>

Fascinating chart above via David Wilson of Bloomberg.

It very much suggests that while Speculators may not have been the prime mover on the 2008 Oil peak, the specs seem to be a very large portion of the current push.

By comparing the net number of contracts owned by non-commercial oil traders (Source: Commodity Futures Trading Commission).

Crude 5.8% the first two days of this week, suggested that speculative demand for oil may be declining.

Category: Derivatives, Energy, Trading

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

77 Responses to “Are Oil Prices Driven by Speculators?”

  1. Andy T says:

    Duh! Winning….

    Don’t put too much weight in some of these commercials/non-commercials Open Interest charts. There are certain firms that are classified as commercials who are actually non-commercials (for all intents and purposes.)

    Also, it’s difficult to factor in the exposure on ICE, which is where the Brent swaps/futures trade.

    ~~~

    BR: Thanks Andy T

    Commodity Futures Trading is not my thang

  2. But look at the price action versus volume. The volume on the second move drove the price half as high as the volume on the first move, yet the second move volume was also approximately twice the volume of the first move. OK, now I’m confused, but it sounded right in my head and I think there is a four in there somewhere

    So to surmise, this actually proves that volume is having less of an impact than other fundamental factors

  3. Lyle says:

    Just the fact that Goldman said prices were to high and they go down 6% says it all. Demand did not change that drastically between Friday and Monday. Actually I wish commodity analysts had to disclose their and their companies position on the commodities they comment on, i.e. I hold no position in X and my company is net (long,short) on X. But the cause and effect on this one is so clear. The situation in Libya did not change that much over the weekend either.

  4. willid3 says:

    thinking it would be better to know not just how many contracts, but how much are they worth too. and we know that demand had been tanking in 2008 (and has barely recovered since. but appears to be going back down again). and as far back as 2007. so why would it be demand if the end customers weren’t buying as much as before? as best as i can recall in 2008, we didn’t have any real new news of threats to oil production, and no oil fields that stopped producing (unlike say 2005 with the hurricanes for example), nor was there a major oil spill that took a major producer out, or threatened others because of the danger of an explosion from the oil in the water. and we were seeing lots of reports of tanker ships at sea basically parked with no place to go. as refiners were buying the oil, as they didn’t have a need for it. and considering that oil spot market is 106, and gas is already almost $4 (and over $4 in some places), care to guess what it should have been at $147?

  5. mac says:

    Looks like net speculative positions have no pedicitive information on price. 2007/2008 Net spec went steadily down as prices went steadily up!

    Does anyone find it curious that virtually the same day that the IEA reaffirms their 2011 forecast for oil demand growth at 1.4mbpd and furthermore states that at current run rates OECD inventories will be at 5 year lows by the end of 2011 AND OPEC itself forecasts strong oil demand growth in 2011 despite the Japan situation, Saudi Arabia announces they are cutting production due to lack of demand? (With Brent at $120 to boot) If Matt Simmons were alive today, I think he would say that petroleum engineers have told the Saudis that if you really want your wells to last another 60 years you need to stop “red-lining” them now! Or else you are gonna break em!

  6. [...] – A chart showing oil prices plotted against the net number of contracts owned by non-commercial oil traders (aka speculators). [...]

  7. DeDude says:

    I don’t understand why we let non-commercials invest in this without imposing a 90% tax on any profit they make. What they are doing is un-american activity undermining society, and theft from consumers of oil products. Off with their heads.

  8. rip says:

    @DeDude: Could not agree more.

    Seems certain people on Wall Street and their greed are far more important than all those little guys on Main Street.

    Used to be a lot better. Not now. Thanks Bill.

  9. Winston says:

    DeDude – excellent comment! Speculation among non-commercials is tantamount to theft.

  10. Andy T says:

    “DeDude Says:
    April 13th, 2011 at 6:55 pm
    I don’t understand why we let non-commercials invest in this without imposing a 90% tax on any profit they make. What they are doing is un-american activity undermining society, and theft from consumers of oil products. Off with their heads.”

    Are you being sarcastic? Or, are you serious with that comment?

    Hopefully you were just being sarcastic. Otherwise, that would be the new “#1 Dumbest Thing DeDude Has Ever Written at TBP.”

  11. Livermore Shimervore says:

    Dear Sirs,
    Can someone explain why we allow speculation on that which there has never been a shortage of demand for? Or any lack of funds to spend on its production? or any lack of those wanting to invest in it?

    I’m mean for real, seriously. C’mon someone let me on this. I trade you an autgraphed copy of Bob Rubins book that I actually read.

  12. rgjohannes says:

    Hmmm… seems more correlative in the past 3 years, but that would correspond to a larger group of small investors jumping into the mix.

    I think what we have forgotten is that the contracts market was set up so that buyers and sellers could exchange for risk management. This just seems like stealing in a legal form: If I have the capital to do so, I can drive the price up and down and make profits that way, but unlike the zero sum nature of the stock market, this effects the balance between producer and consumer artificially. While it may sound anti-capitalist, I say banning this activity to all but the large consumers of the product (airlines, rail, etc) wouldn’t hurt my feelings.

  13. Andy T says:

    “Dear Sirs,
    Can someone explain why we allow speculation on that which there has never been a shortage of demand for? Or any lack of funds to spend on its production? or any lack of those wanting to invest in it?

    I’m mean for real, seriously. C’mon someone let me on this. I trade you an autgraphed copy of Bob Rubins book that I actually read.”
    ~~~~~~~~~~
    You answered your own question.

    The reason you’ve never seen real shortages is BECAUSE of the role of Speculators. Speculators help in defining the forward curve of every single commodity. That information provides “signals” to the “commercial players” do decide whether they need to produce more or less of a commodity.

    Without such “market clearing” discovery, we would have HUGELY inefficient markets that would be vulnerable to extreme volatility, outtages, over supply conditions, etc, etc….

    So, THAT sir is why we “allow” speculation in markets.

    It’s THE most fundamental and important aspect of commodity markets.

