The author of that article, Phil Davis has absolutely very little clue about what he is talking about when it comes to the oil markets. Very little clue indeed. Moreover, the comments that accompany the article by various readers also show a complete ignorance of how the commodity futures markets work. In my opinion, Seeking Alpha is quickly becoming nothing more than a TABLOID. It's almost not even worth the time and effort to comment on. Absolute rubbish.
Given that the world runs on oil, is it a surprise of its size? And you have a replacement? Should we burn wood chips?
That's great, but can you give a little more of a substantive rebuttal? I'm not saying you're wrong, but you're begging the question with this kind of response. In a few words, why is he wrong?
For starters, he acts as if there is something morally wrong with people trading commodity futures contacts . . . be they on WTI crude oil on the Nymex or S&P's on the CME, or T-Bonds on the CBOT. He acts as if only "commercials" ( such as producers or end-users ) should be allowed to participate in the futures markets because they have the capacity of actually taking delivery. In his mind, anyone else ( a speculator or investor ) shouldn't be allowed to trade such futures contracts because they have no intent on taking delivery of the actual commodity and only serve to drive up the price of a commodity that every consumer uses. This is pure horse-crap. Moreover, he doesn't seem to understand that energy products are simply yet another ASSET CLASS, and that one of the reasons that crude oil surged to $147 per barrel summer before last and trading volume has increased dramatically over the years is because the amount of pension fund exposure to the energy markets ( as an Asset Class ) has increased. Are we suppose to tell an investor such as a State Pension Fund that they are not allowed to have any exposure to the energy markets as an asset class and way to diversify their portfolio because they are not a "commercial" and are not interested in taking delivery? Give me a break. Meanwhile, his remarks about so-called "round-trip" trading on the "clandestine" ICE is an attempt to yell "FIRE!" where no fire is. Crossing trades from one account to another at the same price is not illegal. It's done on every single commodities exchange in America, and has been completely legal to do so for decades.
"...one of the reasons that crude oil surged to $147 per barrel summer before last and trading volume has increased dramatically over the years is because the amount of pension fund exposure to the energy markets ( as an Asset Class ) has increased." Where did they store it?
You don't understand. They didn't have to store it. They simply bought futures contracts and rolled from one contract into another in order to maintain their position and exposure. Data from U.S. pension funds showed an $80 BILLION increase in capital committed to the energy markets as of the end of Q1 of 2008. That's a fact.
What I find interesting is that during the climax of the oil spike last year, the media and the politicians were screaming about speculators driving up the price. The commitment report showed a net short position on oil. Things are never as easy to explain as people like to believe. Landis thanks for the added insight on pension funds.
I believe that speculation definitely influenced oil prices, whatever the source. There was a herd stampede out of the securitization market into commodities. But old fashioned supply and demand really was the #1 factor. Charts always help: Production has obviously plateaued since 2005, with an occasional bump. Supply met demand only because of the Great Recession. It will be interesting to see what the future holds. Most oil producers keep the taps running so to speak. Whereas the middle east producers like Saudi Arabia, Kuwait, UAE, have the luxury of decreasing production when prices fall. Saudi Arabia's oil fields are unaudited, and there are some experts that believe Saudi Arabia may have peaked. It's rig counts have practically tripled in the past few years, yet production remains relatively flat. They have also recently hired Haliburton to drill in the Ghawar field (the world's largest). Draw your own conclusions. I believe that depending on economic recovery here, or oil usage in developing countries especially India and China, oil could easily break the $150 a barrel... and then, we would have another economic shock. I expect a seesaw of economic activity from here on out impacted by a very volatile oil market. There is no real bridge fuel alternative that would make a transition seemless.
Well, if you speculate with your own money, there aren't anything wrong with it. But, for people who managing others money, it is different story, it is possible for their personal gains on fees, etc. cause there were/are not many area to put the money with bigger asset class than energy market. Bigger the market will result larger sum of fees for bankers and hedges of pension funds.