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Politics : View from the Center and Left -- Ignore unavailable to you. Want to Upgrade?

To: Lane3 who wrote (71466)	6/10/2008 3:58:41 PM
From: Katelew	Respond to of 543365

Lane and Allen....according to the CFTC, 95% of futures contracts in oil are being bought by entities that are not involved the the delivery of the product. For ex. an oil company like Exxon will buy futures contracts in order to deliver the product at a later date at a fixed price. On the other side, an airline company would buy a contract in order to determine now what it will pay later when the product is delivered. These types of players are those that have a vested interest in assuring delivery of the physical product. So even though each of them is 'speculating' as to where they think future prices are going, they aren't considered speculators. They are hedgers. As I said, this type of player only represents 5% of the activity right now in futures contracts. The other 95% are considered to be "speculators". This is a significant change but I don't know what the previous mix of hedgers, speculators, ETF investors, etc. was. In addition, there appears to be players in the oil markets that are actually pure speculators that are presenting themselves as hedgers. This is being investigated in the effort to determine just how much speculation is taking place. But this is just one part of the situation. The other significant component is the opacity of the oil trading taking place on the ICE. This exchange is exempt from oversight by the CFTC which scans trades made on the Nymex for evidence of price manipulation. So we have a two-sided problem with oil and certain other commodities. New entrants in the form of ETFs, hedge funds, other institutional investors, etc. are bidding up the value of the contracts with no intention of taking delivery. At the same time, a handful of large trading organizations (Goldman Sachs is the most well known) dominate the electronic, OTC market on the ICE. Not being monitored, these traders could if they wanted manipulate prices. One of the things that could have helped which was the raising of margin requirements died today when the Democrat sponsored energy bill, the one with windfall profits taxes in it, died for lack of votes. There was much in the bill not to like but I wish margin requirements could be raised. I also think ETFs that are structured to benefit from higher commodity prices, inc. agric commodities, should be disallowed. Some guesses are being made that the price of oil would be in the eighties if all these new speculative forces were pushed back out or otherwise limited, but these are just educated guesses. Oil, being a finite resource, is tricky in terms of valuation. IMO, the speculative impact is easier to discern in the agric. commodity prices and for moral reasons should be clamped down on even though you hear more clamoring over the price of oil right now.

To: Lane3 who wrote (71466)	6/10/2008 6:39:16 PM
From: Cogito	Read Replies (1) \| Respond to of 543365

>>Allen, it occurred to me that part of the problem might be definitional. I had lunch today with a friend who considered everything about the futures market to be speculation. I thought that the normal transactions involving, say, farmers and canners, would not be speculation but that the activity of hedge funds, who have no involvement in the industry, would be speculation.<< Karen - I was thinking something similar myself. I've read recently that as much as 95% of the activity in the oil futures markets is from entities that have no intention of ever taking delivery of any oil. Those people are, by definition, speculators. So although the supply/demand balance of the actual oil is a factor in futures prices, the other big supply/demand factor at stake is the availability of the contracts themselves. I, too, can't see how it's possible that the prices would not be affected by speculation. - Allen