As I've said in another forum on similar topic, as soon as the idea of a hefty USA tax on imported crude oil gains traction, as in viable, crude will drop like a rock, and hugely. The tax idea might be mated to temporary relief from the federal gasoline tax, which is retail, thus making it an easier sell to the masses, who otherwise will continue to pay a corner tax to the emirs, mullahs, and fellow travelers. I'd rather get ripped off by my Govt than by the corner. But that's just me.
Speculators are always the most active towards the end of a move. That is fact. I am not saying the end is near, certainly do not step in front if this train. But rampent public specs is one of THE signals to be aware of. Commodity trading informercials are starting to pop up like active trading ones did in the roaring 90`s. Plus I recently saw HGTV hawking gold and pitching it as "dollar safehaven". Just something to ponder and playing devils advocate. Good trading to you!
What if... a "bonafide hedger" could offer promissary notes instead of trading on margin??? Corn farmer offers notes going out...and hog owner buys em..Wheat farmer offers...cereal producer bids....etc That would be but one angle the politrickans could pull out. In this day and age of goverment funding corp/wall st losses nothing would shock me.
For this to happen America would had to become Venezuela, and communism to win. So, in short, it would never happen.
The problem with that is credit risk. If a farmer hedges his production at 400 and sees it go to 2000, the bank is risking 5 times the loan. There is no way a rational financial institution can offer hedging loans with *no* margin calls regardless of how high the price goes. What if the crop fails or the farmer takes the money and runs? The bank faces huge potential losses in a bull run, and it's quite prudent and fair to ask for collateral as prices go up. As for promissory notes, how is that different to a future - only difference is they will have far less liquidity and price transparency, and the transactions costs will be far higher. It will make it far harder for small farmers to hedge. Thanks to speculation, farmers got to hedge at 500 instead of 400, 1300 now instead of 1000 etc. Their risk is less and the price they get is better than if there were no spec longs in the market. Now a true speculative market corner, like the hunts in 1980, is another matter. But exchanges already have means to deal with that - position limits, and force majeure rules (e.g. with the Hunts they made trading liquidation only). But there are few if any signs this is a purely speculative runup - it is a genuine supply shortage. Behind every call for clamping down on speculation, is the same desire - people (consumers and their representatives) wish prices were lower. Well if you want lower prices, be honest and call for price controls. Then see how much wheat or oil you get - diddly squat.
The current traded price is always an equilibirum *at that moment in time*. Obviously the equilibrium price changes - almost constantly in a liquid, active market - as expectations change and new data points come out. Yes, markets do of course reflect the current expectations of participants. That is exactly why when everyone is bullish, prices will already have gone up. To get further increases, you need more people to get bullish, or current bulls to increase their bullish bets. But if they are already bullish to the max, they have already done all that. Anyone who expects the price to rise would be long already. For new speculative demand, people who were neutral or bearish on oil have to *change their minds* and go from flat or short to long. But since you said everyone is already bullish, that can't happen. Hence the only possible change in speculative positions is to go from 100% bullish to 99% bullish or less - and that would result in sales and thus price falls. In other words, under your postulated conditions, the only possible influence of speculation going forward would be to move prices down. That is why markets with overwhelming bullish speculative positions & sentiment usually go *down* in future, not up - there are simply no more speculators to get long, the only thing the speculative community can do is to sell in future.
But he didn't buy during the commodity bubble. He bought when commodities were depressed. His early longs are now a source of current or future supply - which will *reduce* the increase in prices. And, since he was fully long, he has had *zero* impact on the price run up after he bought. His only impact was to raise prices years ago when he bought at the undervalued levels - which provided better prices for people hedging at the time, and reduced the downside volatility. That is good, useful speculation - just like the guy in the bible who bought grains when they were cheap during a glut for 7 years, so he could provide them to the population during the shortage in future. Also, why should the government stop people being able to buy or sell things? Why shouldn't speculators get paid for smoothing the price during gluts and shortages, providing liquidity, reducing transactions costs, and making the price more accurately reflect the true supply/demand picture? And quite apart from the social ills that would result from no speculation, what about his right to freedom of contract with his counterparties? How do you as a consumer have *any* right to buy oil at the price of your choice, rather than the free market price? It's not your oil. Oil belongs to the landowners/people in the producing areas, who sell it on to oil companies, who then sell it to either consumers or speculators, whoever offers the best price. This guy paid the best price at the time, so its his oil to do with as he wants. How dare you criticise him when you were to cheap to buy it yourself - you want a handout for your laziness and ignorance?
A tax increase on imports will make all imported crude being supplied at the current price become more expensive. In other words it'll reduce the total supply available at the current price. Why would reducing the supply of crude available result in a price fall?
Thanks for reminding me there are folks that know alot more about the actual mechanics than me. I just trade em.. Great explanation. Your posts are always a wealth of info. Cheers!