It appears that Becky likes and respects you, but Kernan seemed kinda sour on the whole blogging concept .

http://www.hussmanfunds.com/wmc/wmc080707.htm

(I still don’t think that futures traders caused the $147 price in July)

“It’s sometimes suggested that hedge funds, commodity pools and speculators don’t actually drive up the price of oil, because they don’t actually take delivery of the physical product – instead rolling their futures contracts over indefinitely or until they close out their positions. From an equilibrium standpoint, however, this argument ignores the zero-sum nature of the futures market. Producers have an interest in selling their output forward to lock in a predictable price. Similarly, bona-fide hedgers (such as transportation and industrial companies) have an interest in buying their oil forward so they can plan without concern about future fluctuations.

To the extent that the speculators begin to take one-sided trend-following positions, their purchase of a futures contract crowds out the purchase that a hedger would otherwise be able to make from a producer.

It doesn’t matter that the speculator has no intent to take delivery. What matters is that if the speculators are unbalanced on one side, the producers will have satisfied their need to pledge future delivery. Moreover, because they can lock in a high price, they will be inclined to sell more for future delivery than they otherwise would. Meanwhile bona-fide hedgers will be inclined to buy less on the forward market than they otherwise would. You can see this combination of effects in the commitments data, as a tendency for commercials as a group to become net short following significant price increases in oil.
When it comes time for the speculators to roll the contracts forward, they have to sell their existing contracts either to someone who is willing to take delivery, or to a producer who sold the oil forward and can now clear that liability without actually producing the stuff. Given relatively high spot demand and tight supply, these rolling transactions have worked fine to this point, without
driving prices lower”.

I think this is a repeat of an exchange we had a few weeks ago. But to continue…

What do you mean by “leveraged longs”, if not the futures traders?

I don’t think it was the futures traders per se who sent oil up to $147 last summer. That is not to say that spot oil prices would follow exactly the same price path if governments around the world were to suddenly decide to abolish futures markets. But again, I don’t think that futures traders, on their own, had the power to send oil up to $147 last summer.

Nor do I think that futures traders themselves have the power to send crude oil down to $34, where it is now.

I think the price of oil is, at present, being determined by a combination of (a) slack demand, (b) exchange rate of the dollar, and (c) actions by the oil producers themselves, particularly non-OPEC countries.

………………

I’m just trying to understand the “ins and outs” of the oil markets myself. But I’m also trying to prod others into being much more exact than to simply refer to nebulous “oil speculators”.

Government gives you 2000$ cash back for an efficient furnace, the furnace is 2000$ more expensive than before the grant.

Government give you 1000$ cash back for buying and effiencet car. The car company increases the price by 1000$.

It looks like it’s coming in Canada… Last week we were at o defict. This week 20 billion is being handed out. Government is already starting to hand out money to individuals: 2500$ cash back for home renovations, giving back each individual investor their money back for the failed commercial paper that was frozen for a year, etc.

I would offer that when some stock, index or commodity goes parabolic (crude at $100) it is leveraged longs and when it finally goes vertical (crude at $125) it is a sure sign that there is speculation on the short side, and that the shorts are being squeezed. Once they are out of the market there are often no more buyers and the bubble pops. Some hedge funds are going out of business because they made bad bets on crude.

Certainly, those people and entities that influence the exchange rate of the dollar will have an influence on oil prices, but very few people would characterize those participants as “oil speculators”.

It seems to me that the only real “oil speculators” out there that influence price are the oil producers themselves. It is true that a company which can store large quantities of oil could, in principle, affect the price of oil. But most such companies are producers as well, and should be primarily characterized as such.

Leave it to the politicians to use the term “oil speculator”; a person with at least a minimal degree of financial sophistication ought to be offering at least a hypothesis as to who these “oil speculators” might be, if not the oil producers themselves.

similarly a company keeps inventory per its computer systems–at the end of a year they actually (sometimes) take an inventiry (they do samples usually)

Now–get the government involved with oil inventoiries and reserves.

Any questions?