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Copy of recent article I received.If you agree, please contact Congress at the link below and forward for others to do the same.
Twenty years ago, 21 percent of oil contracts were purchased by speculators who trade oil on paper with no intention of ever taking delivery. Today, oil speculators purchase 66 percent of all oil futures contracts, and that reflects just the transactions that are known. Speculators buy up large amounts of oil and then sell it to each other again and again. A barrel of oil may trade 20-plus times before it is delivered and used; the price goes up with each trade and consumers pick up the final tab. Some market experts estimate that current prices reflect as much as $30 to $60 per barrel in unnecessary speculative costs.

Over seventy years ago, Congress established regulations to control excessive, largely unchecked market speculation and manipulation. However, over the past two decades, these regulatory limits have been weakened or removed. We believe that restoring and enforcing these limits, along with several other modest measures, will provide more disclosure, transparency and sound market oversight. Together, these reforms will help cool the over-heated oil market and permit the economy to prosper.

The nation needs to pull together to reform the oil markets and solve this growing problem.

We need your help. Get more information and contact Congress by visiting www.StopOilSpeculationNow.com.
 

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Innocent Bystander
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That's an e-mail that all the airlines sent to their frequent flyers to try to get pressure on congress to help them with their fuel costs.
 

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Stokers Rule
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I graphed out weekly oil prices for seven different countries throughout the US and Europe for the past eleven years. The prices for ALL moved at the exact same time and in the exact same direction weather up or down.

What I get from that is no individual country, president, SPECULATOR, or event effects the global price separately. Simply put, if the speculators hurt the price in the US then our gas prices would move separately from other countries; but it doesn't.

I see the speculator angle as an elaborate home based blame game rather than getting the problem fixed.
 

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Schnook said:
That's an e-mail that all the airlines sent to their frequent flyers to try to get pressure on congress to help them with their fuel costs.
I wouldn't say all the airlines sent them out as I didn't get it from any of the airlines that I fly. :confused1
 

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aquaforce said:
I graphed out weekly oil prices for seven different countries throughout the US and Europe for the past eleven years. The prices for ALL moved at the exact same time and in the exact same direction weather up or down.

What I get from that is no individual country, president, SPECULATOR, or event effects the global price separately. Simply put, if the speculators hurt the price in the US then our gas prices would move separately from other countries; but it doesn't.

I see the speculator angle as an elaborate home based blame game rather than getting the problem fixed.

now thats some interesting info... I didnt know that
 

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I've Survived Everything!
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Sorry for the delay in replying, didn't read the original post until this morning.

This is a subject I am very familiar with and experienced. As many here already know, I was in the securities industry from 1986 through 2000. I was a broker with E.F. Hutton, having my series 7 and commodities trading license throughout that period.

What you read in the first post is not accurate.

First, futures contracts were not created for someone to take physical delivery of the underlying contract, it is the potential of physical delivery that keeps speculation in check and not producing the kind of wild casino like environment critics of speculators would have you believe. They were first created so farmers could protect profits by selling the contract at a price higher than the current spot market giving them what the farmer felt was a fair price plus the time premium of the contract. Bottom line is the farmer made more money in the end when he sold his crop in the spot market when it came to harvest. The original contract was closed at a price lower than the original spread between the future month and the spot price. The farmer kept the time premium for added income.

Over time every commodity sold in every spot market ended up in the futures market, the same concept was used to enhance the end amount a producer of all commodity products produced. Futures contracts for producers of product is a hedge / enhancement of the spot market price.

Physical delivery rarely if ever takes place! The contracts are rolled out in 99.9% of cases coming to expiration / delivery date.

As for speculators, they are the liquidity that allows the futures market to work!

Without speculators taking the opposite side of contracts, producers could not hedge / enhance the final spot price of their products.

Bottom line is, without speculators the price paid by the consumer for every commodity, including oil, would be significantly higher today than we are paying.
 

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aquaforce said:
I graphed out weekly oil prices for seven different countries throughout the US and Europe for the past eleven years. The prices for ALL moved at the exact same time and in the exact same direction weather up or down.

What I get from that is no individual country, president, SPECULATOR, or event effects the global price separately. Simply put, if the speculators hurt the price in the US then our gas prices would move separately from other countries; but it doesn't.

I see the speculator angle as an elaborate home based blame game rather than getting the problem fixed.
Were all the prices listed in US dollars? Would you mind sharing the data source of oil prices for different countries? Would you mind sharing the rationale behind linking oil prices to gas prices?

I think a lot of what's happening these days is confusion over the term "speculator." A true, professional "speculator" is actually a market maker, someone that provides liquidity when/if needed. Most often they trade for their own account and they represent a small percentage of trading volume.

The "speculation" that has distored the markets for crude comes from investors that neither produce nor consume crude at a market level. They simply use the crude market as a proxy for inflation, for currency hedging, or simply another asset class in which to invest money.
 

