the wolves more like. The Guardian story already made Vitol a pariah amongst the publicity conscious pols, but it was also a good patsy. Vitol only held 11% of the market for a short time and that means 90% of the NY market plus all the newly permitted offshore trading was being held by other speculators. The story dates back to 2001 and maybe Vitol was let in the game precisely because it would be a great fall guy when needed. Vitol will to go down eventually and in December 08 when everything is back to normal, pols have another four years covered. They can forget about oil speculation oversight and get their snouts back in the trough.

Posted by: Debs id dead | Aug 21 2008 21:05 utc | 5

However many traders may have been in the market before offshore trading opened up, those middlemen were all subject to regulatory scrutiny. That covered the size of their trades and any unusual speculative syle finesses a trader may have pulled. That is no more. Oversight on the Mercantile Exchange has fallen away largely because the traders were able to argue that a heavy hand would drive business offshore. The pols have picked Vitol rather than look at the real cause, deregulation of the market which they don't intend to touch even if they could. They don't want the blame but they do want lobbyists 'long lunches'.

None of that changes the straightforward assertion that most of the rise in oil has been due to speculation. It has. We have discussed this in here interminably. I suggest that if people want evidence they go further than some badly linked, arcane, market spreadsheet and google the subject here or on the internet at large.

Posted by: Debs is dead | Aug 21 2008 21:21 utc | 6

rbv@4,
ralphieboy's point @2 is very clear and his use of the word "inelastic" is very appropriate in the context. With a little patience, one day someone might suggest (in a similar context) that the consumption of mangos is inelastic. Then you would be right.

wrt to your comment on "pit locals", first, b's referenced comment is absolutely right. Traditionally, commodities exchanges place much fewer restrictions on activity related to actual physical goods than those that are simply chasing paper margins (i.e paper-speculators). You are also wrong about Glencore & Phibro. These traders actually do trade a lot of physical oil. Likewise Vitol. But it appears from the content b has provided that Vitol's paper trading far exceeds its actual physical activity, which is the reason for the CFTC's reclassification (of Vitol).

Also. how relevant is the data in your CFTC link ? This thread is focused on the effects of unreported data.

Posted by: jony_b_cool | Aug 21 2008 21:42 utc | 7

hi jony! I'm sorry I was unclear. Vitol, Aron, Morgan Stanley and the pit schnooks are all middlemen, and yes some of them (including the banks) ship physical oil. All of them are also speculators, and so are the refiners marketers airlines, aluminum smelters etc who buy and sell swaps and futures every day. they were and are "allowed" to take positions because they can afford the margins, because it makes them money, and because its a free country, not because of some law privileging shell or northwest over vitol or goldman sachs. GS trades a hell of a lot more oil than any airline or refiner, and so have many pit locals.

re speculators:

1: oiland gas prices are highest in europe and the far east, not in the USA where the oil futures are based. in fact ALL energy costs are higher in commercial-only over-the-counter markets. European coal, power and gas (wholesale only markets with few if any financial speculators) are all nearly double the cost of their equivalents on US exchanges where speculators are supposedly running rampant.

2: there's 1000 times more speculation in equities, bonds and real estate than commodities. Hardly anyone has traded an oil future , while most americans speculate in stocks & bonds and no one cares.

3. No onecared about oil futures when oil was at 10 dollars a barrel (most of the 90s.) No one cares when dozens of hedge funds run by hyperaggressive morons go bust when commodities crash. Nor should they. Mostly these guys trade with each other as you noted. which means that for every one that gets rich, theres another who goes broke. who cares? not me.

4.) OIl futures dont keep any physical oil off the market. in fact the higher the forward prices go, the more likely it is that unconventional oil will come onto the market, as commercials wont sink any money into production unless they can guarantee their future revenues by selling it forward (one reason why the "commercials" are usually short) if oil prices were somehow a function of hoarding, we'd see it in commercial inventories, and they're at historic lows.

