Oil, Again

Oil closed at about $91/barrel today.

This Blog had the distinct privilege and honor, and the good fortune, to publish on July 12, 2008, when oil was at approximately $146/barrel, the following:

Saturday, July 12, 2008
A Mathematical Answer to the Oil Price Bubble Question

Below is a link to an article from physorg.com

http://www.physorg.com/news134646313.html

_______________________________________________________________________

It's an article well worth reading, especially now, and especially because it flat-out called the oil market what it was: A Speculative Bubble. They also called the top of the market.

Oil, Again

Could there be better news?

Oil prices close the day at $100.20, after having been briefly below the magic $100 level.

Have China and India vanished from the face of the earth?

Don't we care about hurricanes anymore?

Didn't OPEC CUT production a couple of days ago?

My, my.

See earlier posts of mine on Oil on the right column of the blog.

A Few Speculators Dominate Vast Market for Oil Trading

Below are two excerpts from an article in today's Washington Post.

"The [Commodity Futures Trading Commission],... now reports that financial firms speculating for their clients or for themselves account for about 81 percent of the oil contracts on NYMEX, a far bigger share than had previously been stated by the agency. That figure may rise in coming weeks as the CFTC checks the status of other big traders."

"...investment funds have poured into the commodity markets, raising their holdings to $260 billion this year from $13 billion in 2003. During that same period, the price of crude oil rose unabated every year."


Full Article: http://www.washingtonpost.com/wp-dyn/content/article/2008/08/20/AR2008082003898.html?hpid=topnews

Financial "Bubbles" & Barack's Campaign

Everyone has heard the term "Bubble" used in reference to various markets.

There was the Tech Bubble of the late 1990s when technology stock prices kept rising at an ever-increasing rate and everyone thought the sky was the limit. The Bubble burst, of course.

Then the housing market embarked on a rocket-ship ride straight up, roughly from 1999 to 2005. Prices doubled, went up 13% in a month sometimes. Everybody was going to be a millionaire. The Bubble burst, of course.

Recently the oil and other commodities had their turn in the Bubble bottle---a barrel was going to go to $200+, maybe more. That Bubble, too, seems to have burst.

It's been found that real, sustainable upward movements in price occur gradually, slowly, over time. And over that time, there are clear price setbacks that occur---periods of Consolidation, the Wall Street types like to call it, where the market pauses and digests its gains, moving back a bit, catching its breath, so to speak, before it begins its steady climb up again.

Barack's campaign is going through one of those Consolidation phases right now. Its catching its breath after a long, solid upward run...it is, thereby, avoiding the trap of being a Bubble.

These consolidations aren't fun in the stock, housing, commodities or any other financial market. It makes the weak-kneed bail out, selling to those who believe the long-term trend is still very positive. That dynamic is called, in Wall Street terms again--aren't those guys great!--a Shakeout. The weak get shaken out by fear that the upward trend is over, and sell to others. The buyers then reap the rewards when the price resumes its steady upward trend.

There's no shortage of Obama supporters on the verge of being Shaken-out right now. No, they are not about to convert to McCain; they merely want their candidate, Barack, to abandon the principles that have gotten him to where he is, and jump on the cynical-sleaze bandwagon of his current and former opponents.

This interlude of Consolidation will make Obama's candidacy all the more formidable when it resumes its relentless march to the White House. Those of his supporters who don't get Shaken-out will have an even stronger candidate to work for. Those that do get Shaken-out will miss out on the "profits" to come.

Oil: What Goes Up Must Come Down...

...But it sure doesn't get near the media coverage as prices radically plunge as it did when they radically rose.

If ever there was a better example of how the professional media is only in the game of spreading panic, whipping-up the masses, creating confusion, I don't know it.

They fed the public the transparent nonsense that prices were rising because--suddenly--people discovered that China and India existed, or that we were 'running out" of oil per se; or that, on a given day, prices were up because Hurricane Wilma was, maybe, kinda, going to strike the Gulf of Mexico or was it that Iran's leader said something that spooked the market?....

It was all lies, mere rationalizations for irrational activity, for speculation by Wall Streeters.

On the way down, the media, in much more subdued tones, of course, sticks to explaining the price reductions by citing more rationalizations, more lies. Weak demand my ass!

