Delta Airlines -fuel and Speculators

[Nashwan]

How did Geroge Soros corner the comodities market on the British Pound?

Didn't he almost single handedly bankrupt England?

What Soros did was play the market against the government.

The government was committed to maintaining the pound at a certain level. To do that they kept buying pounds to keep the price up. Soros, and others, knew that the government couldn't maintain that for long, so they kept selling pounds. The government was forced to abandon the policy, the pound fell, and Soros and Co simply bought the pounds they had been selling at the lower price.

That wasn't an example of speculators rigging the market, in that case it was the UK government were attempting to manipulate the market to force the pound higher. As is usual, they failed.

It cost the government about £3 billion. It actually greatly benefited the UK because the pound fell, the government stopped trying to defend it with high interest rates, and the UK went on to enjoy 16 years of uninterrupted economic growth.

So with Soros's billions and a few willing human proxies, can Soros as an individual create the current gas price problem by cornering the commodities market for crude?

No. There simply isn't that much money available to the financial markets, and there is no evidence of anyone "cornering the market".

About $12 billion gets spent on oil every day at the moment. If you want to corner that market, you are going to have to come up with a lot of money.

Either way, you are correct that supply trailed in 2007, my mistake.  Different source, but I see 81,695M barrels/day in 2006 and 81,533M barrels/gay in 2007.  Whats even more interesting are the ten year trends.  With a single exception; 1998, every other year saw production slide in just under consumption

In the long term supply and demand have to balance. If they don't you get either increasing or decreasing stockpiles. Whether or not supply and demand are truly in balance depends on how the statistics are measured, but it isn't really a major issue.

Point is - the increase in cost doesnt make any sense - supply is not fixed

Supply has been pretty much fixed in practice for the last 3 years. Why it has barely risen is an interesting question, but it's beyond doubt that production has remained almost flat for 3 years.

In 2002, for purposes of comparison, back when petroleum products were still mighty cheap, production was 95.63% of consumption... a worse production/consumption ratio than we have right now... how come oil wasnt trading at $140/bbl then?

Because the price rises and falls to balance supply and demand. The production/consumption ratio doesn't really tell us much

Look at it another way. In 2002, with oil at about $30 a barrel, the market was balanced. There was enough oil produced for everyone who wanted to buy.

In 2007 the market was again balanced, with oil at over $70 a barrel, even though demand was down due to the high price.

The oil producers can force the price higher, for example if Saudi cuts their production by 10%, world production is down 1%, and that pushes up prices. But that doesn't explain how speculators can distort the market, or why stockpiles aren't increasing if speculators have managed to push the price up.

[Charon]

The oil producers can force the price higher, for example if Saudi cuts their production by 10%, world production is down 1%, and that pushes up prices. But that doesn't explain how speculators can distort the market, or why stockpiles aren't increasing if speculators have managed to push the price up.

Here are links to Congressional testimony on how that is the case:

Masters

Today, Index Speculators are pouring billions of dollars into the commodities futures
markets, speculating that commodity prices will increase. Chart One shows Assets
allocated to commodity index trading strategies have risen from $13 billion at the end of
2003 to $260 billion as of March 2008,5 and the prices of the 25 commodities that
compose these indices have risen by an average of 183% in those five years!6...

In the popular press the explanation given most often for rising oil prices is the
increased demand for oil from China. According to the DOE, annual Chinese demand
for petroleum has increased over the last five years from 1.88 billion barrels to 2.8 billion
barrels, an increase of 920 million barrels.8 Over the same five-year period, Index
Speculatorsʼ demand for petroleum futures has increased by 848 million barrels.9 The
increase in demand from Index Speculators is almost equal to the increase in demand
from China!...

In fact, Index Speculators have now stockpiled, via the futures market, the equivalent of
1.1 billion barrels of petroleum, effectively adding eight times as much oil to their own
stockpile as the United States has added to the Strategic Petroleum Reserve over the
last five years.10

One particularly troubling aspect of Index Speculator demand is that it actually
increases the more prices increase. This explains the accelerating rate at which
commodity futures prices (and actual commodity prices) are increasing. Rising prices
attract more Index Speculators, whose tendency is to increase their allocation as prices
rise. So their profit-motivated demand for futures is the inverse of what you would
expect from price-sensitive consumer behavior.
You can see from Chart Two that prices have increased the most dramatically in the first
quarter of 2008. We calculate that Index Speculators flooded the markets with $55
billion in just the first 52 trading days of this year.19 That’s an increase in the dollar
value of outstanding futures contracts of more than $1 billion per trading day. Doesn’t it
seem likely that an increase in demand of this magnitude in the commodities futures
markets could go a long way in explaining the extraordinary commodities price
increases in the beginning of 2008?

There is a crucial distinction between Traditional Speculators and Index Speculators:
Traditional Speculators provide liquidity by both buying and selling futures. Index
Speculators buy futures and then roll their positions by buying calendar spreads. They
never sell. Therefore, they consume liquidity and provide zero benefit to the futures
markets.20

( http://hsgac.senate.gov/public/_files/052008Masters.pdf )

Greenberger

One of the fundamental purposes of futures contracts is to provide price discovery in the ―cash‖ or ―spot‖ markets. Those selling or buying commodities in the ―spot‖ markets rely on futures prices to judge amounts to charge or pay for the delivery of a commodity.1 Since their creation in the agricultural context decades ago, it has been widely understood that, unless properly regulated, futures markets are easily subject to distorting the economic fundamentals of price discovery (i.e., cause the paying of unnecessarily higher or lower prices) through excessive speculation, fraud, or manipulation...