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I think the biggest misunderstanding about this subject is the participants of futures trading are only affecting the price of a commodity in terms of future month settlement, they are not trading the spot market!

Futures contracts fall into a buy range or a sell range based on the premium over the spot market. That premium can be calculated to fair value based on the time remaining in the contract and the carrying cost, that is the value of money over time. If the contract is priced above fair value, sellers will come into the market, conversely if the price is at a discount to fair value buyers will come in. The buying and selling of those contracts to take advantage of the premium fluctuations maintain an equilibrium in the premium over the spot price. The time between opening and closing transactions of futures contracts could last seconds to minutes in most cases where speculation activity is prevalent.

This is not an activity for the novice investor with limited funds. You can lose significant amounts of money trading futures contracts.

Bottom line is, the price fluctuations in the premium of futures contracts have zero to do with the spot market.
 

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Stokers Rule
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handfulz28 said:
Were all the prices listed in US dollars? Would you mind sharing the data source of oil prices for different countries? Would you mind sharing the rationale behind linking oil prices to gas prices?

I think a lot of what's happening these days is confusion over the term "speculator." A true, professional "speculator" is actually a market maker, someone that provides liquidity when/if needed. Most often they trade for their own account and they represent a small percentage of trading volume.

The "speculation" that has distored the markets for crude comes from investors that neither produce nor consume crude at a market level. They simply use the crude market as a proxy for inflation, for currency hedging, or simply another asset class in which to invest money.

First let me add some clarity on my "speculator" comment; I think that the media faulting speculators over gas price is disjointed and erroneous when "all things" in this are considered. I'm saying that there are much bigger fish in this frying pan than speculators.

I'll have to answer your questions off the top of my head because when I processed this data my laptop had a memory stick failure and some of my work is on my wifes computer and I can't get to that info rignt now.
Most of the info came from DOE and EIA websites concerning fuel cost analysis. The weekly reporting came from a spread sheet given to me by one of my team mates who got it from a reporting site affiliated with DOE/AEI but I don't remember which one. I think I can find it but some serious effort would be needed on my part to find the paper. I had to crunch all that data off paper :eek: :eek: :eek: :eek:
Yes all prices were in US dollars since all crude is priced in US dollars. In short; our weakening dollar is causing big problems in this department.
The connection with crude and gas is refinement of course; high material cost in is high product cost out.

I did this work last symester in school as a final research paper assignmnet and it showed me how misunderstood and misrepresented this topic is, both in general and in the biased media. :angry1: :angry1: :angry1:
I am not an expert and don't profess to be one but I do think and use my head for something other than a "hat rack" as the saying goes. I can appreciate sound logic but the media hype and the lazy people that follow that stuff irritate me with a gross lack of rational.

I got a lot more out of that research paper about fuel cost but I won't hijack this thread. :bigsmile: :winker:
 

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aquaforce, you're post is right on target. If there is one factor causing the current price of crude oil and ultimately the cost of all refined products, it is the decline in the US Dollar.

Everything else is speculation! :p:
 

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ghart said:
aquaforce, you're post is right on target. If there is one factor causing the current price of crude oil and ultimately the cost of all refined products, it is the decline in the US Dollar.

Everything else is speculation! :p:


Thanks ghart. Coming from someone who has real world experience and success in this nature of work means more to me than a simple grade. Of course I need the grade but I want to be accurate in real rational too; not just an educated idiot. :winker:
 

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aquaforce said:
I got a lot more out of that research paper about fuel cost but I won't hijack this thread. :bigsmile: :winker:
So did you get a good grade/pass the class? :star:

I agree that it's not probable to have an effect on just one country's prices, but perhaps I'd have to read the paper to understand how your evidence supported the conclusion. If the products are priced/traded in USD, and all your data is in USD, was there a correction for local currency flucuation? Also as you point out, there's a much smaller correlation between crude and gas prices than a lot of people realize.

ghart
Bottom line is, the price fluctuations in the premium of futures contracts have zero to do with the spot market.
I agree, the theory and the mathematical equation provide that prices in the futures markets are derived from what the spot price is. So why do some very well respected oil analysts say there's a significant speculation premium? Spot prices (http://tonto.eia.doe.gov/dnav/pet/hist/rwtcd.htm) have run up, but producers are neither increasing nor decreasing production. Yet there's no shortage of product available and supposedly there's no hoarding of inventories.

What has truly caused the nearly tripling of oil prices in the last 18 months?
 

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handfulz28 said:
What has truly caused the nearly tripling of oil prices in the last 18 months?
Perception of the unknown has always moved equity and commodity prices, actual facts have not cause nearly as radical movement of pricing. It is primarily the perception of events that are in part causing the current price movement in crude oil.

First, it has been said that as much as $50 of the current price of crude is geopolitical. That concept is clear whenever news from that part of the world comes out, ie: Israel does there war games a couple weeks ago in the Mediterranean Sea and crude jumps $10 to a new high!

Second, the supply side of oil is and has been a great unknown! Members of the Organization of the Petroleum Exporting Countries have been misrepresenting their reserve capabilities for years. The key players have reported no new discoveries for decades. They have always said they can supply the need but the facts fail to support that claim. The perception is we really could run out of oil! Remember I said perception, not fact.

Thirdly, the one fact that can be correlated to the movement of crude prices is the exchange rate of the US Dollar. On any given day, when the dollar falls, crude goes up, when the dollar gains, crude falls in price. Oil is priced in dollars. And the dollar is in the dumper. Indeed, rising inflation and falling interest rates have put the greenback into a steep downward spiral. And if prices keep rising, and if Federal Reserve policymakers keep cutting short-term interest rates, the dollar will continue to lose altitude against other key global currencies. OPEC members will counter the greenback decline by marking up the price of crude as converted to their currency, causing prices to increase still more in dollar-denominated terms.
 

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handfulz28 said:
So did you get a good grade/pass the class? :star:


Yes :star: and Yes :star: I understood the price report was adjusted as listed. We did very well. :bigsmile: :bigsmile: :bigsmile: Had some dead weight, which is why I hate group projects :dead:

Something that was quite interesting: (ghart refered to this regarding OPEC) The reporting of OIIP, (Oil Initially In Place) has now been proven to be erroneous for the past 15 years on part of OPEC. Of course speculation has taken this in the very worst way, gloom, doom, were running out, but their lavish expenditures don't support running out, maybe, price fixing at the expense of other countries. Anyway, OPEC tell us a lie.......come on now :winker: If they ran out of oil tomorrow that only means to me our "reserves" strategy has played very well to the finish and now the middle east has a weaker role. I believe there is pleanty of crude elsewhere. :yak:
 

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ghart said:
It is primarily the perception of events that are in part causing the current price movement in crude oil.


Agreed, but wouldn't the argument be that perception manifests itself in the futures prices, since spot prices are just that, pricing for near immediate delivery? And that seems to be the point of origin for all of these "speculation" debates, the futures markets. But I have yet to see someone do a real good regression on spot vs futures since Jan 2007. I don't know if there's a continuous contract for crude, but it seems like there hasn't been a significant movement of futures prices away from spot.

So that brings us to spot prices and the USD. As I type I'm too lazy to look up changes in rates and the price data for the USD index. But I'm with you that the lowering of rates, along with all the rest of the negative economic news, is dragging down the USD. I think the FOMC realizes they're between a rock and a hard place, and lowering rates hasn't done anything to curb inflation when rising energy cost is the primary culprit. But I think there's something to the declining USD and "producer" countries managing their currency exposure. I hope there's some serious academic research going on.

I wonder if anyone has the balls to tell the FOMC to raise rates? :clown: I bet a .5% rise in rates would do more to reign in oil prices than anything else currently under consideration.
 

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handfulz28 said:
Agreed, but wouldn't the argument be that perception manifests itself in the futures prices, since spot prices are just that, pricing for near immediate delivery?

News and the anticipation of news will only impact the price of future month delivery contracts, it has no impact on spot prices. Interpretation of future month delivery contract pricing can and does give indication of the future trend of the underlying commodity. In the case of crude oil, future month delivery prices over the past several weeks are in many cases below the spot price. That condition is not unusual, when this happens, it is the opinion of speculators that crude oil will be lower at some point in the not too distant spot market. I personally have taken advantage of the price movement, taking both the long and short position in crude to take advantage of the price swings. I am most aggressive on the short side with expectation that when crude breaks it will be violent and to the downside.

So that brings us to spot prices and the USD. As I type I'm too lazy to look up changes in rates and the price data for the USD index. But I'm with you that the lowering of rates, along with all the rest of the negative economic news, is dragging down the USD. I think the FOMC realizes they're between a rock and a hard place, and lowering rates hasn't done anything to curb inflation when rising energy cost is the primary culprit. But I think there's something to the declining USD and "producer" countries managing their currency exposure. I hope there's some serious academic research going on.

If you are not in a position to listen to Ben Bernanke's testimony, take the time to read the text of his testimony. You are correct in that the fed is in a tough spot. The data supporting an inflation event vs the data supporting contraction in the economy currently has one component in both columns, that is rising energy prices.

Typically lowering rates are to stimulate a slowing economy while fed action raising rates is to slow a runaway inflationary economy. In an environment where there is evidence supporting both a slowing of some parts of the economy and rampid runaway growth in other parts of the economy the fed has no choice but to leave rates alone, which has been the position of the fed in recent testimony.

I wonder if anyone has the balls to tell the FOMC to raise rates? :clown: I bet a .5% rise in rates would do more to reign in oil prices than anything else currently under consideration.
There are many influential people screaming for higher rates currently!
 
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