Friday, August 15, 2008

Oil Speculators Everywhere

Data emerging on players in the commodities markets show that speculators are a larger piece of the oil market than previously known, a development enlivening an already tense election-year debate about traders' influence.

Last month, the main U.S. regulator of commodities trading, the Commodity Futures Trading Commission, reclassified a large unidentified oil trader as a "noncommercial" speculator.

That one speculator's position was $55 billion dollars or 460 million barrels of oil.

Now here was the CFTC's report saying that speculation wasn't driving the oil market. It's 48 pages, but let me give you a quick version.

The Task Force’s preliminary assessment is that current oil prices and the increase in oil prices between January 2003 and June 2008 are largely due to fundamental supply and demand factors....Task Force’s preliminary analysis to date does not support the proposition that speculative activity has systematically driven changes in oil prices.

Why wouldn't they take this position? The want the volatility and the action that the speculators provide.

Much of the attention related to participants in futures markets has focused on the role of commodity index investment funds and the commodity swap dealers that often act as their intermediaries... Some observers have suggested that this rapid inflow of investments through index funds has been a cause of oil price increases...The CFTC has issued Special Calls for data about this activity, but only partial responses have been received as of the date of publication of this interim report. An analysis of the data from these Special Calls will be made available in September.

So they publish the report saying that speculators don't influence the data, but they don't have the data on the speculators position until September. Instead they inudate the public with statistics like this:

World surplus production capacity remains low (the estimated 1.35 million barrels per day in June 2008 is equivalent to less than 2 percent of consumption, an amount well below the 1996-2003 annual average of 3.9 million barrels per day). The combination of these factors means that prices react strongly to actual or perceived supply disruptions.

The speculator with 460 million barrels of oil, could of been taking down the excess capacity of 1.35 million barrels for 340 days in a row. Wouldn't that affect the price of oil? It would surely affect the perceived supply wouldn't it? Instead the CFTC talks about Nigeria, Iraq or Iran. As if they actually have reliable data on them!

Oil exporters suffer a decline in the purchasing power of their revenues when the dollar depreciates. To defend their international purchasing power, these producers could, in principle, seek an offsetting increase in the dollar price of oil by curtailing supply.

Oh really? Who determined that linkage? What happened to the dollar lately? Let's say that we transact 86 million barrels of oil at $80. That's $6.88 billion dollars. 86 million barrels of oil at $126 a barrel gives us $10.88 billion dollars. Now we have $4 billion more dollars on a daily basis going to pay for oil. Does anybody think that affects the currency? But the report won't say that. Instead it said this:

This widening may have exacerbated concerns about the sustainability of the current account deficit, thereby putting downward pressure on the dollar.

The economic legalese of obfuscation. Bivariate regression by Granger Causality testing proves their position. I could of written this report in my sleep. In fact, I should be sleeping now. I guess I'm just writing my rebuttal in my sleep.

But do you think the floor traders are reading this? All they are now doing, is shorting every rally in oil. They see the money flows when the price of oil was being rigged, and now they see the unfolding of the bet. But the fundamentalists what a reason.

You won't get it from the CFTC report. Why would you?

It's the fox guarding the henhouse!

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