If heggies & investments banks are the reason for the run up in commodities prices can someone PLEASE PLEASE answer this. If you say that the hedge funds and Investment banks keep on driving prices higher, they do that by buying. Well if they are buying then you MUST take delivery of the commodity. In a you tube video http://www.youtube.com/watch?v=PNp0y0SjOkY it says that Morgan Stanley is the #1 holder of heating oil in UK. What are they doing with all that heating oil? If Investment banks & hedge funds are NOT using heating oil, crude oil, sugar, corn... etc and they are in fact hoarding it, then wouldn't they eventually have to sell it? causing the price to go back down to where it originally was?
I don't know why people don't understand. If you want to be continuously in a futures contract before the front month expiration, you just sell the front month and move into the next. The selling you do in the front month is offset by the buying in the roll forward. There are arbs in the different months that take advantage of these hedge funds rolling forward, which keeps enough liquidity so there's no pronounced selloff.
I think you got it right. Index funds etc. have to roll their positions every month, making them sellers as well as buyers of commodities. Speculators are the usual scapegoats when something is wrong.
Yes I understand that, that you can roll into the next month. But if all the hedge funds DID that, how would that drive up the price, because every contract month they wouldn't be net long, that'd be flat!!!!! Every contract that is open MUST GO TO DELIVERY. If you sell it, someone else buys and AND IT MUST GO TO DELIVERY. If commerical demand is the same (or not representing the demand reflected the run up of the commoditiies) then there MUST BE SOMEONE WHO IS TAKING THE DELIVERY. Common sense would tell you that, therefore wouldn't it make sense that the hedge funds are not selling off the contracts they are indeed taking the delivery of the contract and hoarding it. But, I'm not sure I understand why? if there was a stock @ 50.00 and I have a billion to buy say I drive it up to 60.00 with an average fill price of 55.00. If I went to sell I'll sell it back down to 50.00 with an average fill price of 55.00. Net 0 So why are the hedge funds and investment banks accumlating all these commodities
You forget, it's a liquid market. There are also short sellers that want to cover to move into the next month, they are buyers. Also, if funds are bullish on crude, they would add some to the position as they roll forward. If you remember though a couple months ago when crude took off, even the very back contracts years out were bought up. The original cause of this move was supply tightening to offset the dollar decline, now it has turned into an outright bubble. I don't blame the speculation, it's a symptom, not the cause.
You need to watch "open interest". Sometimes open interest drops on higher volume. AT the end of each trading month you declear intent to deliver. Most contracts get offset except those intended to deliver against. Many nowdays are just cash settled.
Take a look at this chart: http://www.quote.com/us/futures/cha...pe=LINE&chartUi.size=650x450&chartUi.minutes= It's the chart of Light Crude Oil with delivery in July '08 The lower pane is the Open Interest of the contract. As you can see, Open Interest tanks as we aproach the delivery date. Only a small percentage of contracts are held 'til maturity.
skog, thanks for the chart,i changed it to candles and you can see a 3 step pattern there which may mean drop to bottom of 1st step 100-107,same pattern in dow preceding '87 crash
Paul Krugman writes a great deal about this topic in his blog. The post below is about metal futures, but it applies equally well to Oil. commodities-and-speculation-metallic-evidence To sum it up, unless you are buying up the actual stuff(Oil,Wheat, etc) it doesn't affect prices.