Regulators look into possible price manipulation in oil market

usatoday.com/money/industries/energy/2008-05-29-oil-markets_N.htm

WASHINGTON (AP) — Federal regulators are six months into a wide-ranging investigation of U.S. oil markets, with a focus on possible price manipulation.
The Commodity Futures Trading Commission said Thursday it started the probe in December and is taking the unusual step of publicizing it “because of today’s unprecedented market conditions.”

John

It almost looks as if the SEC is taking serious the idea that speculators are minipulating the oil market. I’ve said in this forum several times that speculators are one of the key causes of this run up of oil prices. Did you know that as these speculators trade contracts they do it on a margin of less than 4%? That means they’re required to put up less than $5.40 for every barrel of oil they “buy” at $135.00.

Looks like I was also right on this point. However, they should not stop at oil. They should also look at the grain markets. Speculators have turned the commodities markets into a den of immoral behavior.

However, they should not stop at oil. They should also look at the grain markets. Speculators have turned the commodities markets into a den of immoral behavior.

Dead on!

John

I’ve also held this position.

However, what I’m not sure about, in a free-market economy, what can anyone do about it?

Jim

Given that I know about zero on this kind of stuff, please bear with me.

I read some headline a day or so back saying OPEC said that oil should be at about $60 a barrel. So why doesn’t OPEC just sell it at $60 a barrel? Wouldn’t that immediately cause the stock prices to fall. If you could buy it direct for 60 why pay 135+ on a stock market?

Be kind, for I am simple.

You’re simple, but right.

It is buyers and sellers who set the price, not speculators.

The commodities market is a zero-sum game. For every winner, there is a loser, dollar-for-dollar. Now if “speculators” could set the price, why would any of them lose?:confused:

I suspect the goal of the current investigation is to prove somebody, anybody but Congress, is at fault here.:wink:

Remember, manipulation of the market through speculation is not what a free-market economy is about. For a relatiely low sum of money a person can control the market. With just 5 million dollars one person can control 135 million barrels of oil. Speculation isn’t the natural forces of the market at work and create disequalibrium.

Right now the losers in the market are the consumers…and those folks that get caught holding contracts for $135 a barrel oil when the market finally corrects.

No, he cannot control the market.

All he can do is hold a contract to buy or sell oil at a certain price by a certain day. If the speculator has a contract to** buy** and the price is higher than he anticipated, he loses. He must buy oil at the higher price and deliver it at the agreed-upon price.

In commodities markets, for every winner there is a loser, dollar-for-dollar.

If speculators could control the market, they would never lose.

But the market will only correct when buyers will only offer less than $135 a barrel, and sellers are willing to accept their offers.

Seems to me the main reason for the investigation is to create the appearance of action. I doublt any good will come of it.

No problem is so big that the governmant can’t make it worse.

They might do better to investigate those in Congress who have prevented energy generation and oil production and exploration for years and years.

Whle they’re at it, they might investigate Greenspan for inflating the economy.

Question for Vern: I do not argue against your statement that the commodities is a zero-sum game, but some of the buyers are real buyers of the actual commodity, and some of the sellers are real sellers. If the price of a commodity is manipulated upward on the futures market, those who use it and who hedge future price increases by buying futures now, pass the cost of the whole exercise on to the consumers, if they’re able. I’m not blaming commodity users for hedging. They have to try to predict prices of “ingredients” in order to plan production and price their own products.

But even if it’s a zero-sum game, then, is it not possible, at least theoretically, (I realize as a practical matter they don’t) for all speculators to come out, while the consumer actually ends up with the tab.

Bingo!

You just broke the code.:wink:

A thing is worth what a willing seller will offer and a willing buyer will accept.

The sellers are the oil-producing nations, who have oil. The buyers are our oil companies – who make less profit, percentage wise, than most businesses.

Any manipulation is by the sellers – and speculators have nothing to do with it.

There are two ways to make money in the futures market:

  1. If you think the price is going up, buy futures at current prices and sell at higher prices.

  2. If you think the price is going down, sell futures at current prices, then when the price goes down, buy at the actual price and deliver at the agreed-upon, higher price.

Since half the speculators will lose, how can anyone say speculators control the market?