  14. mathman says:

    i was looking for a “Tuesday afternoon reads” to file this little gem under:

    http://www.bloomberg.com/news/2011-04-13/goldman-sachs-cdos-bet-against-clients-misled-congress-senate-panel-says.html

    Not that it’ll amount to anything, of course.

  15. bulfinch says:

    Andy T says:

    “Without such “market clearing” discovery, we would have HUGELY inefficient markets that would be vulnerable to extreme volatility, outtages, over supply conditions, etc, etc….
    This from Matt Taibbi’s 2009 article on the oil bubble:”

    Yes! We should all praise God/Allah et al, that the speculators are in there doing the heavy lifting for the little guy! Have greed, will travel. Huzzah!

    Then there’s this:

    “Between 2003 and 2008, the amount of speculative money in commodities grew from $13 billion to $317 billion, an increase of 2,300 percent. By 2008, a barrel of oil was traded 27 times, on average, before it was actually delivered and consumed.” Matt Taibbi 2009.

    And this, also from Taibbi:

    “In other news, Goldman has done an analysis of the 2008 commodities spike and concluded that speculators added some $9.50 to oil prices on average during the 2008 bubble. This is interesting and very telling because Goldman’s analysis excludes so-called “passive” index speculators — i.e. pension funds who buy commodity futures as investments. Since there was nearly $300 billion of this sort of passive “long-only” money (meaning that all of this was money betting on prices to rise) in the commodities markets in 2008, it stands to reason that Goldman is wildly underestimating the effect of commodities speculation.

    Piggybacking on Goldman’s math, Energy Intelligence Finance did its own analysis and concluded that speculation more likely added a $60 premium to oil prices in 2008.”

  16. Thor says:

    Andy – give it a rest – you say some pretty ridiculous shit a lot of the times. You don’t like it when people pick on you for stupid shit you say, be an adult and just let it go. You don’t need to constantly berate people you don’t agree with, it makes you look petty and unintelligent.

  17. wally says:

    “Speculators help in defining the forward curve of every single commodity.”

    I think, Andy T, you need a refresher on the meanings of the words “define” and “help”.

  18. cfischer says:

    AndyT: Sorry, I disagree. I don’t think anything will top DeDude’s assertion that a 35 hour/week, 180 day a year teacher should be paid the same as other professionals with masters degrees.

  19. DrSandman says:

    I’m with DeDude. A commodity is something that is consumed to make something else of higher value. If you bet/speculate on prices of assets that you do not consume or transform into a good or service that’s worth more than the asset you speculated on, then you are not entitled to the profit you made.

    This means a 90% tax on all profits from oil/copper/gold/silver/coffee/Pork Belly/Corn/OJ/Cotton/etc. contracts that you do not take delivery of. Really, it should be 100%… prove me wrong. The OIL market is hardly inefficient or illiquid….

  20. Andy T says:

    @cfisher:

    I almost forgot about that one. Agreed that that DeDude statement still ranks #1. The one above is probably #2.

  21. Andy T says:

    @bulfinch.

    Yeah, who are we to argue with Matt Taibbi, a journalist with Rolling Stone magazine. He’s obviously an authority figure on this subject matter. Not.

    However, most of his facts on that matter came from Michael Master’s testimony before Congress in 2008, which was largely spot on. The extremely large pension funds essentially circumvented traditional “speculative” limits by putting the passive money in things like the GS Commodity Index, etc, etc. I agree that the this “passive” investment, by “our” Pension funds, created a “warping” affect in the back of the commodity curve that temporarily raised prices.

    I wrote about this concept extensively during that time period in these very comment sections.

    Basically, Pension funds and mutual funds exceeded speculative position limits which are in place for a reason. If we were to merely enforce the those limits, none of that would have happened.

    So, again, there’s nothing “evil” or “wrong” with Speculators or speculation. Though, there is something wrong with large Pension funds buying more forward contracts than they’re legally allowed.

    Do you see/understand the difference?

    IOW: Speculation is FUNDAMENTAL to commodity markets. Speculators who exceed the CFTC Position Limits can cause problems.

    Those are two separate discussions.

    Think it’s one of the reason Goldman Sachs stopped their involvement in things like a “Commodity Index.”

  22. Rand says:

    I noticed that the positions were net. How different would the chart look if it was just first month contracts? I know that spread arb was a popular trade during the rise in prices and I feel that would give a fuller picture as to the impact of speculators. Any one else curious?

  23. Andy T says:

    Thor@9.23.

    If you have something to add to a discussion on the role of speculators in a Commodity market, please do so.

    Otherwise, why don’t you just go back your hole and keep discussing the merits of Apple over the Android.

  24. Lyle says:

    Given the report about Goldman today, which says don’t trust them any further than you can throw them, I wonder if Goldman went short oil and then issued the report. It would be consistent, since they don’t give a damn about their customers its only about them making money. Of course this just proves that the vaunted principals Goldman lays out are not worth the disk space used to store them, or the paper to print them out.

  25. dss says:

    You answered your own question.

    The reason you’ve never seen real shortages is BECAUSE of the role of Speculators. Speculators help in defining the forward curve of every single commodity. That information provides “signals” to the “commercial players” do decide whether they need to produce more or less of a commodity.

    Without such “market clearing” discovery, we would have HUGELY inefficient markets that would be vulnerable to extreme volatility, outtages, over supply conditions, etc, etc….

    So, THAT sir is why we “allow” speculation in markets.

    It’s THE most fundamental and important aspect of commodity markets.

    I cannot believe that anyone make such an incredibly stupid statement:

    “Without such “market clearing” discovery, we would have HUGELY inefficient markets that would be vulnerable to extreme volatility, outtages, over supply conditions, etc, etc….”

    Oh yea, the futures markets are hugely efficient, not at all volatile. Have you looked at any charts of futures, ever?

    Rolling on the floor laughing so hard I am crying. Jeez Louise Andy, did you really just say that?

