Transparency is an issue.......one of the big questions is how much transparency is correct or efficient - and I know I don't have the definitive answer for that..... I know a bunch of funds actually don't have any objection to increased transparency


I don't think anyone has a problem with going after people trying to manipulate the price of commodities (or anything else), but it seems that many commentators these days are confusing (deliberately, for politcal gain?) hedging, speculation, and manipulation.


I honestly don't know of a better way to allocate a resource with limited supplies - let people bid what they will, and those who value it most can buy it. If they're not actually using it, they have to sell it again (thus pushing the price back down) or they end up sitting on 1000 barrels of West Texas Intermediate crude!



What has driven the oil market from $13b to $260b over hte past 5 years...... (1) tight short/medium term supplies (2) reasonably steady/slightly increasing demand (3) VERY weak US dollar (4) oil is a good inflation hedge (5) people looking to get as good a return on their money as they can (6) big pension funds looking to diversify away from equities and bonds (7) the MCSI index - this is a commodity index, that lets you invest in a weighted basket of commodities


Why shouldn't more people buy oil, thus bidding up the price? Nobody complains when it happens to equities. It's simply the nature of the marketplace. I know lots of pension funds have made good money out of the oil market, softening the blow from their equity investments! Oil is also a reasonably decent hedge against inflation and the puny US$.


Your point about it being demand for contracts is true - but thats how oil is traded these days (and for many many years past). It's simply much more efficient than actually piping the stuff all over the country as its bought and sold.


Is your arguement with the level of transparency, the volumne of money in the market, or the use of contracts (or all of them)?

P

Those two are not interchangeable. They are vastly different as you would know. Shares of Intel going up doesn’t increase PC costs on the shelves the next day. (If anything high equity helps to lower costs)



There is lies the crux of my issue with the oil market today. The number of people that have entered the oil market that are motivated by the above is suspected to now far out place the number with actual demand and need for oil or oil hedging. Of course with out much transparency is hard to prove either way.

Bad things can happen when you get an overwhelming number of players in a market motivated by fundamentals outside of said market. You only have to look back at history in the markets to see that.

This puts the price into perspective. (Adjusted for inflation) You can see certain events and the price during that time. Also this charts stops at $103 so keep in the mind that line now is at a substantially higher mark now then in 1970 when an actually supply storage was in place.

http://bp0.blogger.com/_8FEZeAhD6mo/R81P...ation_chart.gif

Vastly different, but also similar in that people buy them because they believe they will appreciate in price....... My point wasn't that they were the same, but that they are both instruments for financial speculation. Why shouldn't people and firms speculate on the price of oil? There is no such thing as a correct price, only what people are willing to pay.


Equally bad things can happen when you have government trying to determine who can or cannot buy things............ so who should be excluded from the oil markets Smike? Who gets a quota and who doesnt? What decides how big your quota is?

The oil market seems to be working perfectly well right now. Prices are high, relative to the historical short/medium term, but thats not "wrong" necessarily. Producers are bringing marginal supply back into production, and marginal users are cutting back. If you didn't have a real market signal, you wouldn't get the extra production as fast, you wouldn't get people carpooling to the daks, reducing demand.......


I'm not sure what you mean by people "motivated by fundamentals outside of said market" - for sure, everyone trading oil, be they a producer, speculator, hedger, or end user, is motivated by market fundamentals. In fact you could argue that speculators are the most purely motivated by market fundamentals. They aren't producing it, and they aren't using it. They buy contracts when they feel the market has undervalued them, and sell them when they feel they're at full (or greater than) value. End users are completely free to buy or sell contracts at the same times that speculators do.

Rules somewhat to this effect already exist (and have for many years in other commodities markets) For one, my understanding is the threshold of upfront capital for buying into the oil commodities is very low as compared to other commodities. Looking back at the mortgage industries we know how bad of situation that can create.





Fundamentals of the oil market:

Oil price Hedging
Oil Supply
Oil demand.
Conservation
Supply disruptions

Outside market influences:

The devaluation of the dollar
Massive influx of fund money into the oil market to hedge against bad investments. (The recent exit from the banking sectors)

Not saying these things could ever be independent from oil as free market is a sum of all of parts that all have some influence on one or another. But I feel that when you have a land slide of one into the other at such a dramatic rate, the market can not adapt as quickly and someone gets hung out to dry.


So the numbers look like this:

“ Historically, roughly 70% of market participants used exchanges for commercial purposes” …. “Today roughly 30% of market participants on the New York Mercantile Exchange (NYMEX) are identifiable hedgers with a legitimate business purpose”



God help me If I see congress in 2 yrs talking about an investor bail out on those holding oil future contracts that are turned into physical holding when deamand goes down. A lot of people are going to lose, as there is no way the oil market can sustain 260 billion. What goes up fast (in this case ultra fast) will come down just as fast.

smike, forget about what trading volume the oil market can sustain. that's beside the point. instead think about what price per barrel it can sustain.

I don't see the price going down. As with many other products, there is a period of shock as the price shoots up, "testing the water" as it were, but if all's well, then it settles in at the higher level. My favorite example of this is maple syrup. About 10 yr ago there was a (reportedly) terrible sugaring season and syrup prices doubled. Guess what - they're still up at that level, cuz people kept buying it at the higher price.

As long as everyone is selling all the oil they can produce, who's going to break ranks and lower their price? I mean, I don't hear any cries of anguish out of the American Petroleum Institute (Big Oil lobby/trade group), nor is ExxonMobil apologizing to their shareholders.

Sometime in the not-too-distant future, I suspect, one of those posters above (possibly me) will have to explain why he was wrong in his prediction.

Haha... unm when was the last time a country went to war over syrup???

Not syrup, but people have been fighting for centuries over SPICES.