Posted by: rbv | Aug 21 2008 22:47 utc | 8

But it appears from the content b has provided that Vitol's paper trading far exceeds its actual physical activity

Paper trading is often backed up (distantly) by physical flows -- a cargo might change hands on paper many times before reaching a refinery -- along the way this trading is sending price signals to other shippers, other refiners and everyone else who has an interest in the supply and demand for oil. The churn rate in currency for that matter is way larger than actual currency flows. it's a silly measure of whether a market is manipulated.

And as you probably know, tiny proportions of traded commodity futures are ever delivered and it has always been thus.

Posted by: rbv | Aug 21 2008 22:55 utc | 9

The Free Market is a fine mechanism for balancing supply and demand and for helping direct the flow of capital to where it will do the most good.

There's no such thing as a free market except in the abstract. Are you really foolish enough to think that any market is truly free and therefore efficient? What we have in the West is neither free, nor efficient. It's a scam, and it's days are numbered. Besides, how can depleting all of the natural resources on the planet to zero be considered efficient? What a joke. It's suicidal in the aggregate.

Posted by: Shrubageddon | Aug 21 2008 23:47 utc | 10

the free market is anything but free

the barbarians in creating the myth of free markets hoped to hide all the horror it actually entails

the free market is a savage spectacle scripted by the senseless

Posted by: remembereringgiap | Aug 22 2008 0:09 utc | 11

Related?

The Great Consumer Crash of 2009

by: James Quinn posted on: August 14, 2008

“It is easy to ignore the storm if you look at the opposite horizon. When the storm reaches your location there can be no more ignorance.”

I hate to tell you, but the storm has reached your location and it is a Category 5 hurricane. The levees are leaking. Ignore it at your own peril. The 6,000 sq ft McMansion buying, BMW leasing, $5 Starbucks latte drinking, granite countertop upgrading, home equity borrowing days are coming to an end. The American consumer will not go without a fight.

For the last seven years the American consumer has carried the weight of the world on its shoulders. This has been a heavy burden, but when you take steroids it doesn’t seem so heavy. The steroid of choice for the American consumer has been debt. We have utilized home equity loans, cash out refinancing, credit card debt, and auto loans to live above our means. It has been a fun ride, but the ride is over. We can’t get steroids from our dealer (banks) anymore.

Thus enters the : prison-industrial complex:

The continuing story: find out what the products are being manufactured via what amounts to slave labor for pennies on the dollar (everything from lingerie to bull whips). Our corporate propagandists also tend to recommend investing in prison stocks. There's big money involved in putting your ass in the big house.

Speculation, faith, delusion, it's all part of, 'The Great Judeo-Christian Sin, Outlaw, Guilt, Crime & Punishment T.V. Show. ' Guest-staring, well, uh, you.

Welcome to the 'Chinese Finger Trap' you willingly stuck your appendage into.


Fuck consensus reality and it's corny cop show script: Create your own.

Posted by: Uncle $cam | Aug 22 2008 1:41 utc | 12

Part 1

Related?

The Great Consumer Crash of 2009

by: James Quinn posted on: August 14, 2008

“It is easy to ignore the storm if you look at the opposite horizon. When the storm reaches your location there can be no more ignorance.”

I hate to tell you, but the storm has reached your location and it is a Category 5 hurricane. The levees are leaking. Ignore it at your own peril. The 6,000 sq ft McMansion buying, BMW leasing, $5 Starbucks latte drinking, granite countertop upgrading, home equity borrowing days are coming to an end. The American consumer will not go without a fight.

For the last seven years the American consumer has carried the weight of the world on its shoulders. This has been a heavy burden, but when you take steroids it doesn’t seem so heavy. The steroid of choice for the American consumer has been debt. We have utilized home equity loans, cash out refinancing, credit card debt, and auto loans to live above our means. It has been a fun ride, but the ride is over. We can’t get steroids from our dealer (banks) anymore.