  26. anonymouse says:

    If you saw [an oil speculator], the giant who holds the world on his shoulders, if you saw that he stood, blood running down his chest, his knees buckling, his arms trembling but still trying to hold the world aloft with the last of his strength, and the greater his effort the heavier the world bore down upon his shoulders – What would you tell him?”

    I…don’t know. What…could he do? What would you tell him?”

    To shrug.

    I don’t know any teachers who work 35 hrs/week. But then again, I don’t know any UAW autoworkers who make $75/hr or any cops who make $250,000/year or any public sector union employees who make $150,000/year like some of us will claim is common. I did read that Jamie Dimon makes $21 million/year though.

    Excuse me.

    Gas prices? It’s beginning to seem a lot like the Spring of 2008 all over again. I have a feeling “this is gonna hurt” by July or so.

  27. anonymouse says:

    I was down in the Texas cotton patch last Fall.

    There were a few farmers making out well from $1.40 cotton and convinced they’d caught the top. I suspect none caught $2 cotton. I wonder if any commodity speculators that did catch $2 have ever dropped their drums to pick a row of cotton or dumped a basket or tromped a module? I doubt it.

    I doubt any oil speculators have ever come closer to physical oil than the Pennzoil they bought for the Beemer at WalMart.

    I read somewhere that Ayn Rand took Social Security and Medicare under an assumed name?

    Pardon me.

  28. Andy T says:

    Like night follows day, here comes DSS stalking me at TBP….but not really saying anything–as usual.

    So, are you saying that Speculation is not fundamental to commodity markets? Is that what you’re saying? For real?

    Are you, with intellectual honesty, really going to assert that here?

    Or, are you just here to mess around….

  29. gasman says:

    i hope everyone here is joking about spec trading by non-commercials being inherently “bad” in some way. i’m not sure how many people here have experience in the commodities arena so i’ll share my 2 cents.

    the rally into 2008 (starting in early 2000′s) was driven by legit concerns about demand growth vs spare supply capacity. back in the day (1990′s into early 2000′s ) there was plenty of spare capacity. if there was extra demand or some disruption to supply the price could rise a little and taps would get opened. however, a few years ago people started to realize the demand growth from china was a game changer, and that some of the major oil fields were either peaking or already declining. there looked like there could be a true supply shortage just a few years out. well when it looks like demand is gonna outpace supply and supply is relatively inelastic in the short/medium term you gotta take price high enough to kill demand. that was the rally to 2008.

    then, at the same time we were getting demand destruction from high prices, the house-of-cards economy built on leverage was exposed. i think we can all agree we would have seen severe deflation were there no intervention. however, there was intervention, and it was massive. so the current rally i believe is built on 2 things: 1) all the liquidity bernanke dumped on the market has to go somewhere, and 2) the more the economy gets back on track the more we are at risk again for demand gains outpacing supply gains.

    so this recent rally is only real to the extent the recovery is real. however, a couple hiccups (more demand destruction, debt ceiling not being raised/gov’t spending being lowered) could easily put us back on the path to deflation.

  30. bulfinch says:

    Yeah, who are we to argue with Matt Taibbi, a journalist with Rolling Stone magazine. He’s obviously an authority figure on this subject matter. Not.

    Andy T says (with adolescent sarcasm): “Yeah, who are we to argue with Matt Taibbi, a journalist with Rolling Stone magazine. He’s obviously an authority figure on this subject matter. Not.”

    That’s really pretty stale shit. Hell, I like Taibbi’s work, and I could have come up with a more imaginative swipe at his credentials, or lack thereof. A giant Pffffttt would have read better.

    Look, it’s called investigative journalism, or muckraking, and I don’t believe not being an “authority figure” on a subject precludes teasing it apart — in the case of Taibbi, with the aid of authority figures. In the same way, you can write a biography about XXX without having ever met the subject, or be a private investigator without ever having cheated on your wife.

    Meanwhile, I understand the basic role of speculators in markets; I also readily perceive the turmoil created by them in the last several years. In the most basic sense, speculators are gamblers (backed by the house) and they have a deleterious effect upon end consumers, and worse, upon savers.

  31. Thor says:

    Andy @ 10:17 – No sir, nothing to add to this particular discussion. I’m just here to remind you that you’re not fooling anyone. Real nice try though, real nice try.

  32. Livermore Shimervore says:

    @Andy T
    “The reason you’ve never seen real shortages is BECAUSE of the role of Speculators. Speculators help in defining the forward curve of every single commodity. ”

    Doesn’t the fact that there are NEVER shortages, NEVER a lack funding (given the modest margins) and NEVER sees a lack of investors a signal that perhaps there’s TOO much a good thing? Shouldn’t there be some sleepless nights at the Rex Tillerson home?

    Also, can you explain how 2,300% increase (I have the comma in the right place correct?) in speculative money in one commodity sector not affect price action?

    and lastly, with China (among others) shooting nearly 2 million cars out of their centrally planned cannons onto the roads PER MONTH, and a record crush of demand to move other commodities from and to in the rest of the emerging world…..with NO ONE claiming anything but a further acceleration of this level of demand going forward, do you we really need speculators telling us the sky is blue and the grass is green. I mean any run of the mill analyst can tell you that your business is on a different track than Blockbuster Video.

  33. bulfinch says:

    gasman says: ” well when it looks like demand is gonna outpace supply and supply is relatively inelastic in the short/medium term you gotta take price high enough to kill demand. that was the rally to 2008.”

    Except that the US Energy Information Admin states that during that period the world oil supply rose from 85.24 million barrels a day to 85.72 million. Contemporaneously, demand for oil dropped from 86.82 million barrels a day to 86.07 million.

  34. dss says:

    Pretty funny Andy, coming from you, the Stalker’s stalker. You forget, there is a complete record of your stalking just a few mouse clicks away. You really don’t want to start that fight again, do you?

    No I did not say that speculation is not fundamental to commodity markets, as everyone can plainly see. But nice try to deflect attention from your own lame and idiotic statements.