The price has fallen from $148 to $112 a barrel in a few weeks, 26%. Have China and India shrunk 26%?!? Are there no more hurricanes out there, no more tension in the Middle East?

As they--with a few notable exceptions--are displaying for all to see in their disinformation-lock-step-with-government coverage of the Russia/Georgia War, the media, though given explicit Freedom in the Constitution, march like lemmings to the tunes set by the powerful, be the power in Washington or the corridors of Wall Street.

Al Gore, Taxpayer Money, & His Private Investments

Am I the only person, aside from right wing nutcases, who thinks it would be appropriate for the media to identify Albert Gore as follows?

The former Vice President and currently the chairman of the for-profit Generation Investment Management mutual fund which invests in companies that would significantly benefit financially if Mr. Gore's proposals regarding government energy policy were adopted.

As we in the real estate industry phrase it: Disclosure, Disclosure, Disclosure.

Gore's Energy Proposal: The Apotheosis of Political Arrogance

Albert Gore, the Nobel Prize winning climatologist---oh wait! he's got zero training in climatology.

Albert Gore, the Nobel Prize winning meteorologist---oh wait, he's got zero training in meteorology.

Albert Gore, the Nobel Prize winning astrophysicist---oh wait, he's got no training in astrophysics either.

Albert Gore, the born-with-a-silver-spoon-in-his-mouth son of a US Senator has raised the upper limits of audacity and hubris to hitherto unseen heights by calling for a mandated program that would cost the American taxpayers and private investors the tidy sum--even by today's standards--of $1.5 trillion based on a hypothesis he, Mr. Science, believes to be true: Global Warming.

The program would convert the US from a carbon-based fuel economy to a non-carbon-based one, by employing solar, windmill and other non-carbon energy technologies.

The sheer arrogance of a single individual, any individual, proposing a program, any program, that requires the commitment of $1.5 trillion is exceeded only by the financial (and scientific) ignorance that such a proposal evinces.

For instance, what if the price of a barrel of oil were to fall to $80 or $60 or $40 during the life of this program? What then?

For instance, since the prediction even of the next day's weather is such an enormous and complicated mathematical task that the National Weather Service (NWS)_ has the largest collection of Super Computers in the world, more the Pentagon, more than NASA, and the NWS still guarantee with absolute certainty that tomorrow's weather will be so and so; how can a coherent persuasive argument be mustered for such an expenditure based on data whose interpretation may prove erroneous?

And finally, how can a person--Albert Gore, not Albert Einstein--possibly understand any of the physics and mathematics that underlie the prediction of weather and climate changes? I can answer that one for you: He can't. If he were shown the equations, his eyes would glaze over. Without understanding those equations, his guess on the future of climate is no better than yours or mine.

But he relies on "experts," you may say. Yes, that's true. But there is not unanimity on the part of experts, though there may or may not be a general consensus that supports Gore's position.

"A General Consensus" is insufficient grounds to suggest, let alone adopt, a project of this magnitude with taxpayer funds. If the private sector--of which Gore is a part--likes the idea, they are more than welcome to raise the funds and go for it. Otherwise, both Presidential candidates should immediately announce that they have no intention of seizing roughly 12.5% of the nation's GDP based on Senor Gore's beliefs.

The USGovt should never undertake any project of this magnitude, period!

A Mathematical Answer to the Oil Price Bubble Question

Below is a link to an article from physorg.com

http://www.physorg.com/news134646313.html

Democrats and the Dow Jones: Is There a Correlation?

With one trading day left to go, the stock market, as measured by the Dow Jones Industrial Average (DJIA), is set to have its worst June since 1930! The Great Depression era.

Today alone, the DJIA lost over 3% of its value, bring June's loss to just under 10%. In 1930 the June loss was over 17%.

If that's not enough excitement for you, consider these other financial events of the day:

Oil hits $140/barrel for the first time.

And Goldman Sachs, the most influential and financial solid firm on The Street, issues a few pronouncements. They recommended the sale of shares of General Motors, sending that stock to its lowest price in 50 years; they recommended not only the sale of Citigroup shares, but went further and recommended selling those shares SHORT!

Why is this happening? The market "analysts" have rounded up the usual suspects to blame, including my namesake at the Fed, consumer retrenchment, runaway oil prices, possible runaway inflation and on and on.

Why post this here at TPM?

Because the Democrats should be able to win the election even if they decide to nominate the San Diego Chicken (in full costume) and run him instead of Obama.

The House of Cards came tumbling down in foreign affairs a long time ago; now we're witnessing the Homeland House of Cards doing the same.


MyBlog: http://ProteanPerspectives.blogspot.com

Obama Strikes Back At The Oil Speculators

Today Barack Obama became the first national figure to enunciate a plan to deal with the speculation-driven increase in the price of oil.

Dribs and drabs of concern have come from the Administration, usually via the SecTreas, but Obama today leaps beyond anything yet proposed and gives some coherence to a multifaceted plan of action to address another new and unique issue.

Oil price rises have the same effect as tax increases, and are brutally regressive to boot. Money is extorted from individuals pockets; but instead of flowing INTO the USG, it flow OUTWARD into the pockets of such wonderful organizations as the House of Saud, the Iranian Gov't, Putin, Inc., Chavez' Venezuela.

It is the greatest transfer of wealth in world history. And the wealth is being transferred from the Western & Eastern (Japan) Democracies to the boys listed above. [Granted, some of this wealth returns in the form of investments made in the US by various foreign entities.]

It also means, obviously, that oil consumers have less in their pockets to pay for other goods and services, thereby slowing the economy.

The oil market, until very recently, was composed primarily of those players who actually were in the oil business. They made their buy/sell decisions based on fundamental supply/demand equations.

Recently, the same guys who brought us the Tech Bubble in US stocks in the late 1990's realized that the actual supply/demand equations need not be the primary factor in moving oil prices. Rather, the mere purchase of oil futures contracts in great volume was enough to drive the price of oil up. These speculators have/had no intention of actually taking delivery of an oil tanker full of crude: they only want their pieces of paper, the contracts, to go up in value.

They also noticed that these futures markets were subject to limited regulation and disclosure requirements. Yum Yum.

Just as in the Tech Bubble when company share prices rose to the moon, irrespective of the actual economic worth of the company itself, so now we see the value of oil contracts going to the moon, irrespective of the actual "value" of a barrel of oil.

Obama proposes closing the "Enron Loophole" which permits domestic companies from escaping regulation on their oil futures trading activities; it calls for a draconian increase in international regulation of futures trading; and it calls for the opening of investigations by the DoJ and another regulatory authority currently charged with monitoring futures trading.

The importance of this proposal, and the fact that the man who is likely to be the next Prez, has shown he takes the issue seriously and is not merely saying we should bike to work, cannot be overestimated.

It's Bold. It's Brave. And it shows Barack's got some good economic advisers on his team.

Oil Prices...Again

Perhaps what we are seeing in the futures market is not demand for oil; maybe what the price reflects is the demand for the futures contracts themselves...not for the underlying commodity.

Commodities are the New Tech-Bubble

The title kind of says it all, but there are far more serious consequences to the price of oil reaching $126/barrel, or wheat, corn, rice, soybeans, copper et al reaching exorbitantly inflated prices than Cisco or Juniper Systems or Yahoo stock behaving similarly, as they did in the late 1990's.

Commodities are things the "real" economy needs and uses to function. Commodities have "use" value. Stocks have only "exchange" value.

Nobody needs to buy Cisco at $90 per share. But people do need to buy oil at $126 per barrel.

I'll try writing further articles on the fungibility of various commodities--e.g., coffee vs. tea--but for now I'll only comment thus: Essential commodities are too important to the literal survival of the world to be treated as if they were common shares of Microsoft, mere vehicles of financial speculation. And these essential raw materials are now being transformed into speculative investment vehicles, probably through the ingenious proliferation of derivatives and the sudden attraction by "investors" to commodities as a better store of value than alternative investments.

Sometimes, most of the time, so-called free markets function quite efficiently. But there are exceptions, as even the most conservative of economists would agree.

We are right at the beginning of what could be a pernicious extension of free market, speculative capitalism into a sphere previously dominated by real-world economic conditions of supply and demand. For example, if suddenly the demand side for corn is radically increased not by more users of corn, but by speculators whose only concern is that the price of corn will rise, the use-market be damned, the risks of creating artificial non supply/demand dislocations to the real economy may have consequences that reach far beyond Forex traders.

This is a topic I'm researching and thinking about. It's very interesting, very complicated and urgently important.

More to come.

More on Oil Prices from the Asia Times Newspaper

More in the continuing series on oil prices. FB


Speculators knock OPEC off oil-price perch
By F William Engdahl

The price of crude oil today is not made according to any traditional relation of supply to demand. It is controlled by an elaborate financial market system as well as by the four major Anglo-American oil companies. As much as 60% of today's crude oil price is pure speculation driven by large trader banks and hedge funds. It has nothing to do with the convenient myths of Peak Oil. It has to do with control of oil and its price. How?

First, the role of the international oil exchanges in London and New York is crucial to the game. Nymex in New York and the Intercontinental Exchange (ICE) Futures in London today control global benchmark oil prices which in turn set most of the freely traded oil cargo. They do so via oil futures contracts on two grades of crude oil - West Texas Intermediate and North Sea Brent.

A third rather new oil exchange, the Dubai Mercantile Exchange (DME), trading Dubai crude, is more or less a daughter of Nymex, with Nymex president James Newsome sitting on the board of DME and most key personnel British or American citizens.

Brent is used in spot and long-term contracts to value much of crude oil produced in global oil markets each day. The Brent price is published by a private oil industry publication, Platt's. Major oil producers including Russia and Nigeria use Brent as a benchmark for pricing the crude they produce. Brent is a key crude blend for the European market and, to some extent, for Asia.

West Texas Intermediate (WTI) has historically been more of a US crude oil basket. Not only is it used as the basis for US-traded oil futures, but it is also a key benchmark for US production.

The tail that wags the dog.

All this is well and official. But how today's oil prices are really determined is done by a process so opaque only a handful of major oil trading banks, such as Goldman Sachs or Morgan Stanley, have any idea who is buying and who is selling oil futures or derivative contracts that set physical oil prices in this strange new world of "paper oil".

With the development of unregulated international derivatives trading in oil futures over the past decade or more, the way has opened for the present speculative bubble in oil prices.

Since the advent of oil futures trading and the two major London and New York oil futures contracts, control of oil prices has left the Organization of the Petroleum Exporting Countries (OPEC) and gone to Wall Street. It is a classic case of the "tail that wags the dog".

A June 2006 US Senate Permanent Subcommittee on Investigations report on "The Role of Market Speculation in rising oil and gas prices" noted, "... there is substantial evidence supporting the conclusion that the large amount of speculation in the current market has significantly increased prices".

What the senate committee staff documented in the report was a gaping loophole in US government regulation of oil derivatives trading so huge a herd of elephants could walk through it. That seems precisely what they have been doing in ramping oil prices through the roof in recent months.

The senate report was ignored in the media and in the Congress. The report pointed out that the Commodity Futures Trading Trading Commission, a financial futures regulator, had been mandated by Congress to ensure that prices on the futures market reflect the laws of supply and demand rather than manipulative practices or excessive speculation. The US Commodity Exchange Act (CEA) states:
Excessive speculation in any commodity under contracts of sale of such commodity for future delivery ... causing sudden or unreasonable fluctuations or unwarranted changes in the price of such commodity, is an undue and unnecessary burden on interstate commerce in such commodity.

Further, the CEA directs the CFTC to establish such trading limits "as the commission finds are necessary to diminish, eliminate, or prevent such burden". Where is the CFTC now that we need such limits? It seems to have deliberately walked away from its mandated oversight responsibilities in the world's most important traded commodity, oil. As that US Senate report noted:

Until recently, US energy futures were traded exclusively on regulated exchanges within the United States, like the NYMEX, which are subject to extensive oversight by the CFTC, including ongoing monitoring to detect and prevent price manipulation or fraud. In recent years, however, there has been a tremendous growth in the trading of contracts that look and are structured just like futures contracts, but which are traded on unregulated OTC [over the counter] electronic markets. Because of their similarity to futures contracts they are often called "futures look-alikes".

The only practical difference between futures look-alike contracts and futures contracts is that the look-alikes are traded in unregulated markets whereas futures are traded on regulated exchanges. The trading of energy commodities by large firms on OTC electronic exchanges was exempted from CFTC oversight by a provision inserted at the behest of Enron and other large energy traders into the Commodity Futures Modernization Act of 2000 in the waning hours of the 106th Congress.

The impact on market oversight has been substantial. NYMEX traders, for example, are required to keep records of all trades and report large trades to the CFTC. These Large Trader Reports, together with daily trading data providing price and volume information, are the CFTC's primary tools to gauge the extent of speculation in the markets and to detect, prevent and prosecute price manipulation. CFTC chairman Reuben Jeffrey recently stated: "The commission's Large Trader information system is one of the cornerstones of our surveillance program and enables detection of concentrated and coordinated positions that might be used by one or more traders to attempt manipulation."

In contrast to trades conducted on the NYMEX, traders on unregulated OTC electronic exchanges are not required to keep records or file Large Trader Reports with the CFTC, and these trades are exempt from routine CFTC oversight. In contrast to trades conducted on regulated futures exchanges, there is no limit on the number of contracts a speculator may hold on an unregulated OTC electronic exchange, no monitoring of trading by the exchange itself, and no reporting of the amount of outstanding contracts ("open interest") at the end of each day.

Then, apparently to make sure the way was opened really wide to potential market oil price manipulation, in January 2006, the George W Bush administration's CFTC permitted the ICE, the leading operator of electronic energy exchanges, to use its trading terminals in the United States for the trading of US crude oil futures on the ICE futures exchange in London - called "ICE Futures".

Previously, the ICE Futures exchange in London had traded only in European energy commodities - Brent crude oil and United Kingdom natural gas. As a United Kingdom futures market, the ICE Futures exchange is regulated solely by the UK Financial Services Authority. In 1999, the London exchange obtained the CFTC's permission to install computer terminals in the United States to permit traders in New York and other US cities to trade European energy commodities through the ICE exchange.

The CFTC opens the door
Then, in January 2006, ICE Futures in London began trading a futures contract for WTI crude oil, a type of crude oil that is produced and delivered in the United States. ICE Futures also notified the CFTC that it would be permitting traders in the United

States to use ICE terminals in the United States to trade its new WTI contract on the ICE Futures London exchange. ICE Futures as well allowed traders in the United States to trade US gasoline and heating oil futures on the ICE Futures exchange in London.

Despite the use by US traders of trading terminals within the United States to trade US oil, gasoline and heating oil futures contracts, the CFTC has until today refused to assert any jurisdiction over the trading of these contracts.

Persons within the United States seeking to trade key US energy commodities - US crude oil, gasoline and heating oil futures - are able to avoid all US market oversight or reporting requirements by routing their trades through the ICE Futures exchange in London instead of the NYMEX in New York.

Is that not elegant? The US government energy futures regulator, CFTC, opened the way to the present unregulated and highly opaque oil futures speculation. The present chief executive officer of NYMEX, James Newsome, who also sits on the Dubai Exchange, is a former chairman of the US CFTC. In Washington doors revolve quite smoothly between private and public posts.

A glance at the price for Brent and WTI futures prices since January 2006 indicates the remarkable correlation between skyrocketing oil prices and the unregulated trade in ICE oil futures in US markets. Keep in mind that ICE Futures in London is owned and controlled by a US company based in Atlanta, Georgia.

In January 2006, when the CFTC allowed the ICE Futures the gaping exception, oil prices were trading in the range of US$59-60 a barrel. Today, some two years later, we see prices tapping $120 and trending upwards. This is not an OPEC problem. It is a US government regulatory problem of malign neglect.

By not requiring the ICE to file daily reports of large trades of energy commodities, it is not able to detect and deter price manipulation. As the senate report noted:

The CFTC's ability to detect and deter energy price manipulation is suffering from critical information gaps, because traders on OTC electronic exchanges and the London ICE Futures are currently exempt from CFTC reporting requirements. Large trader reporting is also essential to analyze the effect of speculation on energy prices.

The report added:

ICE's filings with the Securities and Exchange Commission and other evidence indicate that its over-the-counter electronic exchange performs a price discovery function - and thereby affects US energy prices - in the cash market for the energy commodities traded on that exchange.

In the most recent sustained run-up in energy prices, large financial institutions, hedge funds, pension funds and other investors have been pouring billions of dollars into the energy commodities markets to try to take advantage of price changes or hedge against them. Most of this additional investment has not come from producers or consumers of these commodities, but from speculators seeking to take advantage of these price changes. The CFTC defines a speculator as a person who "does not produce or use the commodity, but risks his or her own capital trading futures in that commodity in hopes of making a profit on price changes".

The large purchases of crude oil futures contracts by speculators have, in effect, created an additional demand for oil, driving up the price of oil for future delivery in the same manner that additional demand for contracts for the delivery of a physical barrel today drives up the price for oil on the spot market. As far as the market is concerned, the demand for a barrel of oil that results from the purchase of a futures contract by a speculator is just as real as the demand for a barrel that results from the purchase of a futures contract by a refiner or other user of petroleum.

Perhaps 60% of oil prices are speculation.

Goldman Sachs and Morgan Stanley today are the two leading energy trading firms in the United States. Citigroup and JP Morgan Chase are major players and numerous hedge funds speculate.

In June 2006, the senate investigation estimated that of oil traded in futures markets at some $60 a barrel, about $25 of that was due to pure financial speculation. One analyst estimated in August 2005 that US oil inventory levels suggested WTI crude prices should be around $25 a barrel, and not $60.

That would mean today that at least $50 to $60 or more of today's $115 a barrel price is due to pure hedge fund and financial institution speculation. However, given the unchanged equilibrium in global oil supply and demand over recent months amid the explosive rise in oil futures prices traded on Nymex and ICE exchanges in New York and London, it is more likely that as much as 60% of the oil price today is pure speculation. No one knows officially except the tiny handful of energy trading banks in New York and London, and they certainly aren't talking.

By purchasing large numbers of futures contracts, and thereby pushing up futures prices to even higher levels than current prices, speculators have provided a financial incentive for oil companies to buy even more oil and place it in storage. A refiner will purchase extra oil today, even if it costs $115 per barrel, if the futures price is even higher.

As a result, over the past two years crude oil inventories have been steadily growing, resulting in US crude oil inventories that are now higher than at any time in the previous eight years. The large influx of speculative investment into oil futures has led to a situation where we have both high supplies of crude oil and high crude oil prices.

Compelling evidence also suggests that the oft-cited geopolitical, economic and natural factors do not explain the recent rise in energy prices - this can be seen in the actual data on crude oil supply and demand. Although demand has significantly increased over the past few years, so have supplies.

Over the past couple of years, global crude oil production has increased along with increases in demand; in fact, during this period global supplies have exceeded demand, according to the US Department of Energy. The US Department of Energy's Energy Information Administration (EIA) recently forecast that in the next few years, global surplus production capacity will continue to grow to between 3 and 5 million barrels per day by 2010, thereby "substantially thickening the surplus capacity cushion".

Dollar and oil link
A common speculation strategy amid a declining US economy and a falling US dollar is for speculators and ordinary investment funds desperate for more profitable investments amid the US securitization disaster to take futures positions selling the dollar "short" and oil "long".

For huge US or EU pension funds or banks desperate to get profits following the collapse in earnings since August 2007 and the US real estate crisis, oil is one of the best ways to get huge speculative gains. The backdrop that supports the current oil price bubble is continued unrest in the Middle East, in Sudan, in Venezuela and Pakistan and firm oil demand in China and most of the world outside the US. Speculators trade on rumor, not fact.

In turn, once major oil companies and refiners in North America and European Union countries begin to hoard oil, supplies appear even tighter lending background support to present prices.

Because the OTC and London ICE Futures energy markets are unregulated, there are no precise or reliable figures as to the total dollar value of recent spending on investments in energy commodities, but the estimates are consistently in the range of tens of billions of dollars.

The increased speculative interest in commodities is also seen in the increasing popularity of commodity index funds, which are funds whose price is tied to the price of a basket of various commodity futures. Goldman Sachs estimates that pension funds and mutual funds have invested a total of approximately $85 billion in commodity index funds, and that investments in its own index, the Goldman Sachs Commodity Index, have tripled over the past few years. US Treasury Secretary Henry Paulson is a former chairman of Goldman Sachs.

F William Engdahl is author of A Century of War: Anglo-American Oil Politics and the New World Order. He may be contacted at info@engdahl.oilgeopolitics.net