Unregulated speculation in U.S. energy markets - a brief tutorial

[JohnWxy]

You can take a postion in oil futures by putting up (putting at risk) LESS THAN 10% of the contract price. Speculators buy futures contracts to trade them before delivery of the commodity. They do not want the commodity. They only buy the contract to sell it later BEFORE delivery to make a profit. IT is in their interest for the prices to be moving (either up or down) so they can buy and sell and make a profit (preferably quickly).


http://www.star-telegram.com/business/story/706612.html
~~
~~
How do speculators drive up oil prices?

Speculators are able to drive up crude oil prices today because they're allowed to trade in the U.S. in futures markets not overseen by U.S. regulators. Therefore, they are free to dominate these markets by taking huge positions within them. And there is an additional fear that, because of a lack of oversight, they may be engaging in manipulative practices — i.e., wash sales and false reporting that would be barred in a regulated environment.

Who are these speculators? Do they have names and addresses?

I really cannot answer that with certainty because these unregulated markets are so opaque. Many say that Goldman Sachs & Co. and Morgan Stanley are primary traders on the principal market outside of direct U.S. supervision, the Intercontinental Exchange, otherwise known as ICE. The whole point here is that we need transparency through a thorough investigation to determine precisely what is happening on the Intercontinental Exchange, including who key traders are and the positions they are taking in these markets. That transparency is provided regularly for those exchanges regulated directly by the (futures trading commission).

How much of today's record oil price is attributable to speculation?

There are many estimates being made by observers of these markets, economists and industrial energy consumers suggesting that the price of a barrel of crude oil could be anywhere from 25 percent to 100 percent in excess of what market fundamentals would dictate. For example, (the Organization of Petroleum Exporting Countries) has recently said that a barrel of crude should not be in excess of $70, and it has opened its own investigation into excessive speculation in these markets to find out what interests are causing the price to be almost double that.

How does the absence of effective regulation of commodity trading compare to the stock-market excesses of the 1920s?

To the extent that the Intercontinental Exchange operates outside of U.S. limits and controls on speculation, there is very substantial evidence suggesting that United States futures trading on that exchange is akin to the unregulated trading in U.S. stocks in the 1920s. That comparison is aided by the fact that huge positions in these markets can be obtained by speculators with less than 10 percent margin.

(more)
--------------------------------------------------------------------------------------------------------------------------------

NOte that there is an economic reason to have futures contracts. Buyers of a commodity can put up a percentage of the total contract price to lock in a price today if they fear the price will be going up before delivery date. Suppliers of a commodity may want to sell a futures contract to lock in today's prices if they fear the price may go DOWN before delivery date. In each case the interested party puts up (or risks) a percentage of the contract price to protect themselves from economic losses due to a change in price between the day of the futures purchase and the day delivery is made. NOte However, the interested parties in this example are actually going to trade in the actual commodity. The buyer of the futures contract does want to take delivery of the commodity and the supplier of the commodity really does intend to sell the actual commodity to a buyer. SPECULATORS DO NOT WANT TO TAKE DELIVERY OF ANYTHING. THEY JUST WANT TO BUY AND SELL FUTURES CONTRACTS AND DO IT WITH A VERY SMALL PERCENTAGE OF THE TOTAL CONTRACT PRICE BEING PUT AT RISK.

The quickest way to kill off this kind of gambling is to put the margin requirements to buy and sell futures contracts up to a higher percentage. Probably 25% would kill off most reckless speculation. THis could be done quite quickly IF WE REGULATED THE EXCHANGE THESE TRANSACTIONS ARE TAKING PLACE ON (THe ICE - the Intercontinental Exchange). BUT WE DO NOT! that's a prescription for disaster - remember what happened in California when ENRON had it's way with the electricity market?

[Nickster]

1. Important stuff, thanks for sharing.

[wurzel]

2. We will have to wait till after the election before it is stopped.

Speculators are still speculating. So clearly they are not expecting any Congressional action this year.

[Schema Thing]

3. I don't see what would be wrong with limiting the market to actual buyers and sellers?

Why allow speculators at all, even with higher margins?


The buyers and sellers would of course speculate, but it would be honest speculation.

[whistle]

4. Well shit and congress sits on their collective hands while Americans

...are economically raped by these speculators

[JohnWxy]

5. Go to congress.org to send an email to your congressman- link provided>

www.congress.org
it's easy, you just type in your zip and the site brings up your senators and reps and provides an input box for you to type in your email or hard-copy letter. the site does it for you free!

YOu never know your one email might make them reach the tipping point.

...and you feel good after you've done it!

[raccoon]

9. That's just what we all need to do. nt

[raccoon]

6. Another very informative paragraph from this article:

"What is a "wash sale" and how does it work?

That's a prearranged trade between two or more parties in which there is no economic risk and the sole purpose of which is to give the appearance that the price of a commodity is going higher or lower in a way that does not reflect supply and demand. "

Thanks for the link.

[JohnWxy]

7. and without any regulation you just have to TRUST these energy traders to not be doing this.

Like we trusted Enron. We don't evin know hat the hell is going on on the ICE.

[liberalla]

8. bookmarked

Thanks for posting

:kick: