Am I getting this Oil thing right?

[EconProf]

For every speculator who profited from the runup in oil prices, there was a seller. IOW, one speculator gained, another lost the same dollar amount.
That is why the politicians’ rant against “speculation” is simply a feint to divert our attention from the supply and demand fundamentals that have driven the price up. Those same politicians could favorably impact supply and demand via drilling, encouraging conservation, and other politically painful measures if they had the integrity to do so.

[Arraya]

renterclient-Do not spend to much time on irrelevant minutia of the oil futures market. What should be of concern to you is the fact that world oil production will most likely go into terminal decline within 5 years or less and that demand will forever outstrip supply.

In the next few years oil could go to $300 as it could to $80 due to short term elasticity and long term fundamentals. For learning more about this situation and everything you ever wanted to know about the futures market go here.

http://www.theoildrum.com/node/4334#comments_top

The oil price can be thought of as a composite signal, resulting from a speculative signal superimposed over a fundamental signal. If we can determine the magnitude and sign of the speculative signal at each time, we can ascertain whether speculation was the main driver of the latest price rise or not.

To that purpose, an essential source of data is the weekly Commitments of Traders (COT) report from the CFTC. For the report, each trader is classified either as “commercial”, if the trader uses futures contracts in that particular commodity for hedging (meaning they deal with the physical commodity in the spot market), or “non-commercial.” Traders holding less positions than a specified number of contracts (different for each commodity) are “nonreportable”. For “Nonreportable Positions,” the number of traders involved and the commercial/non-commercial classification of each trader are unknown.

[Arraya]

renterclient-Do not spend to much time on irrelevant minutia of the oil futures market. What should be of concern to you is the fact that world oil production will most likely go into terminal decline within 5 years or less and that demand will forever outstrip supply.

In the next few years oil could go to $300 as it could to $80 due to short term elasticity and long term fundamentals. For learning more about this situation and everything you ever wanted to know about the futures market go here.

http://www.theoildrum.com/node/4334#comments_top

The oil price can be thought of as a composite signal, resulting from a speculative signal superimposed over a fundamental signal. If we can determine the magnitude and sign of the speculative signal at each time, we can ascertain whether speculation was the main driver of the latest price rise or not.

To that purpose, an essential source of data is the weekly Commitments of Traders (COT) report from the CFTC. For the report, each trader is classified either as “commercial”, if the trader uses futures contracts in that particular commodity for hedging (meaning they deal with the physical commodity in the spot market), or “non-commercial.” Traders holding less positions than a specified number of contracts (different for each commodity) are “nonreportable”. For “Nonreportable Positions,” the number of traders involved and the commercial/non-commercial classification of each trader are unknown.

[Arraya]

renterclient-Do not spend to much time on irrelevant minutia of the oil futures market. What should be of concern to you is the fact that world oil production will most likely go into terminal decline within 5 years or less and that demand will forever outstrip supply.

In the next few years oil could go to $300 as it could to $80 due to short term elasticity and long term fundamentals. For learning more about this situation and everything you ever wanted to know about the futures market go here.

http://www.theoildrum.com/node/4334#comments_top

The oil price can be thought of as a composite signal, resulting from a speculative signal superimposed over a fundamental signal. If we can determine the magnitude and sign of the speculative signal at each time, we can ascertain whether speculation was the main driver of the latest price rise or not.

To that purpose, an essential source of data is the weekly Commitments of Traders (COT) report from the CFTC. For the report, each trader is classified either as “commercial”, if the trader uses futures contracts in that particular commodity for hedging (meaning they deal with the physical commodity in the spot market), or “non-commercial.” Traders holding less positions than a specified number of contracts (different for each commodity) are “nonreportable”. For “Nonreportable Positions,” the number of traders involved and the commercial/non-commercial classification of each trader are unknown.

[Arraya]

renterclient-Do not spend to much time on irrelevant minutia of the oil futures market. What should be of concern to you is the fact that world oil production will most likely go into terminal decline within 5 years or less and that demand will forever outstrip supply.

