Traders Need Only $8 to Buy Barrel of Oil: Massive Oil Supplies: 'Peak Oil' Is a Myth

It's called fundamental attribution error. Every American (including myself) likes to blame others when shit hits the fan, and take credit when things go right.

 

Took the words right out of my mouth, excellent post sir.

 

The guy who wrote this was on CNBC today. He got shot down harder than anyone I have ever seen get interviewed. The other guy on with him actually laughed when he was making this argument. This is not the reason for high oil.

 

Michael Masters testimony was awesome. It's not to say that the banks and hedgies won't lose their ass in all this, I think they will. When Goldman Sucks screams 200 oil, and gets so much press that grandma hears it, it's getting close to the time for every long to take it in the ass. Anyone who has been trading more than a month knows when Goldie says buy with both fists, that means they are lubing the knife. $60 oil before $200, imo.

 

quit trying to sound like a fucking quant

whether he was speaking about a derrivative of x or f(x) it means absolutely nothing as the underlying point is the exact same "no more cheap oil"

if you think global demand justifies the current price of crude, your just showing everyone how irrelevant your posts on this topic are

 

Politicians’ oil argument is flawed

By John Dizard

Published: June 22 2008 21:19 | Last updated: June 22 2008 21:19

When I wrote last month about the US politicians’ attacks on oil and grain speculators, I assumed the issue would dry up and blow away after some useful airtime had been collected. I assumed that while people such as Senator Joseph Lieberman would never admit their analysis was flawed, they would quietly postpone any real action until a tomorrow that would never arrive.

I was wrong. This Tuesday, Senator Lieberman will resume his hearings on whether institutional investors in commodities are responsible for the increase in oil and grain prices. It is quite possible legislation restricting institutional investors’ positions in commodities will pass Congress, though it could be vetoed by this president. If reintroduced during a Democratic administration, though, it would probably become law.

The case for such a policy is based on a flawed concept of how these markets work. Those pushing for restrictions argue that an artificially high demand for essential commodities such as oil and corn has been created by the institutions’ purchase of long positions in futures contracts. This enormous weight of money, in the hundreds of billions of dollars, has been competing with the needs of “average families”.

This has led to food and energy price inflation. While Senator Lieberman is a Democrat, I get similar press releases from Republicans.

Now if it were true that pension funds, insurance companies, evil hedge fund managers etc were all buying large quantities of physical products such as silos of grain and storage tanks of oil, then the peasants with the torches, and their leaders, would have a point. But the investors aren’t buying physical product.

For example, one of Senator Lieberman’s favourite witnesses, hedge fund manager Michael Masters, compared an 848m barrel increase in index speculators’ positions over a five-year period with the 920m barrel increase in Chinese demand. In other words, the speculators were almost as big as China.

Nonsense. Speculators only increase the demand for oil, or any other commodity, when they buy physical product and hold it off the market. So to match the real Chinese demand over that five-year period, the institutions would have had to build an astonishing amount of storage capacity. Using Mr Masters’ numbers, they would have had to fill storage tanks with more than 40 times the capacity available at the Cushing oil terminal in Oklahoma, which is where the WTI (West Texas Intermediate) oil contract is valued. Didn’t happen.

Actually, total oil stocks held in the developed (OECD) countries, have been stable. A year ago, including strategic reserves, they amounted to about 4.1bn barrels, and today are at about the same level. In the US, commercial inventories have fluctuated in a narrow range this decade, between about 280m-350m barrels.

The institutional investors Senator Lieberman is frothing about do not buy physical product; they buy futures, or total return swaps that in turn are hedged with futures by the dealers. Those dealers, in turn, may hedge part of their exposure by buying receipts for physical product at a location such as Cushing, but that would account for only a small part of their total positions. The trading volume for the WTI contract would be in the order of 500m barrels a day, but, as noted above, only 20m of that is sitting in tanks in Cushing.

Let’s say you were an evil speculator, or misled institutional investor, trying to squeeze oil futures higher. How would you go about doing that?

You would establish a long position in futures contracts. Then you would buy up the physical product that would be eligible to be delivered against contracts, and hold it off the market by notifying the exchange you did not intend to make it available. Then users and short sellers would bid up the price of the remaining oil, increasing the value of your futures contracts. Fun, right?

Just try it for quantities larger than a teaspoon, and see what happens to you. What we do know is that the pension funds and other institutional investors who are the objects of the proposed laws are not buying the physical product.

Instead of speculators, look to government policies, particularly those in the oil exporting countries, China, India, and other export driven economies. They have maintained price controls on domestic fuel; until last week a gallon of gas cost about $2.60 in China, compared with $4.00 or more in the US.

The difference has been subsidised, effectively, by the earnings on labour -intensive goods. So the emerging market governments are buying political stability with the money from the international labour cost arbitrage. That explains much of the fuel price run-up. But India is already raising prices and China started to do so last week. Continued increases will probably add further downward pressure on world oil.

The US could also conserve more, in part by shifting more of the tax burden to energy. It could allow more domestic drilling, and eliminate programmes such as ethanol subsidies. None of that will happen. Instead, we will get more volatility inducing static such as Senator Lieberman’s hearings, and ineffective, ill-conceived new laws.


all the speculators are really doing is smoothing the highs and the lows of oil costs. To say that China purchased 920 million barrels of oil, and speculators purchased 850 million or so, and therefore have an equal impact on the demand curve is ridiculous because Chinese oil purchases are being consumed and removed from the market by their consumption. I'm pretty sure that large hedge funds aren't burning off these 850 million gallons or building large Strategic Petroleum Reserve equivalents to store them.

 

Ten years ago when oil traded below $11.00 on the NYMEX and cash oil was getting below $10.00 per barrel where were all of you experts? Since it is so "obvious" now that prices are high because of hedge-funds, was it not just as obvious that prices were too low then because of excess speculation to the downside? Why weren't you crying out then that prices being too low were putting many small producers in the US out of business, which would later contribute to higher prices? When speculators drive the price of oil back down are you going to applaud them?