The next step would be to increase margins on agricultural products. Maybe they will re-think how the whole commodity business should be dealt with. I am a speculator and I am long oil and gold and agricultual products for some time now. Just like Jim Rogers. The whole managed futures industry that does long term trend following is long also - with bln. of dollars. To announce 100 % margin or change the rules from one day to next would chnage the whole game and a lot of us would blow out. I dont think it would be fair unless they would at the same time when they announce it settle all trades at the price before the announcment. Because otherwise they would favour the shorts. I am just brainstorming what will happen and I am sure politicians do what the population wants -- they want these speculators out of markets. Markets that are so crucial to the normal population.
<i>"People that think speculators are a problem or the reason oil is at these prices don't understand the role of futures markets and how they work."</i> 1,000% correct Large specs cannot artificially drive up (or down) commodity prices for extended periods of time. The natural laws of supply & demand of a commodity negate that. If there was an abundance of oil and natural gas thru the global pipeline right now, large specs who are driving up the price would get obliterated by commericals. Imagine for a moment if #2 crusher-run gravel had a futures market. Those are the 2" stones used to line railway track beds, base septic systems, blacktop driveways, foundations, etc. We've all seen them, everywhere around us. Suppose some large specs (hedge funds, etc) decide that the price of gravel is too low due to shipping costs, weather and mining laws. They begin to amass huge positions long. The price of #2 crusher run rises to new historical highs. How long can it stay there, you ask? Not very long. Once the price is out of line with production, production brings prices back in line. Stone crushers would be working three shifts to break big rocks into 2" pieces for delivery. The specs would be holding front-month or near-month futures contracts long, but the commericals would be selling back-month futures into oblivion... hedged by the actual underlying commodity, in this case common rocks found everywhere. The cure to high commodity prices is, high commodity prices. That is what adjusts the natural laws of supply & demand. Commodities are a purer world than stocks... artificial games are a short-term phenom at best because of the physical underlying. If there was an abundance of oil and gas in the visible future, commerical producers would be selling back-month contracts into the 80s, 70s, 60s or wherever they saw fit. Commercials kill out of line specs because commercials use the futures market for its true, intended purpose: offset future underlying commodity possession with today's prices. * Oil is where it's at because there ain't enough of it for the amount of people needing it. Fundamental fact. There is obviously speculative pressure at $110, but not much. If you think prices at the gas pump this year will cripple U.S. consumers, wait until everyone visits the grocery stores this summer and fall. The price of oil trickled thru our food supply (#3 necessity behind air and water) will be shocking.
It would be interesting to know how many contracts of oil are held long by the OPEC countries themselves to keep the prices high. I would not be surprised if they do "insider trading" in big scale themselves. They buy some contracts before they announce that they wont increase production. Then they sell it later. When prices fall too much then maybe some friends blow up something - Al Kaida style. (Maybe Al Kaida was created by the idea to drive up oil prices -- worse: maybe Bush and his texan friends worked together with Arabia on this plot -- lol) Soon they will blame everything again on the speculators. The speculators drive food prices and energy prices up. But in reality we are only the "cleaners" of the system. Like the press we cover up economic mismanagement. Would you forbid the press ?
Agree with the first part. Most textbook writers don't fully understand speculation either. One overlooked role is that "overvalued" prices are actually necessary to stimulate future production. If oil was at $60 or $70 as the original poster wants, there'd be no incentive to develop oil supplies with production costs of $60 or higher. At $110 there is a very strong incentive to start looking at projects with a higher cost of production, exploring for new sites, and increasing efficiencies. It has the additional effect of stimulating substitution into alternative fuels, and research into new methods of supplying energy. Overvaluation is the market's way of bringing new sources of supply on tap. The quicker the price gets up, the quicker R&D, substitution, development, and exploration take place. Speculators speed up that process. Retarding speculation would mean it would take even longer to match the needs of energy consumers.
If everyone believes prices would rise, then who is selling at the current prices? There would be no one selling here at $109-110, and prices would have already risen to equilibrium. By definition, the current price indicates that demand is equal to supply i.e. the bears and bulls are having roughly equal balance in the market. Regarding investment portfolio demand, and hedging demand - long-term demand (including long-term speculation) will of course influence prices. But what is your point exactly? If we ban all sources of demand except for current cash purchases for immediate use by consumers, how will producers and consumers hedge their future oil price risks? If it did indeed drive prices down below the current equilibrium price, how would we get enough oil supply to meet the demand? You would have supply shortages, leading to queues at gas stations, factories shutting down, transport disrupted, the armed forces unable to move their vehicles etc.
The short-term effect of banning margin/speculation would be to cause a short-term price correction - probably multiple limit-down days. However, the long-term effects would be to actually increase commodity prices, and increase the volatility of prices. Banning margin would also make it virtually impossible for producers and consumers of commodities to hedge their future consumption or production. This would eliminate one of the main roles of futures markets, and increase risk substantially across the entire economy. Farmers would go back to going bust any time there is a bear market. Corporations would run out of fuel, airlines would go bust more frequently etc. Cashflow demands would become more intense, increasing the rate of consumer/producer bankruptcy. Bear in mind also that margin is not needed for speculation. I am an aggressive commodity bull, and my total commodity positions range between 40 and 80% of my total account. In other words, I could pay for all my positions in cash, I do not need margin at all. Banning margin would simply mean I can buy less stocks whilst I have on my long-term commodity positions.
Hi, can someone expain to me how it is possible to drive up crude oil by speculations ? Im newbish, so this may be a dumb question. But I'm able to drive up the price by buying crude contracts (well, not really). But this only has a short term effect, because I will have to sell those contracts before the contract expires. Otherwise I would have to actually buy those barrels of oil . So how do those big speculators drive up the price ? Are they actually buying oil ?
..So, you're saying that 'by definition' futures prices are always at an equilibrium. In that case, by your definition, there is no such thing as overbought, oversold, etc. Funny, I thought futures prices were exploratory in nature... I thought they reflected expectations of the market participants. I think that the large rise in prices (especially over a short period of time) indicates that a large number of the participants are expecting prices to rise and were trading accordingly. An equal balance of buyers and sellers in the market would mean very little to no price change. imho
thats right.Like that guy up in CT someone posted about a week ago, he made $300 mil buying and holding oil futures.guess what that 300 is coming right out of your pocket, and mine. in my opinion this should be stopped. we need government intervention to snap this commodity bubble.