In the next few years oil could go to $300 as it could to $80 due to short term elasticity and long term fundamentals. For learning more about this situation and everything you ever wanted to know about the futures market go here.

http://www.theoildrum.com/node/4334#comments_top

The oil price can be thought of as a composite signal, resulting from a speculative signal superimposed over a fundamental signal. If we can determine the magnitude and sign of the speculative signal at each time, we can ascertain whether speculation was the main driver of the latest price rise or not.

To that purpose, an essential source of data is the weekly Commitments of Traders (COT) report from the CFTC. For the report, each trader is classified either as “commercial”, if the trader uses futures contracts in that particular commodity for hedging (meaning they deal with the physical commodity in the spot market), or “non-commercial.” Traders holding less positions than a specified number of contracts (different for each commodity) are “nonreportable”. For “Nonreportable Positions,” the number of traders involved and the commercial/non-commercial classification of each trader are unknown.

[Arraya]

renterclient-Do not spend to much time on irrelevant minutia of the oil futures market. What should be of concern to you is the fact that world oil production will most likely go into terminal decline within 5 years or less and that demand will forever outstrip supply.

In the next few years oil could go to $300 as it could to $80 due to short term elasticity and long term fundamentals. For learning more about this situation and everything you ever wanted to know about the futures market go here.

http://www.theoildrum.com/node/4334#comments_top

The oil price can be thought of as a composite signal, resulting from a speculative signal superimposed over a fundamental signal. If we can determine the magnitude and sign of the speculative signal at each time, we can ascertain whether speculation was the main driver of the latest price rise or not.

To that purpose, an essential source of data is the weekly Commitments of Traders (COT) report from the CFTC. For the report, each trader is classified either as “commercial”, if the trader uses futures contracts in that particular commodity for hedging (meaning they deal with the physical commodity in the spot market), or “non-commercial.” Traders holding less positions than a specified number of contracts (different for each commodity) are “nonreportable”. For “Nonreportable Positions,” the number of traders involved and the commercial/non-commercial classification of each trader are unknown.

[renterclint]

Thanks jficquette.

EconProf,

I get your point about how every buyer has a seller – but that might be oversimplifying things a bit. With each of these selling events there are market implications. It seems that when sales get exagerated or over-applified by rampant speculation, these individual sales events become aggregated into an entire market movement where not just speculators lose, but the true industry-related hedgers who are attempting to mitigate their business risk fall on the losing end of an over-inflated market.

I do not think this needs to be a political issue. Regardless of what politicians are saying or what their motives are, there are real instances where unregulated speculation has distorted commodity markets & the unassuming end-consumer gets hurt in the process.

See this article for example:
http://www.washingtonpost.com/wp-dyn/content/article/2007/10/20/AR2007102001203.html
This article illustrates how one hedge fund manipulated the natural gas market. As an entire market was artificially manipulated, utility companies had to continue to operate & hedge their risks. In the process utilities paid too much for energy & we consumers were left paying a higher bill.

I’m not saying supply & demand is not the main issue, and I agree that we should open more refineries & drill domestically. Encouranging conservation is great too. But there appears to be a real issue here with this speculation, and it seems wrong to brush it away like it’s some sort of political ploy.

Unfortunately, as commodities & other investments have gotten increasingly complex with swaps & derivatives as well as over-the-counter & new alternative foreign trading markets popping up, simply closing a US regulatory loophole probably will not fix the speculative impact for the long-haul.

[renterclint]

Thanks jficquette.

EconProf,

I get your point about how every buyer has a seller – but that might be oversimplifying things a bit. With each of these selling events there are market implications. It seems that when sales get exagerated or over-applified by rampant speculation, these individual sales events become aggregated into an entire market movement where not just speculators lose, but the true industry-related hedgers who are attempting to mitigate their business risk fall on the losing end of an over-inflated market.

I do not think this needs to be a political issue. Regardless of what politicians are saying or what their motives are, there are real instances where unregulated speculation has distorted commodity markets & the unassuming end-consumer gets hurt in the process.

See this article for example:
http://www.washingtonpost.com/wp-dyn/content/article/2007/10/20/AR2007102001203.html
This article illustrates how one hedge fund manipulated the natural gas market. As an entire market was artificially manipulated, utility companies had to continue to operate & hedge their risks. In the process utilities paid too much for energy & we consumers were left paying a higher bill.

I’m not saying supply & demand is not the main issue, and I agree that we should open more refineries & drill domestically. Encouranging conservation is great too. But there appears to be a real issue here with this speculation, and it seems wrong to brush it away like it’s some sort of political ploy.

Unfortunately, as commodities & other investments have gotten increasingly complex with swaps & derivatives as well as over-the-counter & new alternative foreign trading markets popping up, simply closing a US regulatory loophole probably will not fix the speculative impact for the long-haul.

[renterclint]

Thanks jficquette.

EconProf,

I get your point about how every buyer has a seller – but that might be oversimplifying things a bit. With each of these selling events there are market implications. It seems that when sales get exagerated or over-applified by rampant speculation, these individual sales events become aggregated into an entire market movement where not just speculators lose, but the true industry-related hedgers who are attempting to mitigate their business risk fall on the losing end of an over-inflated market.

I do not think this needs to be a political issue. Regardless of what politicians are saying or what their motives are, there are real instances where unregulated speculation has distorted commodity markets & the unassuming end-consumer gets hurt in the process.

See this article for example:
http://www.washingtonpost.com/wp-dyn/content/article/2007/10/20/AR2007102001203.html
This article illustrates how one hedge fund manipulated the natural gas market. As an entire market was artificially manipulated, utility companies had to continue to operate & hedge their risks. In the process utilities paid too much for energy & we consumers were left paying a higher bill.

I’m not saying supply & demand is not the main issue, and I agree that we should open more refineries & drill domestically. Encouranging conservation is great too. But there appears to be a real issue here with this speculation, and it seems wrong to brush it away like it’s some sort of political ploy.

Unfortunately, as commodities & other investments have gotten increasingly complex with swaps & derivatives as well as over-the-counter & new alternative foreign trading markets popping up, simply closing a US regulatory loophole probably will not fix the speculative impact for the long-haul.

[renterclint]

Thanks jficquette.

EconProf,

I get your point about how every buyer has a seller – but that might be oversimplifying things a bit. With each of these selling events there are market implications. It seems that when sales get exagerated or over-applified by rampant speculation, these individual sales events become aggregated into an entire market movement where not just speculators lose, but the true industry-related hedgers who are attempting to mitigate their business risk fall on the losing end of an over-inflated market.

I do not think this needs to be a political issue. Regardless of what politicians are saying or what their motives are, there are real instances where unregulated speculation has distorted commodity markets & the unassuming end-consumer gets hurt in the process.

See this article for example:
http://www.washingtonpost.com/wp-dyn/content/article/2007/10/20/AR2007102001203.html
This article illustrates how one hedge fund manipulated the natural gas market. As an entire market was artificially manipulated, utility companies had to continue to operate & hedge their risks. In the process utilities paid too much for energy & we consumers were left paying a higher bill.

I’m not saying supply & demand is not the main issue, and I agree that we should open more refineries & drill domestically. Encouranging conservation is great too. But there appears to be a real issue here with this speculation, and it seems wrong to brush it away like it’s some sort of political ploy.

Unfortunately, as commodities & other investments have gotten increasingly complex with swaps & derivatives as well as over-the-counter & new alternative foreign trading markets popping up, simply closing a US regulatory loophole probably will not fix the speculative impact for the long-haul.

[renterclint]

Thanks jficquette.

EconProf,

I get your point about how every buyer has a seller – but that might be oversimplifying things a bit. With each of these selling events there are market implications. It seems that when sales get exagerated or over-applified by rampant speculation, these individual sales events become aggregated into an entire market movement where not just speculators lose, but the true industry-related hedgers who are attempting to mitigate their business risk fall on the losing end of an over-inflated market.

I do not think this needs to be a political issue. Regardless of what politicians are saying or what their motives are, there are real instances where unregulated speculation has distorted commodity markets & the unassuming end-consumer gets hurt in the process.

See this article for example:
http://www.washingtonpost.com/wp-dyn/content/article/2007/10/20/AR2007102001203.html
This article illustrates how one hedge fund manipulated the natural gas market. As an entire market was artificially manipulated, utility companies had to continue to operate & hedge their risks. In the process utilities paid too much for energy & we consumers were left paying a higher bill.

