It's been rumored Goldman Sachs has over $80 billion in the market, although the investment bank declined comment for this story. Its influence is so big, traders refer to the day of the month when the bank sells the current month contract and buys the future month as the "Goldman roll" due to its effect on price. When Goldman last month told its clients to sell oil when it approached the mid-90's, crude lost over $3 in one day. Goldman is of course not the only one. Morgan Stanley, which also declined comment, has reportedly bought facilities to store oil. Hedge funds, pension funds, commodity-centered mutual funds, insurance companies - all have gotten in on the act. http://money.cnn.com/2007/11/27/markets/oil_speculation/index.htm
Congress is looking into this as of next month? That should be interesting. In my opinion, and I'll probably get flamed for it, some method of curbing speculative flows needs to occur.
Investment bankers have been big buyers of crude and products transportation and storage since at least early 1990s, when I first got involved in that area. It's kinda like a corner now, with capital and producers all lined up on one side, gripping hands, with consumers on the other, gripping . . . well you get the picture.
I believe it is essentially the corner -- capital and producers -- that is bidding it up and up and up. Along with some free riders. So, you correctly identify the location of the problem. Classic corner involves a rout when the corner picks its time to exit. Which explains why Big Oil is in no rush to pour its profits into alternatives. (And why few large companies are willing to bet big in that gap.) Big Oil knows what the corner knows: the per barrel price can be dropped like a boulder any time, crushing expectations of profit in alternatives.
Yes, but don't you think it's getting a bit out of hand now, and that it might be sowing the seeds to it's own distruction?
Well put. $55 oil for sure - but when and how high until? Kinda like shorting AMZN. You knew it was going down eventually, but if you shorted it at 100 it was sure a long and painful wait (and you probably blew out on margin anyway).
re the queries, "ut when and how high until?" and "Might [it]be sowing the seeds to it's own destruction?" Don't know. Perversely, the corner will say alternatives are viable only so long as you (meaning regulators) don't interfere with the corner. Let us keep the corner (and our rivers of profit) and you can have a little in the way of alternatives, in other words. Else we let the boulder fall, destroying economic viability of alternatives. World is awash in oil, so the boulder exists.
I agree. Especially when it generates more contracts on paper then needed to physically represent the commodity. Perhaps the best way would be to up the margin requirements. I hope Goldman takes it up the ass. John
As do I. The reality is that they won't. Too much talent and money over there for anything terribly bad to happen.
Yeah, or could be that the Goldman roll refers to all those passive investors that are linked to the *Goldman Sachs* Commodity Index (now owned by S&P)?