I don’t argue that oil has a limited number of sellers relative to, say, live cattle. But if some buyers of any commodity are buying in order to hedge prices on a commodity they are actually going to use, then, yes, if the price of the actual commodity goes down, they lose. Anyone, however well-intented, who hedges prices is, in a sense, a “speculator”. But he is not a “pure” speculator who is hazarding his own money only. Some speculative losses get passed on to the producers of products and, if those producers can manage it, to the ultimate consumers.

Doubtless, most commodity speculators are simply following their beliefs or hunches about future prices. But I don’t know it’s a given that none can actually manipulate the prices. I remember, for example, Bunker Hunt’s manipulation of the silver market until, of course, he and his oil sheik friends miscalculated how much silver there was on the arms of the women of India. But in the meanwhile, when silver was $20, $30 an ounce, actual silver users bought in order to hedge the prices. When silver came screaming down, they, as well as Bunker Hunt, lost. Now, maybe, commercial users of silver didn’t try to pass whatever losses they took on to the consumers. But it’s hard to believe they didn’t.

None of that says commodities speculation is not a “zero sum game”, as you say. But losses are not confined to the professional speculators.

But again, I agree that this investigative effort isn’t likely to show much that’s worth knowing. Everybody knew about Bunker Hunt. George Soros admitted to his manipulation of the British pound. What difference did any that knowledge make?

Ridgerunner;

They might do better to investigate those in Congress who have prevented energy generation and oil production and exploration for years and years.

Why, this has nothing to do with the high cost of oil that we have right now. There is no shortage of oil on the market.

Jim

I respectfully suggest that this is a bit like saying there’s no shortage of, e.g., consumer goods in a town where there is only one store and the proprietor charges twice what those same goods might cost if there was a competing store in town. Just because the sole store in town keeps enough stock on hand to meet demand at his prices does not mean there is no shortage of goods on the market.

Were there no OPEC, whose purpose is to produce just that amount of oil that will result in the highest return to its members and never result in downward price pressure due to actual or threatened oversupply, I would likely agree with you. Significant development of domestic resources could certainly affect the supply side of the equation by altering OPEC’s ability to control prices by controlling supply.

I do not discount the adverse effect of the Greenspan inflationary monetary policy. There’s plenty of blame to spread around. But Congress is greatly to be faulted for stifling domestic energy production, as is a former President who put many promising areas off limits for exploration and then, strangely, was paid millions by oil-producing states for doing nothing. But it isn’t necessary to have investigations and recriminations. It is only necessary to remove the barriers to energy generation and petroleum development in this country.

“Speculators” are not buyers. They buy options, not the commodity. No one is buying billions of barrels of oil and storing it away while waiting for the price to go up.

How do speculative losses get passed on? If the speculator bet the price of oil would go up, and it goes down, what can he do about that?

My point, exactly!

The Hunts expected the price of silver to go up – and they were wrong and lost money.

For every speculator who wins, another one loses – dollar for dollar.

Losses in speculation are confined to speculators – unless they are gambling with someone else’s money. Why is why you should never put money into a firm that speculates.

The purpose of this investigative effort is to produce a smokescreen to hide the real culprits – the politicians who put so much of the US off-limits to drilling, who obstructed the construction of more refineries and nuclear powerplants, and so on.

[quote=vern humphrey;3752400For every speculator who wins, another one loses – dollar for dollar. **No argument from me. However, some “speculators” are actually users or producers of the commodity, who are hedging against the unexpected. They, and only they, may be able to recoup losses by passing the consequences of errors along to their customers.
[/quote]

Losses in speculation are confined to speculators – unless they are gambling with someone else’s money. Why is why you should never put money into a firm that speculates. Wellllllllll, some can be guaranteed a profit speculating in live cattle, I hear.

The purpose of this investigative effort is to produce a smokescreen to hide the real culprits – the politicians who put so much of the US off-limits to drilling, who obstructed the construction of more refineries and nuclear powerplants, and so on. With this, I could not agree more.

If you can use the straddle – you get someone to go opposite to you (if you go long, they go short) and then if they turn out right, they declare their option to be yours, and they eat your losses.

This only works if your husband is the governor.:wink:

I met the poor guy who was on the other end of that deal. He was most unhappy. He was suing Red Bone at the time in a “non-core” bankruptcy litigation.

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