Two prominent and detailed bipartisan studies of the Permanent Subcommittee on Investigations (―SPI‖) staff represent what is now conventional wisdom: hedge funds, large banks and energy companies, and wealthy individuals have used ―exempt commercial energy futures markets‖ to drive up needlessly the price of energy commodities over what economic fundamentals dictate, adding, for example, what the SPI estimated to be @ $20-$30 per barrel to the price of a barrel of crude oil at a time when that commodity had reached a then record high of $77. The conclusion that speculation has added a large premium to energy products has been corroborated by many experts, including most recently and most prominently, George Soros.3...

Finally, NYMEX President Newsome has further opined that ―[t]he reports on the role of speculators on oil prices are grossly exaggerated. If you look at the data on who is actually trading, the level of commercial participants remains 70 to 72 percent.‖ Of course, as Michael Masters recently explained96, Dr. Newsome‘s calculation treats investment banks and hedge funds laying off the risk of their off exchange swaps transactions on NYMEX as the same as a heating oil dealer using the WTI contract on NYMEX to hedge his business risk. If those banks and hedge funds were properly classified as speculators, about 70 percent of the trading on NYMEX would be speculative – not commercial. And, if you were to add all of the WTI trading on NYMEX, ICE, and the Dubai exchange, speculation might very well approach 80-90 per cent of the WTI trades executed by U.S. owned exchanges. By any objective assessment, the crude oil market is now overwhelmingly dominated by speculation, most of which is not subject to the age old controls imposed upon speculators in these markets. One can easily see then how Goldman Sachs, a huge trader in these markets itself, could confidently predict that oil will soon reach $200 a barrel.97

( http://commerce.senate.gov/public/_files/IMGJune3Testimony0.pdf )



So, what specific criticisms do you have of their take on how rolling over contracts in the futures markets by the major financial houses that only entered the markets at the current scale the same time prices started to skyrocket 2 years ago have directly led to the run away prices we see today.

I am going to try and talk to Greenberger next week, so I can pass along any specific criticisms you may have for clarification. I should actually try and talk to Masters as well. And I'm serious about questions. I am weak on the specifics of the futures market, especially once you get past conventional and traditional hedging, etc. But, I do know the fundamentals in the physical market haven't changed all that much in the past two years.

Charon

[Nashwan]

In the popular press the explanation given most often for rising oil prices is the
increased demand for oil from China. According to the DOE, annual Chinese demand
for petroleum has increased over the last five years from 1.88 billion barrels to 2.8 billion
barrels, an increase of 920 million barrels.8 Over the same five-year period, Index
Speculatorsʼ demand for petroleum futures has increased by 848 million barrels.9 The
increase in demand from Index Speculators is almost equal to the increase in demand
from China!...

This is the fundamental problem I have with the speculation theory. Speculators do not use oil. China does.

So if China increases demand by 920 million barrels, that's 920 million barrels removed from world supplies.

Speculators do not use the oil they invest in. That means they either stockpile it, which would drive up prices, or they sell it on, which should have no effect on prices.

We know from the IEA and EIA that stockpiles aren't increasing. They are towards the top of the normal range, but the IEA says a lot of that is in specific products that are being produced to excess.

In fact, Index Speculators have now stockpiled, via the futures market, the equivalent of
1.1 billion barrels of petroleum, effectively adding eight times as much oil to their own
stockpile as the United States has added to the Strategic Petroleum Reserve over the
last five years.

If total stockpiles are not increasing, but speculators are owning more oil, then speculators must be owning more of the existing stocks. That's possible, I suppose, but I still don't see how it pushes the price up.

FWIW, OECED stocks are something over 4 billion barrels.

If you assume the speculators have built 1.1 billion stocks over 3 years, it works out at about 1 million barrels a day. That's dwarfed by the reduction in growth of oil production.

So, what specific criticisms do you have of their take on how rolling over contracts in the futures markets by the major financial houses that only entered the markets at the current scale the same time prices started to skyrocket 2 years ago have directly led to the run away prices we see today.

I'm way out of my depth on the markets. I had to read your question twice just to understand what you were asking, and I don't have any idea how to answer it.

All I can see is that the world is still burning all the oil that's produced, even at over $100 a barrel. To me, that suggests the price is correct, because if the price was higher than that dictated by fundamentals, demand would drop and stocks would increase. In fact the IEA reported much smaller stock builds than average for this time of year in May.

To me it seems that the fundamentals have changed enough to explain the prices. The world has experienced very strong economic growth over the last 3 years, yet oil production has barely increased. I think if production had increased in line with demand we would be using about 10% more oil than we are now, and I can easily see how a 10% imbalance could raise prices this high.

If you look at previous runs of high world economic growth, growth in oil production was much higher. 1985 - 88 oil production grew by 9.9%. 1994 - 97 it grew by 7.6%. 2004 - 07 oil production has grown by only 1.5%.