    When someone makes really stupid statements, rebutting them is not stalking. So let’s stick to the facts of what was said, instead of making it up as you go along as you are so embarrassed by your statements that you cannot defend them.

    So in fairness to you, I will cut and paste your actual words instead of trying to put words in my mouth like you do.

    “”"”The reason you’ve never seen real shortages is BECAUSE of the role of Speculators. Speculators help in defining the forward curve of every single commodity. That information provides “signals” to the “commercial players” do decide whether they need to produce more or less of a commodity.

    Without such “market clearing” discovery, we would have HUGELY inefficient markets that would be vulnerable to extreme volatility, outtages, over supply conditions, etc, etc….”"”"”

    In your attempt to ridicule Mr. Livermore, you assert as quoted above that because of the role of “market clearing:” discovery (your words again, this is too easy)

    1. we have never seen real shortages (rolls eyes)
    2. because of speculation we have efficient markets (rolls eyes, takes a drink) que up the 1980 corner of the silver market by the Hunt Brothers
    3. and that are markets do not have extreme volatility (rolls eyes, takes a drink, shoots at the fish in the barrel next to my desk) que the Flash Crash of 2010.

    Now, just one of those statements would be enough to make any trader or member of the CBOT have beer shooting out of their noses while they gasp for air, but three boneheaded statements in a row might just put them away for eternity.

    Really, Andy, just give it up.

  35. royrogers says:

    yes, ban all the speculators esp the airlines and the oil producers that are trying to lock in prices.
    all oil bought should be required to be delivered, processed / consumed within 5 days.

    ~~~

    BR: Um, airlines and the oil producers are commercials, not specs.

  36. dss says:

    Andy,

    Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data, ability to repeat discredited memes, and lack of respect for scientific knowledge. Also, be sure to create straw men and argue against things I have neither said nor even implied. Any irrelevancies you can mention will also be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

  37. curbyourrisk says:

    The first go around at $147 was actually caused by shorting. From what I remember….SemGroup and a VERY large short position that it continued to build and build. It filed bankruptcy July 23, 2008. Oil reached a peak of $147 on July 11th….

    Hmmmm……coincidence???? I think not.

  38. Andy T says:

    Ok.

    Tonight I’ve made two key points:

    1) Speculators in commodity markets serve an important function. Markets “with” speculators are more efficient than markets “without” speculators. That’s probably the most fundamental concept in commodity markets. Period.

    2) Position limits on Speculators is important. A single speculator, with enough cash, can temporarily overwhelm markets and cause unnecessary dislocations. I think that the Pension and Mutual funds, via their passive investments in commodities, caused such a dislocation between 2005 and 2008. Because of their “peculiar nature,” as neither a Hedger or Speculator, they were allowed to circumvent traditional position limits and essentially “overwhelmed” the long dated contracts for oil, etc.

    That’s the crux of what I’ve asserted here this evening. Feel free to make a cogent argument against either of those assertions.

    @Thor. Thanks for confirming you actually had nothing to add to the discussion.

  39. Thor says:

    Not really Andy – the only “key points” you’ve made tonight are that you lack civility, and that you do not understand the topics in which you choose to debate nearly as much as you like to think you do.

    BR – Sorry, I couldn’t help myself tonight, I promise I’ll be good ;-)

  40. Andy T says:

    @dss

    You’re “come back” argument to me are these three points:

    “1. we have never seen real shortages (rolls eyes)”

    Well, have you? As opposed to countries that attempt to “control” prices, where shortages occur frequently, we really haven’t experienced “shortages” of commodities, have we?

    “2. because of speculation we have efficient markets (rolls eyes, takes a drink) que up the 1980 corner of the silver market by the Hunt Brothers”

    See my Note above. And where are the Hunt Brothers now? What happened to them? Did they make a lot of money?

    “3. and that are markets do not have extreme volatility (rolls eyes, takes a drink, shoots at the fish in the barrel next to my desk) que the Flash Crash of 2010.”

    So what? I’m talking about the role of speculators in commodity markets. By bringing up the Flash Crash, you’re actually emphasizing my point. The commodity futures markets, where there’s both a “long” and “short,” suffered NO WHERE NEAR the amount of volatility as the stock market, or single stocks, where there is much more “long only” interest as opposed to short interest.

    You want to keep this up? Want to keep debating?

    ~~~~~~~~~~~~~
    “No I did not say that speculation is not fundamental to commodity markets, as everyone can plainly see. ”

    Well, on this…we’re in agreement. Please explain that to DeDude and the others here. Maybe they’ll listen to you.

  41. Andy T says:

    Thor@11.26.

    Thanks for confirming to the crowd, once again, that you have nothing to add.

  42. dss says:

    Andy,

    You made no key points.

    Here are your assertions –

    1. we have never seen real shortages (rolls eyes)
    2. because of speculation we have efficient markets (rolls eyes, takes a drink) que up the 1980 corner of the silver market by the Hunt Brothers
    3. and that are markets do not have extreme volatility (rolls eyes, takes a drink, shoots at the fish in the barrel next to my desk) que the Flash Crash of 2010.

    Defend your indefensible statements or STFU.

  43. dss says:

    Andy,

    There are no come back arguments. I merely repeated your really stupid statements. You can’t defend them, so let’s just call it a day.

  44. gasman says:

    ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
    bulfinch Says:

    April 13th, 2011 at 11:08 pm
    gasman says: ” well when it looks like demand is gonna outpace supply and supply is relatively inelastic in the short/medium term you gotta take price high enough to kill demand. that was the rally to 2008.”

