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Technology Stocks : The *NEW* Frank Coluccio Technology Forum -- Ignore unavailable to you. Want to Upgrade?

To: axial who wrote (24750)	8/21/2009 3:15:26 PM
From: axial	Read Replies (1) \| Respond to of 46821

Talking about migration of Enron's tactics... it has been posted - but not proven - that speculative excess has driven energy prices 'way past the dictates of supply and demand. In the same way that Enron traders savagely ripped off Californians (there's no hyperbole in that description) excessive speculative pressure has cost hundreds of millions of people billions, maybe trillions of dollars. Those who have been watching CFTC address the issue see hope that crude prices could drop substantially as a result of reforms. As predicted, the outcome will be lower prices. Just think for a moment, what this has cost ordinary people, and the economy: not just locally, but globally. Message 25868137 --- Dresdner/Commerzbank blames oil speculators -snip- However, the price of a commodity does not always necessarily correspond to the current supply and demand situation. The greatest advantage of exposure of financial players and speculators to the commodity markets that we can see, apart from representative and liquid pricing, is their ability to process and act on available information quickly and efficiently. So ideally, speculators should iron out the hugely exaggerated upward or downward price movements. They should buy when physical demand is very low but about to recover, and sell in the opposite situation. However, the financial markets and financial market players have utterly failed in this role. Instead, it is our opinion that in recent years, because they drew the wrong conclusions and over-invested, they caused a speculative bubble in commodities, particularly in the oil market. Rather than profiting from existing trends, investors greatly accelerated and to some extent caused those trends. It was precisely their clumsy dealing that, in our view, made the exaggerated upward and downward price swings possible in the first place. The problem is that commodity investors exert far more influence on the market than physical traders. On the one hand, investors exert their influence through regular rolling of commodity futures. On the other hand, one needs to consider the leverage made possible by futures market trading. To purchase a WTI contract on the NYMEX usually requires less than 8% of the value of 1000 barrels of the crude oil which it represents. But the key thing to understand is that the commodity futures exchanges were not really in a position to absorb investments of billions of dollars. In our opinion these investments damaged the existing pricing system, upset “normal” trading and allowed it to run out of control. The relationship between the physical market and “virtual” stock market trading has gone off the rails. Between the years 2003 and 2008 both WTI oil price and the number of outstanding WTI contracts (futures and options) on the NYMEX have gone up six-fold. This was at least partially responsible for the massive price increase in the last years (chart 6). When WTI futures were introduced on the NYMEX in the mid-1980s, production of the US domestic crudes which were chosen as a “good delivery” for the benchmark and were available for delivery in Cushing, Oklahoma stood at around 1.5m barrels of crude oil per day. The total trading volume of WTI on the NYMEX averaged the equivalent of about 10m barrels. The relationship was therefore largely satisfactory because WTI was also accepted as the benchmark for all trading both inside and outside the USA, as it still is today. In the 1980s demand for oil in the USA alone stood at 16-17m barrels per day. However, as investors increased their exposure, the relationship changed utterly. Today, on the NYMEX alone, WTI futures worth the equivalent of 600m barrels of crude oil are traded daily, while US production is less than 5m barrels per day. Even compared with global demand for oil, which currently stands at around 83m barrels per day, there is a huge discrepancy. This becomes clearest when we compare the volume of WTI actually produced with market trading volume: WTI oil production has now fallen to just 300,000 barrels per day. So now, each barrel of WTI crude is traded on the futures market nearly 2000 times over (Chart 7). It is no wonder that calls are increasingly heard, especially in political circles, for an end to the current “madness”, “casino system” and “oil bubble”. The US regulatory authority for commodity futures trading, the CFTC, now intends to do something about this. And what will happen if and when the CFTC cracks down? The significant rise in the oil price seen in the first half of the year is due in large part to a recovery in investment by financial investors. If their influence is reduced by the CFTC’s actions and sanity prevails, the oil price will fall. More: ftalphaville.ft.com Jim