energy prices rigged by futures trading

Discussion in 'Trading' started by silk, Dec 14, 2005.

  1. silk


    Nat gas futures trade thinner than an internet IPO in 1999. This is supposed to represent a $300 billion+ market but my order can knock the bid or offer. Crude oil futures are a more orderly market, but there are major problems here as well.

    Problem as I see it is that volume traded in energy futures is such a small percentage of the actual value of the commodity that is traded in spot market. And because of different grades of product and delivery points, energy futures contracts are not proxies for the underlying commodity. But at same time the futures contract serves as the "price quote" to the world for the commodity.

    So i believe that speculators in energy futures can run up the futures prices which in turn runs up spot prices. Dealers in spot commodity see the futures going up and provides phsychological support to spot market that might not actually be there if it was freely trading.

    Notice that all commodity markets took off in 2003 with the boom in hedge funds and the increasing ease with which people can trade commodities via computerized trading, overnight sessions ect.

    I think it is a matter of national security that this issue be addressed.
  2. Very good post sir. I agree with you on all fronts. There is far too much concentrated liquidity in speculation in the short run that will abandon said markets for technical reasons at the drop of a hat. Obviously, this distorts the fundamental picture immensely as you imply in your post. I suppose to some extent we have already experienced this phenomenon 5 years ago in equity prices and now the momentum and volatility has obviously moved over to commodity products. The big problem is we are all consumers of these industries and the volatility can have and will have enormous repurcussions on the economies of the world as this rampant speculation distorts the supply demand balance.
  3. whats funny to me is that the exact opposite
    has been said for comex futures silver trading in the last few yrs
    that it has been kept too low by the "dark side
    of the force "

  4. i disagree. oil prices are symbolic of true demand as nations are very willing to consume at those high spot prices. what people are willing to pay is the price. in any case, at what point does higher oil prices affect the economy? no one knows for sure. hardly an economist would have believed $60oil wouldn't devastate the global economy. yet, U.S. 2005 GDP grew at 3.7%. also, energy consumption per dollar of GDP has declined at an average annual rate of 1.7 percent during the past 25 years. i don't believe in the potential doomsday thinking.

    secondly, this is a market. hedge funds, speculators, whatever... we've heard this a million times before for every boom and bust. for every buyer, there is a seller, and vice versa. i'm not sure if the author of this thread was infering that somebody's artifically cornering the market. where have i heard this one before....

  5. lol, let me guess. You just received your natural gas bill?

    The truth is there is no manipulation in the energy market. The prices reflect the reality of limited supply and inelastic demand.
  6. its in the interest of national security to keep everything up... up up up...

    abortions for some... miniture american flags for others!

    what's more important is that america is /over/ dependant on a limited commodity for energy...

    for example, high beef prices arent a national security concern because there are alternatives... chicken, tuna, shitake mushrooms, etc...

    but oil... there is no implemented alternative energy source.
  7. I would say that this is simply "a futures market in action". Would your reasoning not also have applied to say beans futures markets of about 100 years ago?
    In fact, historically the US producers and consumers have greatly benefited from the futures mechanism, this in contrast to continental Europe where usage has been historically very limited and markets often non-existent.
    I don't think that terms like rigging or manipulation apply.
  8. silk has a point btw silk are you talking about the big contract when you say you can knock the bid or offer?

    It's not that the market is manipulated, it's the "hedge fund bubble" the term bubble is probably somewhat of an exageration but commodities have gone up so much largely because of all the hedge funds piling in like sheeps. You can see this in gold and in currencies look at the move in JPY, no substantial news came out recently( the Fed altered statement is no substantial news to me) yet so many people ride the same trends that some moves are magnified, it's not far fetched to believe that a similar phenomenon although better supported by fundamentals has taken place in energies
  9. Duh.
  10. If you think that Nat Gas futures are "thin" now, you should have been there on the floor about 10 years ago . . . Atleast the Jan contract trades 25,000 per day now!:D

    But as far as commercial activity is concerned, I would assume that most nat gas transactions are executed "OTC". Thus, actual NYMEX futures trading volume may not reflect actual real-life importance.
    #10     Dec 15, 2005