    Except that the US Energy Information Admin states that during that period the world oil supply rose from 85.24 million barrels a day to 85.72 million. Contemporaneously, demand for oil dropped from 86.82 million barrels a day to 86.07 million.
    ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

    just so you know, what you wrote actually confirmed what i was saying.

    world oil consumption went from 70 mmbpd in 1995 to 84 mmbpd in 2005. it then grew ~1 mmbpd the next couple years. in 2007 we actually had 86.5 mmbpd demand vs 85.5 mmbpd supply according to the iea. there were real concerns we couldn’t add much more supply within a few years. so we HAD to kill demand. you confirming that demand was destroyed by high prices (when according to your own stats demand was outpacing supply by 1.6 mmbpd) doesn’t refute what i wrote. it only confirms price had to spike because you can’t balance a market in the long term that is consuming 1.6 mmbpd more than it is producing.

  45. Andy T says:

    dss@11.40.

    It’s going to be difficult to debate you if you cannot read the English words I wrote @11.30.

    Let me say it a different way:

    “1. we have never seen real shortages (rolls eyes)”

    Because of forward speculation (and hedging) in commodities, we have not suffered supply shortages. We have not “gone without” as is the case in countries that don’t allow “speculation.”

    “2. because of speculation we have efficient markets (rolls eyes, takes a drink) que up the 1980 corner of the silver market by the Hunt Brothers”

    The Hunt Brothers went completely BUST and lost all their money. That episode reinforced the idea that speculative position limits in commodities markets are critical. [My Point #2 above]

    “3. and that are markets do not have extreme volatility (rolls eyes, takes a drink, shoots at the fish in the barrel next to my desk) que the Flash Crash of 2010.”

    That was a “stock market” phenomenon and had NOTHING to do with commodity speculators, which is what was being discussed tonight.

    Is that clearer for you?

  46. Andy T says:

    @dss.

    Agreed.

    Goodnight.

  47. bulfinch says:

    Andy T — nobody would argue that speculators, in the normal classical FDR-era sense of the word, are just as fundamental to the commodities markets as the physical hedgers. The argument is that the modern day iteration of the commodities speculator is a vastly different, much more repugnant beast. Yes, this is THANKS to the lack of position limits, as well as other neat little loopholes, (Enron loophole, et al), but keep in mind who lobbied the CFTC so aggressively for the diminution of said position limits starting at least two decades ago: SPECULATORS.

    Namely, GS.

  48. bulfinch says:

    gasman — I wasn’t suggesting that high prices killed demand. Those EIA figures were from the first quarter to the second quarter of ’08 — my point was that demand was down and supply was up in the run-up to the peak in crude oil prices. In April of ’08, (well before the peak of 149/barrel), OPEC stated that oil supply to the market was enough and high oil prices were not due to shortages in crude.

    It was also not a case of China using more oil. Speculative cash for petroleum in ’08 equaled 918, 955,932 barrels (according to CFTC) while China’s consumption in the same period was 992,261,824 barrels.

    It was an oil bubble, and we’re seeing something similar play out right now.

  49. rjs0 says:

    as long as everyone understands that for every long there has to be a short…

  50. socaljoe says:

    Well duh! Speculators in all asset classes drive the market price to reflect future expectations. A fast growing company stock may be priced to 100 times earnings based on expectations of future earnings growth. The oil price may be driven to prices which seem unjustified today based on future expectations of supply shortage or demand growth. Like all markets the speculators are subject to irrational fear and greed resulting in price overshoot. If their function were to discover the true price based on today’s fundamentals, they wouldn’t be called speculators. Where is the news here?

  51. Greg0658 says:

    now that I’m signed in .. YES .. to mac, DeDude, rip, AndyT _’s points and counter-points ..
    interesting discussion .. and I guess the middlemen* help drive cost up for the real producers to dig deeper and more lateral
    .. should we price oil for the year 2211? NO, just what can be gotten NOW in the near** term

    codas
    * – must be paid for their services via other means > salaries, dividends, rebates, taxes
    ** – life time of current investor as to not ” “red-lining them now” during it’s livelyhood

  52. genevakiwi says:

    “gasman
    i hope everyone here is joking about spec trading by non-commercials being inherently “bad” in some way. i’m not sure how many people here have experience in the commodities arena so i’ll share my 2 cents.

    the rally into 2008 (starting in early 2000′s) was driven by legit concerns about demand growth vs spare supply capacity. back in the day (1990′s into early 2000′s ) there was plenty of spare capacity. if there was extra demand or some disruption to supply the price could rise a little and taps would get opened. however, a few years ago people started to realize the demand growth from china was a game changer, and that some of the major oil fields were either peaking or already declining. there looked like there could be a true supply shortage just a few years out. well when it looks like demand is gonna outpace supply and supply is relatively inelastic in the short/medium term you gotta take price high enough to kill demand. that was the rally to 2008.

    then, at the same time we were getting demand destruction from high prices, the house-of-cards economy built on leverage was exposed. i think we can all agree we would have seen severe deflation were there no intervention. however, there was intervention, and it was massive. so the current rally i believe is built on 2 things: 1) all the liquidity bernanke dumped on the market has to go somewhere, and 2) the more the economy gets back on track the more we are at risk again for demand gains outpacing supply gains.

    so this recent rally is only real to the extent the recovery is real. however, a couple hiccups (more demand destruction, debt ceiling not being raised/gov’t spending being lowered) could easily put us back on the path to deflation.”

    Bingo, nailed it.

    bulfinch – High prices did kill demand, of that there is no doubt. Quoting EIA figures doesn’t hold much relevance here. There are by definition backward looking, and the futures curve is not. OPEC statemnet was also correct, they were there to supply anyone with oil at spot prices, noone that wanted oil went without. The problem was that at those prices no buyers were going to take a drop more oil than they needed because getting caught long when/if demand destruction kicked in would be a very painful and possibly career ending experience. So in effect high prices killed demand by physical traders before it killed it at the pump, creating less supply in the face of seemingly ever increasing demand.

  53. dead hobo says:

    Andy T,

    Good job here. Agree about the need for speculators … can’t have markets or price discovery without them.

    Also agree about the dislocations caused by excessive passive investment. These pigs are the crux of the problem. The only good thing to say about them is that a large number will lose a lot of money when the price of oil breaks.

    These dislocations are going to be a fact of life until realistic position limits are the law of the land and a world practice.

    If oil doesn’t break soon, I’ll probable cash out of equities a few months early. I’ll be up a lot, but not as much as I had hoped/planned to be.

  54. royrogers says:

    royrogers Says:

    April 13th, 2011 at 11:17 pm
    yes, ban all the speculators esp the airlines and the oil producers that are trying to lock in prices.
    all oil bought should be required to be delivered, processed / consumed within 5 days.

    ~~~

    BR: Um, airlines and the oil producers are commercials, not specs.

    …………………………..
    I am being rather fascitious
    they are commercials, but they are speculating on “gaining” by
    betting(hoarding) for the future.

    ~~~

    BR: I was being precise and accurate. You were not being facetious, you were making an incorrect statement.

  55. gasman says:

    bulfinch Says:
    April 14th, 2011 at 12:14 am

    gasman — I wasn’t suggesting that high prices killed demand. Those EIA figures were from the first quarter to the second quarter of ’08 — my point was that demand was down and supply was up in the run-up to the peak in crude oil prices. In April of ’08, (well before the peak of 149/barrel), OPEC stated that oil supply to the market was enough and high oil prices were not due to shortages in crude.

    It was also not a case of China using more oil. Speculative cash for petroleum in ’08 equaled 918, 955,932 barrels (according to CFTC) while China’s consumption in the same period was 992,261,824 barrels.

    It was an oil bubble, and we’re seeing something similar play out right now.
    ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

    maybe you weren’t suggesting high prices killed demand, but they did. i don’t know what else to tell you. oil went from $100 in a couple years. if you don’t think there was demand destruction from a more than doubling in prices, you probably don’t believe in any logic behind finding supply/demand equilibrium. i don’t know how you could discuss any economics without understanding this in some basic way.

    when you say “my point was that demand was down and supply was up in the run-up to the peak in crude oil prices,” you’re focusing on one small data point and missing the big picture. that was the end to a massive multi-year bull run that had both rises prices and rising consumption for a while. and again, we reached a point where demand was starting to outpace supply. i mean, according to your own statistics, even after demand started decreasing in 2008, there was a 0.3 mmbpd supply shortfall to balance the market!!!!! what else needs to be pointed out that the world was becoming short of oil? what else should happen if demand is outpacing supply, and demand growth is outpacing supply growth?!?! you think prices should be going down?

    i think i’ve covered this pretty thoroughly at this point, anyone who wants to blame spec money for the rally up to 2008 probably doesn’t know the underlying numbers.

    also, i said that i believe bernanke is playing no small part in the current rise, but he is helping fuel inflation in all commods, not just oil. so you can blame the symptom if you want (long-side spec), but you are ignoring the disease (bernanke).

    lastly, Andy T has been spot on in most of his posts here. i totally agree that the passive money going into long-only commodity index funds probably had some effect and should be capped more, but that is very different from the traditional speculator in the market.

  56. Greg0658 says:

    genevakiwi repeats “we were getting demand destruction from high prices” ..
    is that the good plan ? discover out here & there who doesn’t need to go to work at these prices — or another concept – push prices up encourage’g new transport schemes for laborers to get to those lovely jobs?

    maybe the Mall Workers Union of America should invest in an oil tanker ? and soon .. get a little contango going for themselves (in the short run) .. when the oil runs out convert the hull into a Waterworld condo and live off the ocean (ugh)
    http://www.imdb.com/title/tt0114898/

  57. DeDude says:

    Andy T @ 8:00 PM

    I am so impressed with the way you lay out facts and arguments to counter what that Dude said. The way you clearly articulate what was wrong with his suggestion and why it could not possibly be successful just “finished” the discussion. Nothing more could be said, and that is obviously what he himself had to conclude*

    *Since you have such a hard time recognizing it, I should point out that THAT was sarcasm – AND so is Berry’s instructions at the beginning of all “comment” sections.

  58. wally says:

    Markets “with” speculators are more efficient than markets “without” speculators.

    ???

    So the copper market is more efficient because Chines pig farmers stockpile the stuff. The problem with your ‘help define’ argument, Andy, is that the help isn’t needed and the result is tendentious.. it is what it is because that’s what it is. The case you make is self-serving and is the same as has been made by speculators for centuries. What ‘helps define’ the markets sometimes rips the guts out of people who need a certain commodities for their lives and the definitional assistance is a public nuisance. It is not, then, a public good. It hurts people.

  59. DeDude says:

    cfisher@9:25PM

    What a brilliant argument. How could anybody be stupid enough to suggest that society should reward teachers who build younger minds and prepare them to be productive citizens, at the same level as MBA’s who suck money out of other peoples pension funds and invent weapons of financial mass destruction that cost society trillions in damages. I think anybody reading your well agued piece will see the blatant idiocy of even suggesting that teachers should exist, let alone be compensated.

    I mean God forbid that teacher’s ended up with money that their pension funds could use to speculate in commodities with – because as we all know (Andy T @ 10:10PM) when teacher’s pension funds speculate in commodities then it drives up prices, but when rich pigs do the same then it is just an important market clearing mechanism (Andy @ 8:53PM). It is so easy to understand the difference*.

    * unmarked sarcasm

  60. curbyourrisk says:

    Blame SemGroup. And the trading houses who knew they were short. This was an instance of hedging gone awry. Their short positions killed them. The trading houses knew they were short, put their hands around their necks and “SQUEEZED” until the last breath was gone.

    Funny…..The market killed a short and no one cared. BUT, If a company was “shorted out of existance” – as so many people argue happens everyone would have been screaming, there is no place for shorts.

    You guys can argue all you want about speculators, but is not buying (or shorting) a stock or commodity in effect speculating on where it is going…..whether it is a hedge or not???

  61. DeDude says:

    Gasman@10:4;

    Thanks for an intelligent contribution to the debate*. But let me throw this idea at you. I can agree that peak oil and coming relative shortages are real. However, in a truly efficient market that would cause a smooth upward curving increase in oil prices. What we have actually observed in oil prices is the bubble-burst cycles that are typical for speculative markets. This has been very destructive for people’s individual finances and destructive for any rational investment in the alternatives that we obviously need to develop sooner rather than later. I agree that supply and end user demand have a strong influence on prices. However, I also agree with bulfinch that price action seen in oil the past decade cannot ALL be explained by supply to end user demand issues (way to big swings without corresponding swings in the supply to end user demand balance). It would be interesting to see the supply minus “end user demand” plotted against oil prices to see how much of oil price fluctuations it explains.

    *no Andy that was not sarcasm, because this guy actually made a coherent and rational argument (look and learn Andy, look and learn).

  62. Greg0658 says:

    many moons ago I requested some MARK that shows when a “Your comment is awaiting moderation” snags a posters post … it seems this thread generated more than a few .. and its hard to follow those (catch-up) … just another wish in this world

  63. royrogers says:

    “…I am being rather fascitious
    they are commercials, but they are speculating on “gaining” by
    betting(hoarding) for the future.

    ~~~

    BR: I was being precise and accurate. You were not being facetious, you were making an incorrect statement.

    …………………………………………….

    I did make an incorrect statement . Speculators affect the price of a commodity. there is no one here to disagree with you. I guess I am not allowd to be sarcastic on this board.

  64. cfischer says:

    @Dedude,

    Not to rehash an old conversation, but I never said a word about MBA’s. Your assertion that teachers should be paid the same as engineers, scientists, and other professionals that work 230 days a year and much more than 40 hours a week in absurd. You also show a complete ignorance for both the current state of the teaching profession(dozens-hundreds of applicants per position) as well as a lack of understanding of supply and demand (at current salaries, the supply is far greater than demand.)

    Supply and demand pretty much sets the target salaries for most professions. It’s time to bring this back to public servents as well. Oh, and most of the rest of us work without a promise of a pension and actually have to save some of our salaries.

  65. Livermore Shimervore says:

    Question,
    1-If speculators are helping the market to become efficient and predictable why are we experiencing these massive bubbles? 2-Are motorists and jet travelers putting massively higher amounts of travel on the roads and skies in short, condensed periods of time? 3-Or we seeing marginal, albeit rising demand from the emerging markets? There seems to be a few slices of the cake that are missing here. Big slices.

    Also, 4-while the pure short and long speculators may blame the long only institutionals, are those pools really putting up THAT level of money? Seems to me you would have to put up quiet a big bank roll to pull off $60-$80 short term spikes.

    5-has it been established that the pure speculators gain a net benefit from the instutional longs entering into their turf? 6-If we entering a new horizon on emerging market demand in oil why do we need speculators at all? Either the real long and short specs or the long only institutional. This industry will have no trouble finding customers in any of our lifetimes. Or is someone prediciting the Chinas and Indias of th world going back to sleep? It’s sort like needing a real estate broker to help you find a vacant house for sale in Florida. Just walk out of your front door.

  66. DeDude says:

    @cfisher,

    I guess I will have to rehash the old conversation if you insist on misquoting me. My contention back then was that people with similar education levels (whatever your master degree is in) deserve a similar level of compensation as what teachers get. If they work overtime they deserve compensation for that. The idiots who claim that teachers only work during class-room hours have no clue what it is to be a teacher. The stupid old right wing lie about teacher’s and public employees not working hard and having much better compensation than private sector employees with similar education – is just an old lie with no basis in data or facts. The only part of the public sector where total compensation (salary + benefits + pensions) is higher than the private sector, is the “high school diploma or less” category.

  67. Andy T says:

    @deahhobo.

    Thanks for the comment.

    @DeDude.

    I apologize for calling your statement dumb. You can clearly write in fully formed sentences and express a thought in written form. So, you’re clearly not dumb or stupid.

    The better terms would be “uninformed.”

    It’s pretty clear that you don’t have any understanding about how commodity markets function or what role speculators serve. So, there’s not reallya lot to discuss.

    But, to answer your orginal “uninformed” comment @6.55 PM: If you taxed speculators at 90%, you would drive all speculative activity out of commodity markets and thus markets would be subject to frequent “stock outs” and “over supply” conditions. Essentially, commodity markets would become hugely inefficient with frequent periods of “scarcity.”

  68. santamonica says:

    I’m still confused as to why everyone is surprised at this conclusion. Go back in history – whenever a central bank loses control of inflation, commodities rocket up. Market participants find the mechanism needed to mitigate inflation risk (commodities) and the resulting drag (from higher commodities prices) slows the economy down since the central bank failed in its mission.

    Let us remember that economics still occurs despite what happens at central banks.

    I’m thankful for high commodity prices – it helps overcome the complete incompetence of politicians and the foolish economists they hire.

  69. patfla says:

    I believe the key ‘innovation’ on the ICE exchange in London, pre-2008, was that it had been recently opened up to WTI (West Texas Intermediate). Brent is what matters for Europe – the equivalent in the US is WTI. If, in the 2008 run-up, you don’t count the Open WTI Interest on the ICE exchange in London you’re probably not seeing most of the speculation.

    Look up International Continental Exchange headquartered in Atlanta. Their name comes up increasingly in the news (but usually discretely) and they appear to be very well-connected in Washington.

    What’s interesting is that 3 years later, oil speculation seems to have much less need for the WTI ICE exchange in London. That’s a step backwards.

  70. DeDude says:

    Andy; I don’t think I would agree with your sweeping statements like “drive all” and “subject to frequent. With a 90% tax on speculators, the “gambeling” would be limited to end users who would either “stock up” on options for several years of future delivery (if they deemed the price favorable) or not stock up on options for more than a few months of future delivery (if they deemed it likely that demand/supply would drive prices further down). Who better to ensure a reasonable and efficient prediction of future supply/demand than the producers and end users. The wild price swings (which have become more frequent as speculative positions have increased) that are totally disconnected from supply/demand issues have been created by ignorant or malicious speculators who’s profit does nothing but adding to the final cost (commodities “investments” are so popular because they net a huge profit – ultimately paid for by consumers).

    If we need outside money as a risk willing insurance capital, then allow that to happen only in direct contracts between investors and specific producers, or specific end users. I have no problem with insurance which is very different from speculation. With a healthy insurance system in hand we could probably get rid of most farm subsidies by telling farmers to purchase crop success and crop price insurance if they don’t want to bet the farm on good weather.

  71. Greg0658 says:

    I will rewrite that 8:30am post – admittedly I should spend more time expressing my thoughts in clear English.

    genevakiwi repeats @5:16a what gasman stated @10:49p
    “we were getting demand destruction from high prices” .. Is demand destruction the good plan? To create here in America a mechanism, to find those job functions that are not entirely needed?
    Another concept of change for good – push prices up to encourage new transportation schemes for those laborers to get to those jobs? Such as fast rail and other mass transit webs. Add in carpooling plans and working from the home via the web. Not to forget electricification of transit.
    Demand destruction through speculation and those higher prices for the good it can invoke. I guess I’m for it (for the kids).
    I’ll cut the Waterworld joking around this time.

  72. bulfinch says:

    Gasman — late to my own defense.

    Without getting down in the weeds, my point is this: Rampant speculation in the commodities market drove the price of a barrel of crude to $147 in 2008, in a time when supply was up and demand was down. This is a fact (goddammit!)

    High prices killed demand later — but demand was down *before* a barrel of crude had hit $100 in April of ’08. There were factors to the decline in demand for crude exogenous to price.

    You disagree.

    Okay.

    Thanks for the nastiness.

  73. socaljoe says:

    Speculators act to reflect future expectations into today’s price. This price signal will result in behavioral adjustment on the part of economic participants resulting in a tendency towards supply and demand equilibrium. It’s how a futures market works. Beats a centrally planned economy, in my opinion.

  74. gasman says:

    DeDude Says:

    April 14th, 2011 at 9:40 am
    Gasman@10:4;

    However, in a truly efficient market that would cause a smooth upward curving increase in oil prices. What we have actually observed in oil prices is the bubble-burst cycles that are typical for speculative markets. This has been very destructive for people’s individual finances and destructive for any rational investment in the alternatives that we obviously need to develop sooner rather than later. I agree that supply and end user demand have a strong influence on prices. However, I also agree with bulfinch that price action seen in oil the past decade cannot ALL be explained by supply to end user demand issues (way to big swings without corresponding swings in the supply to end user demand balance). It would be interesting to see the supply minus “end user demand” plotted against oil prices to see how much of oil price fluctuations it explains.
    ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

    i find your assertion that

    “in a truly efficient market that would cause a smooth upward curving increase in oil prices. What we have actually observed in oil prices is the bubble-burst cycles that are typical for speculative markets”

    to be interesting. do you have any empirical evidence to back up that statement as to why it should be a smooth upward curve? or is that just how you “feel” the market should behave? also, how would the oil chart look if you log-normalized it? a little less parabolic? i believe i have addressed why you would see a blow off top… short-term demand is more elastic than short/medium term supply now… this is a fundamental shift in the oil market in the past 10 years. no one knows what the right price is exactly to balance the market under those circumstances, so for you to claim to know how we should arrive at that price seems a little disingenuous.

    as for this:

    “However, I also agree with bulfinch that price action seen in oil the past decade cannot ALL be explained by supply to end user demand issues (way to big swings without corresponding swings in the supply to end user demand balance). ”

    of course the price is influenced by speculators, and who cares? one reason i love the commodity markets is that at the end of the day they have to balance. you gotta price the market to balance it. short-term dislocations can happen, but they can’t last forever.

    again, you want to find a culprit for these massive price swings over the past decade, look no further than the federal reserve (relaxed lending standards, zirp, qe) trying to pump up an economy that is fundamentally sick right now.

    maybe Barry can add when QE was started to the oil chart?

  75. DeDude says:

    Yes QE2 provided the free capital for speculators.

  76. gasman says:

    bulfinch Says:

    April 14th, 2011 at 8:45 pm
    Gasman — late to my own defense.

    Without getting down in the weeds, my point is this: Rampant speculation in the commodities market drove the price of a barrel of crude to $147 in 2008, in a time when supply was up and demand was down. This is a fact (goddammit!)

    High prices killed demand later — but demand was down *before* a barrel of crude had hit $100 in April of ’08. There were factors to the decline in demand for crude exogenous to price.

    You disagree.

    Okay.

    Thanks for the nastiness.

    ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

    no nastiness here, i just disagree with most of what you’re saying.
    1) i do agree that, yes, there were factors besides price that made demand decline (popping of leverage bubble)
    2) however that effect is not easily separated from the price effect since they were occurring at the same time
    3) high prices didn’t kill demand “later.” you have picked $100 as an arbitrary starting point, but are leaving out that oil rose from $60 to $100 in 2007. are you arguing that a 67% rise didn’t have any demand destruction effects?
    4) by your own data, demand was still outpacing supply in early 2008!!!
    5) there is no perfect real-time supply/demand/storage data in the oil market that i am aware of (although i am a natural gas guy). therefore to make your argument using eia data that is released in a delayed manner doesn’t mean anything. AND, that eia data doesn’t necessarily support your point (see #4).

    at the end of the day you guys gotta understand, it’s not like all speculators are bullish and driving up prices as some conspiracy. i know older crude traders that had their careers ended because they couldn’t get past how “high” oil was at $50-60 a few years ago.

    where were all the posts about how speculators drove the price of oil too low in late 2008 (when the market was net short as shown on Barry’s chart)? where was the outrage at speculators?!?

  77. [...] relative to goods.  In a fascinating graph by David Wilson of Bloomberg (highlighted over at Ritholtz.com), non-commercial net positions in oil futures were compared against the rise in oil [...]