I’m not saying supply & demand is not the main issue, and I agree that we should open more refineries & drill domestically. Encouranging conservation is great too. But there appears to be a real issue here with this speculation, and it seems wrong to brush it away like it’s some sort of political ploy.

Unfortunately, as commodities & other investments have gotten increasingly complex with swaps & derivatives as well as over-the-counter & new alternative foreign trading markets popping up, simply closing a US regulatory loophole probably will not fix the speculative impact for the long-haul.

[renterclint]

“The oil price can be thought of as a composite signal, resulting from a speculative signal superimposed over a fundamental signal. If we can determine the magnitude and sign of the speculative signal at each time, we can ascertain whether speculation was the main driver of the latest price rise or not.”

arraya, I have never claimed to be a mental giant, but this passage you just posted makes my head hurt! I think I got my signals transposed rather than superimposed…

Does the COT address the swaps & other derivatives that are directly related to the commodities futures? It sounds like there is a lot of activity going on with virtually no oversight.

And btw, I think you are right on the $$ about demand forever outstripping supply. As China, India, & other companies continue to develop & the foreign middle-class grows, demand will be out of control. Oil reserves are finite. It is definitely time to plan for our long-term energy future.

But I disagree that the current state of commodity speculation is irrelevant minutia. It is a current problem that if addressed directly could provide economic relief regarding energy prices & likely food prices as well.

[renterclint]

“The oil price can be thought of as a composite signal, resulting from a speculative signal superimposed over a fundamental signal. If we can determine the magnitude and sign of the speculative signal at each time, we can ascertain whether speculation was the main driver of the latest price rise or not.”

arraya, I have never claimed to be a mental giant, but this passage you just posted makes my head hurt! I think I got my signals transposed rather than superimposed…

Does the COT address the swaps & other derivatives that are directly related to the commodities futures? It sounds like there is a lot of activity going on with virtually no oversight.

And btw, I think you are right on the $$ about demand forever outstripping supply. As China, India, & other companies continue to develop & the foreign middle-class grows, demand will be out of control. Oil reserves are finite. It is definitely time to plan for our long-term energy future.

But I disagree that the current state of commodity speculation is irrelevant minutia. It is a current problem that if addressed directly could provide economic relief regarding energy prices & likely food prices as well.

[renterclint]

“The oil price can be thought of as a composite signal, resulting from a speculative signal superimposed over a fundamental signal. If we can determine the magnitude and sign of the speculative signal at each time, we can ascertain whether speculation was the main driver of the latest price rise or not.”

arraya, I have never claimed to be a mental giant, but this passage you just posted makes my head hurt! I think I got my signals transposed rather than superimposed…

Does the COT address the swaps & other derivatives that are directly related to the commodities futures? It sounds like there is a lot of activity going on with virtually no oversight.

And btw, I think you are right on the $$ about demand forever outstripping supply. As China, India, & other companies continue to develop & the foreign middle-class grows, demand will be out of control. Oil reserves are finite. It is definitely time to plan for our long-term energy future.

But I disagree that the current state of commodity speculation is irrelevant minutia. It is a current problem that if addressed directly could provide economic relief regarding energy prices & likely food prices as well.

[renterclint]

“The oil price can be thought of as a composite signal, resulting from a speculative signal superimposed over a fundamental signal. If we can determine the magnitude and sign of the speculative signal at each time, we can ascertain whether speculation was the main driver of the latest price rise or not.”

arraya, I have never claimed to be a mental giant, but this passage you just posted makes my head hurt! I think I got my signals transposed rather than superimposed…

Does the COT address the swaps & other derivatives that are directly related to the commodities futures? It sounds like there is a lot of activity going on with virtually no oversight.

And btw, I think you are right on the $$ about demand forever outstripping supply. As China, India, & other companies continue to develop & the foreign middle-class grows, demand will be out of control. Oil reserves are finite. It is definitely time to plan for our long-term energy future.

But I disagree that the current state of commodity speculation is irrelevant minutia. It is a current problem that if addressed directly could provide economic relief regarding energy prices & likely food prices as well.

[Author]

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