Thus enters the : prison-industrial complex:

The continuing story: find out what the products are being manufactured via what amounts to slave labor for pennies on the dollar (everything from lingerie to bull whips). Our corporate propagandists also tend to recommend investing in prison stocks. There's big money involved in putting your ass in the big house.

Posted by: Uncle $cam | Aug 22 2008 1:42 utc | 13

Part 2

Speculation, faith, delusion, it's all part of, 'The Great Judeo-Christian Sin, Outlaw, Guilt, Crime & Punishment T.V. Show. ' Guest-staring, well, uh, you.

Welcome to the 'Chinese Finger Trap' you willingly stuck your appendage into.


Fuck consensus reality and it's corny cop show script: Create your own.

Posted by: Uncle $cam | Aug 22 2008 1:43 utc | 14

rbv writes - "Originally only people connected to commodities, producers and consumers like farms and airlines plus a few middlemen, were allowed big trades at the commodity exchanges."

Totally false. Pit locals are all 'middlemen' and most of them have never touched a drop of crude oil. Same with investment houses like J. Aron, Glencore, Phibro etc etc etc.

From the WaPo piece I linked above:

"When the CFTC granted the 1991 hedging exemption to J. Aron (a division of Goldman Sachs), it signaled a major shift that has since allowed investors to accumulate enormous positions for purely speculative purposes," said Rep. Bart Stupak (D-Mich.)

Posted by: b | Aug 22 2008 5:20 utc | 15

rbv,

thanks for clarifying the point of "inelastic demand" before I had to. Demand for oil can go up and down, but no industrial nation can go below a particular threshhold of consumption without suffering from serious economic collapse.

And oil has been granted a strategic significance, which means that nations are ready to use military force to secure their access to it. That was the basis of the Carter Doctrine.

In a truly Free Market (TM), the attitude would have to be: Oil is one source of energy among others, let the market decide which ones should be exploited and used. If oil companies cannot access their sources, then that's their problem, let them find others or let other take their place.

Tell that to Dick Cheney...

Posted by: ralphieboy | Aug 22 2008 9:57 utc | 16

If oil companies cannot access their sources,

oil companies can always access their sources. even the 73 opec embargo lasted less than a year with no military effort from the usa.

if you mean that tankers are threatened in international waters (as they were during the 80s) then any country has a right to defend them by force... as civilian infrastructure these attacks are grave war crimes ...just like attacks on power stations which you may agree also have "strategic significance."

b,

stupak is wrong. as noted j. aron does have physical exposure and so do other investment banks/middlemen. theyve also been speculating heavily since well before 1991, the existence of swaps or the ICE. so have oil majors like stasco & bp. contra stupak, no paper trade ever results in an oil delivery. they are all side bets, and they affect the underlying market no more than a bet on weather impacts the temperature.

if j. aron buys a bunch of physically sttled futures against its swaps and can't sell them to a physical buyer in advance of the delivery date, they are screwed. this is in fact what gives both futures prices their integrity (that physical buyers and sellers can force the hand of speculators)

Posted by: rbv | Aug 22 2008 11:49 utc | 17

stupak is wrong. as noted j. aron does have physical exposure and so do other investment banks/middlemen. theyve also been speculating heavily since well before 1991, the existence of swaps or the ICE. so have oil majors like stasco & bp. contra stupak, no paper trade ever results in an oil delivery. they are all side bets, and they affect the underlying market no more than a bet on weather impacts the temperature.

This might have been the case once upon a time. But in recent years, an increasing amount of petroleum products are priced by physical sellers against NYMEX/ICE trading data as reported by Platts. Kind of like the tail wagging the dog.

Posted by: jony_b_cool | Aug 22 2008 15:51 utc | 18

platts swaps are a great example of a physical hedging product that never results in ANY physical trade. even worse, a lot of platt's trades are to hedge oil-indexation ..(japanese lng, german tolling agreements, inflation indexed bond issues yadda yadda) congressman stupak demands an inquiry... this speculation must end! lol.

Posted by: rbv | Aug 22 2008 16:25 utc | 19

rbv,

I don't necessarily mean outright attacks, I just mean embargoes and interruptions of supply, which are enough to throuw some nations into a tizzy.

But if a supply line is that tenuous, then the Free Market (in its ideal form) would dictate that a nation develop other more stable sources of supply.

Posted by: ralphieboy | Aug 22 2008 21:01 utc | 20

- i wrote for an open thread but don’t see one so will just post here, as it is relevant in the sense that it indirectly pertains to the question of ‘tightness’ (real or imagined, peak oil, etc.) of oil supply -

In 2003, many were convinced that the Iraq invasion was primarily for oil. Some, like Chomsky, continue holding that opinion. Others, the contra-oil crowd, seeing the Iraq invasion through other prisms, point out that Iraqi oil production is not doing too well, not as well as expected in any case, and that neither the US or ‘foreign’, that is global actor oil companies have taken it over or in hand in any kind of robust or lucrative way (possibly just because Iraqi resistance thereto, but I find that hard to credit).

I remember reading somewhere in 2003 that the plan was to send oil to Israel through that defunct pipeline whose name I have forgotten; and to send it clandestinely to Saudi Arabia. Large amounts of Iraqi oil have always been smuggled (see sanctions, oil for food, and the various scandals.)

Paul Chefurka discusses the shunting to KSA idea and lists the evidence:

snippet: The one feature of this hypothesis that makes it attractive is the extent to which it can accommodate all the odd and otherwise inexplicable events of the last six years. 

http://www.paulchefurka.ca/Iraq%20and%20Saudi%20Arabia.html>link

This hypothesis would also explain the very mysterious ‘terrorist’ attacks against oil installations / oil workers in Saudi Arabia. (Al Quaida! When these are the designated perps you can be sure hidden hands are at work.) Remembering the name Yanbu, not more, I thought and so if one follows Cherfuka that would have been in a refinery...and yikes, http://en.wikipedia.org/wiki/2004_Yanbu_attack>wiki says..”petro chemical plant.” Possibly, meaningless.

http://english.peopledaily.com.cn/english/200106/18/eng20010618_72922.html>This article reminds that it was KSA that suspended the Iraqi pipeline flow (Gulf war I). Iraq is demanding compensation for losses via the UN.

The Iraqi part of the pipeline was rehabilitated in 2001 (and/or 2002) http://www.memri.org/bin/articles.cgi?Page=subjects&Area=economic&ID=EA3102>MEMRI 02

http://www.eia.doe.gov/emeu/cabs/Persian_Gulf/ExportRoutes.html>EIA 07 states the Saudis use ‘their’ part of the pipeline to transport natural gas. Same info in http://www.middleeastprogress.org/2007/10/pipeline-links-in-the-mideast/>MEP

A poster on KOS (found near the end of my search) takes up the same original post, and does a good job laying out the info: http://www.dailykos.com/story/2007/4/28/17138/6463>kos For anyone reading that, I can’t judge the Basra Light Crude statements.

It is strange that the info. about that pipeline is slim and contradictory; yet, it is oil, it is the underground (we have maps of the surface of the earth, but our maps of below are missing), it is secretive KSA, it is translations from Arabic, etc.

To sum up, it is seductive. Interesting, even if only that it represents the kind of ‘answer’ to the Iraq invasion one would like to see. As over-interpretations in favor of rational explanations in terms of money, power, the life blood of ‘modern’ society - oil - and geo- politics framed in terms of nation states, still a strong organizing principle, aren’t that frequent, it was worth a look and most of my Saturday morning.

Fuck consensus reality and it's corny cop show script: Create your own. from Uncle Scam.

Posted by: Tangerine | Aug 23 2008 16:20 utc | 21

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